What means component allocation?

These days, due to the global shortage situation, many End-users, OEM/ODM companies, and contract manufacturers (EMS) are impacted by the allocation of raw materials, parts, and components from upstream the supply chain.

The semiconductor industry take a heavy beating

Demand exceeds raw material supplies and manufacturing capacity, and lead times for materials and parts are unclear and subject to delays. Or even worse; cancellations and sudden End of Life (EOL) situations with very limited (or none at all) Last Time Buy (LTB) options. This allocation situation is not unique to a specific market, but at the moment, the semiconductor industry take a heavy beating, hence more or less every market using electronic components and computer systems is affected, not to say impacted.

Allocation is a method that (typically) Tier 4 through Tier 2 suppliers are forced to implement when there are not sufficient raw materials, parts, or components available to fulfill the purchase orders of their customer base. In case of such a situation (like now), the lower tier suppliers therefore may see no other options than to allocate partial quantities to their customers (i.e. partially fulfillment of orders only), or not accept any new purchase orders or call-offs for allocated parts.

Shortages and allocations at low-tiers impact Tier 1 and OEMs

The above is something their customers difficult can plan for (not to say act for), at least not in the short run, as delivery dates are delayed on very short notice, often without any information about new delivery date. Sometimes even backlog (partial or entire) is canceled by the low-tier supplier.?Not due to convenience of course but as a direct consequence of shortages or allocations further up the supply chain.

Global shortages and allocation causes chain reactions across the markets

The allocation process differs from supplier to supplier, but typically there is an allocation board consisting of key S&OP (operations, purchasing, and sales) managers having daily, weekly or monthly allocation and escalation meetings reviewing the current situation and the anticipated changes of the shortage situation, and prioritizing to ensure everyone gets a "fair share" of the supplies.

"Fair share" not always possible

Do we believe in that? Fair share? There are of course several allocation strategies a company can follow, or even have to follow. During the outbreak of the Covid-pandemic, several manufacturers and vendors had to follow a "Favor vulnerable buyers" or “Essential products”?strategy to secure manufacturing of medical equipment and ventilators. Another "have to follow" strategy may be to favor manufacturers of military equipment in case of crises and war.

Less fair of course is to favor the most profitable customers or the strategic customers. No one can guarantee this does not happen, but even large and reputed companies like Intel are said to generally use a uniform allocation approach to avoid the appearance of favoritism.

Whatever is the reason behind the allocation, delays and increased costs are unavoidable in the short run, and respin/redesign is often necessary for the mid and long run. Right now, it's all about communication and common problem-solving upstream and downstream of the supply chain.

It's all about communication and common problem-solving

Still, whenever there is a shortage situation and a race (not to say battle) to get deliveries, companies tend to double up their forecast. Hence placing firm orders is at the moment the only real way to secure supply. But as a measure to avoid the larger manufacturers placing parallel orders (just to cancel off what they don't need when they take the first delivery), vendors and distributors have activated Non Cancelable Non Returnable?("NCNR") clauses.

"Only firm order is king"