One the most important questions customers are asking distributors and that distributors are asking suppliers is, “how ready is the supply chain for the introduction of the RoHS directive in July?”

The European directive, which restricts the use of hazardous substances such as lead and cadmium in electronic systems, has clear implications for the component manufacturers, distributors and end-users. Electronics Weekly invited broadline distributor Arrow Electronics to take part in a roundtable discussion with some of its suppliers and customers to assess the industry’s readiness for the RoHS deadline in July.

Significantly, the discussion also raised the particular concerns of the U.K.’s community of small and medium-sized manufacturers (SME), as well as the issue over the level of inventory in the supply chain as the July deadline approaches. The reality is that manufacturers are already seeing lead times on certain components getting a good deal longer than they were six months ago.

“Some customers still have their heads in the sand over RoHS compliance hoping there will be more exemptions,” said Chris McAneny, marketing director for Arrow Northern Europe. “Generally, the U.K. is well prepared, but inevitably there is still non-compliant inventory in the supply chain.”

One problem the manufacturers face is being left with non-compliant product they cannot use after the July deadline. Paul Deehan, managing director of Staffordshire-based contract manufacturer AWS, said that one of the main issues for SMEs is the amount of cash they will have tied-up in obsolete parts. “For small businesses the amount of cash tied-up does not have to be very large to be important,” Deehan stated.

The approaching July deadline means everyone is being more careful with the amount of non-compliant inventory they hold. However, the pressure this is putting on the supply chain is being aggravated by a general increase in demand for both semiconductors and passive components across the world, but most notably in the Far East.

“There is no such thing as a local supply chain anymore,” said Deehan.

According to Ollie Althorpe, U.K. managing director of STMicroelectronics, the gathering momentum of the 3G mobile phone market is just one factor which is affecting global demand for semiconductors.
      
Richard Curley, European sales director for passive component supplier Kemet, agrees and believes this creates a supply issue in the U.K. where SMEs are largely supported by distributors. “Eighty percent of product is going in to the distribution channel to support the SME base,” said Curley.

“The U.K. market needs distributors to interface with the global market,” added Althorpe.

According to passives supplier Curley: “As much of our product goes into global distributors as into the big CEMs in China.”

Yet everyone seems to agree that global demand for product is inevitably increasing some lead times.

The major players in the supply chain are the big CEMs, in China, the Far East and Eastern European and the global distributors. According to Curley, the rapid shift in demand and lead times comes about because most CEMs are on a two week forecasting process and distributors are holding less inventory.

Peter Madeley, purchasing manager at Matlock-based manufacturer Technolog, has seen the lead times of specific items jump from eight to 16 weeks. “It is very hard to predict and does not go gradually. It may only be one item but it only takes one item to stop the production line, and if we cannot live with that lead time we have find a way around it,” said Madeley.

Part of the problem, said Althorpe is that long term orders from China-based CEMs can suck product out of the market.

“The situation is tightening. In part that is due to global demand and in part it is the RoHS effect,” said Arrow’s McAneny.

According to Curley from Kemet, one of the RoHS factors for suppliers is how to manage the amount of inventory in the distribution channel.

Is the supply chain better at predicting the changes in demand? “Yes, I believe there is more visibility and that the information available is of better quality than, say five years ago,” claimed McAneny.

“This industry is still very hard to predict,” said Technolog’s Madeley.

Whether it is changes in the supply channel due to the move to RoHS-complaint product or it is the unpredictable ordering patterns from the large China-based CEMs, the fluctuations in demand are as tested as they have ever been for suppliers and customers a like.

The problem is made worse right now because the relatively low level of inventory in the supply chain, in part due to RoHS but much more due to changes in buying practices following the 2001 market downturn, means few people can be buffered from the changes.

“The reality is that everyone is always trying to reduce the level of inventory because everyone is forced to write-off inventory each year,” said McAneny.

That is still a big concern for smaller manufacturers at the end of the chain. “There will be pressure on SMEs no matter how well they prepare for RoHS,” said Deehan, from manufacturer AWS. “It is inevitable that there will be a level of product obsolescence to come out of the change.”