Supply Chain’s Risky Behavior

Estimated reading time: 3 minutes

Barry Matties and Nolan Johnson speak with Joe O’Neil, CEO of Green Circuits, about something that seems to be on everyone’s minds—the rising cost of, well, everything. Joe’s background in marketing and finance, as well as his leadership at Green Circuits, positions him as an expert on managing costs related to labor, facilities, lead times, employee training, and the future of the industry. But what rising costs actually surprised him? This is a must-read for us all. 

Barry Matties: Joe, costs are going up and fabricators have tried to compress the cost, to not pass it on. But you can only compress for so long. In the past, you might have seen a fluctuation in a particular material or some components, but now it seems to be everything from shipping to labor to utilities. Is it everything?

Joe O’Neil: It’s not everything, but it is most things and they’re the big things. From an EMS provider standpoint, 60–80% of every dollar of revenue is materials, depending on the sector or region you’re serving. The supply chain is strained, inventory levels are down. We’re at the beginnings of the bubble of double and triple ordering. Everyone has horror stories about price gouging. Customers are suddenly okay with taking broker risk, as long as you test and do other things to mitigate the risk. Two years ago, it was, “Absolutely not,” and now it’s, “Whatever could make that two-year lead time turn into tomorrow, we’re open to looking at it.” They’re salvaging bone yards and pulling parts—so that’s the material piece.

There’s definitely a cost increase in labor. Entry-level jobs around here are $20 an hour and that’s if you just want to flip burgers. If you have somebody who will be dedicated, show up every day, and learn a trade, you expect to pay more. One area going the other direction is selling, general and administrative (SG&A) expenses. There’s an opening of the mindset to accept remote workforce, which allows you to contract out your workforce to areas where costs are lower. Our industry was late to the party, and we’ve made gains, although not enough to offset the direct labor increases.

Another surprise to me was factory costs, leases, and real estate. Because of that remote workforce, I thought commercial industrial real estate would go down. Instead, it has skyrocketed; it was a surprise, but it’s up like everything else. Equipment costs are brutal right now because of what our customers are going through. We buy equipment from OEMs, who are typically our customers, and they’re getting hit with cost and lead time increases. It certainly seems like a big inflationary environment.

Matties: With the mention of lead times up to two years, can you expand on that?

O’Neil: It used to be a 52-week lead time, and “we just don’t know how to tell you that it’s been discontinued,” or that “we haven’t gotten it out of the lab yet.” There can be 51 weeks of supply already committed, and you can be in line at 52, so it’s different. One part that seems to be improving is the decommit and recommit chaos. We had those three or four months of chaos on the lead time, where one day you heard it was two weeks, and the next day it was 52 weeks. How does the thing that you ordered two weeks ago suddenly turn into 26 weeks when it’s supposed to be here today?

In years past, you would see that maybe once a week. But it went from one or two things per month, to one or two things per week, to one or two things per bill of materials, to a handful of things per bill of materials. It’s an exponential set of problems, so more resources must be dedicated to validating the supply chain data and ensuring that we’ve got tracking numbers. You come to not trust your “trusted” suppliers because you keep getting burned. You need to validate everything, because you can’t get a production schedule without having some visibility on materials that you can rely on.

To read this entire conversation, which appeared in the February 2022 issue of SMT007 Magazine, click here.