OEMs: Don’t Overlook the Risks of Market Inflation

According to Reuters, the International Institute of Finance forecasts 2018 global growth at 3.5 percent. While this is reported to be an optimistic outlook for the global economy in terms of job growth and reduced employment, such growth also increases the risk of inflation.

This news is of particular interest to the manufacturing industry, who not only are currently struggling as a result of an industry-wide component shortage, but are concerned with the declining value of their stockpiled working capital. It’s a war on two fronts; while escalating demand in the IoT and automotive industry are turning once commoditized components into priceless inventory, the money OEMs already have on hand is no longer sufficient to purchase what they need – even if the inventory is widely available (which is unlikely with lead times currently at all-time highs).

Inflation continues to reduce the purchasing power of the dollar, and it can affect an OEM’s ability to support the lifecycle of their products just as much as a traditional price increase. Should market projections not fall in the OEM’s favor, some may opt to make a bulk purchase of the necessary critical inventory at the front end of a product’s cycle, thus taking advantage of their working capital’s value while they still can.

The logic for making such a decision is sound; as unfavorable as market conditions are now, most analysts agree that even when supply catches up with buyer demand, it is unlikely that component prices will fall back to pre-shortage levels. In fact, it’s much more likely that they will continue to rise. As inconvenient as it may be to part with working capital now, it would be much harder if they choose to wait.

If price increases in a specific market are expected over time, a large bulk purchase is an excellent way for OEMs to mitigate their effects — provided the OEM is prepared to take on added financial burdens related to working capital and warehousing.

Going even further, due to the reduced costs needed to manufacture large quantities of components at once, bulk purchases also give OEMs substantial leverage to negotiate discounts. The potential for component manufacturers to realize multiple years’ worth of downstream revenue in a single order is hard to pass up, and such a proposal is an easy way to tip the component market back in the OEM’s favor.

The missing ingredient in this strategy is, of course, working capital. To commit to a front-end bulk purchase to counter inflation and take advantage of any such discount that may apply, OEMs must be willing to part with cash reserves that are critical for accomplishing long-term company goals such as workforce expansion and new product lines.

Without any outside help from a supply chain partner, OEMs must make an impossible choice: Which established goal is more important? Should I concentrate my resources on supporting my current products, or should I risk compromising current products in favor of long-term growth?

Thankfully, this is not a decision that needs to be made. To learn more about how to negotiate front-end bulk purchases of critical electronic inventory without sacrificing working capital, click here