While this failure can have many potential causes, the most frequent one is that the supplier never really had the parts in the first place. With enough time spent in the grey market, any buyer will get stung, but there are ways to protect against this frustrating practice.

Shortage buyers can turn to one of several sources to find the parts they need to keep the assembly lines moving smoothly. To deliver this level of confidence, suppliers should meet a list of minimum requirements:

• Be fully transparent in their dealings with buyers: not just on issues like pricing or item pedigree, but on operational issues like warehouse types, inventory audits, data freshness and inventory confirmations. To a shortage buyer looking for quick answers, a quick “sorry, no stock” is far preferable to false promises of an impending shipment.

• The inventory should be in-stock in a world-class warehouse facility managed by professionals with no financial stake in closing the order. Inventory lists would be fresh and the data would be ensured accurate by an independent contact. Does the supplier share their process with you? Does the supplier ask you to take their word, or is there someone who independently confirms the inventory is physically present?

Potential Sources and the Shortage Buyer

• Authorized Channels: It should go without saying, but many buyers still fail to check their authorized channels when given a shortage to fill. Searching alternate part numbers can find stock that would not otherwise show up at a particular distributor. Since component manufacturers and franchised distributors have the best mechanisms for fulfilling orders out there, buyers should still go here first.

• Marketplaces: An extension of the primary market, a fully operational marketplace will have controls equivalent to a franchised distributor. Warranties may not pass through with every order, and there are some technical challenges to bringing together dozens of suppliers, but a proper marketplace will handle data integrity, order fulfillment and payment processing. Pay attention to their policies on inventory handling — not all firms are created equal.

• Bulletin Boards: Basically a “list of lists,” these sites will combine the inventory reports from several suppliers without a quality check of the data or determination of whether the parts listed are even physically present. Many will present themselves as some kind of full service provider but will lack the network of systems and processes needed to ensure secure fulfillment. These bulletin boards are good for the first step of the search, but buyers should be wary of any who promise more than they can deliver. Read the fine print.

• Independent Distributors: In recent years, the leading independents have made major investments in their warehousing capabilities. Anecdotal evidence suggests, however, that only 15-20 percent of revenue comes from orders where the parts are already in stock, limiting the total amount of protection buyers can expect when sourcing from independents. The other 80 percent of the time, independents are just brokering orders and are exposed to the delays and holdups of using “available” inventory from “overseas suppliers.”

• Brokers: Brokers do not carry stock. A buyer asks them to find parts, and that is what they do best. With a buyer lined up, they will search high and low to find someone — anyone — with the parts the buyer needs. The better ones will volunteer stock-checks and confirmations, but too many will just process the order and try to find the right parts after they have a PO in hand.

Smart buyers instinctively know there are levels of trust and capability in the shortage market. Purchasing departments should measure suppliers for their transparency of information, the maturity of their operations, the level of control over the parts they list, and their responsiveness of communication. All of this work needs to happen early and be updated a couple of times a year. When the shortage happens, it’s too late to build confidence.

More tips and best practices to come addressing the Seven Challenges for Electronic Component Shortage Buyers. For Tip #1, see Trust. For Tip #2, see Supplier Selection.

Longer supply chains, more players, more volatile markets, more counterfeit parts. These forces are changing the risk created by shortages, so buyers need to understand the implications and take direct action to protect themselves.

In a perfect version of the real world, buyers would resolve a shortage by searching a single catalog for trustworthy parts quickly, easily, without haggling over price or worrying that the order might not arrive on time. Shortage buyers are not just worried about the perfect order. They are worried about perfect ordering.

Tip #2 of this ongoing series is to re-evaluate potential suppliers on your Approved Vendor List (AVL) for their ability to deliver the ease, reliability and speed of the primary market with the flexibility and responsiveness of the secondary market. AVLs should be regularly reviewed and re-prioritized to promote those firms whose processes and systems weed out components that ever passed through the grey market.

The Pain of “Slow”

Imperfections in the grey market slow buyers down. Verical research with leading OEM and EMS purchasing departments shows that buyers waste 40 percent of their time just chasing shortages — which amount to a mere 1 percent of their total annual spend.

One of the biggest time killers is figuring out who actually has the parts and negotiating with them to the point where you can place an order. Google a part number and you can instantly find any number of people who claim to have the part. You would think that would do the trick, but the real search is just beginning.

The challenge isn’t search — it is quality search —filtering out the untrustworthy distributors who lurk throughout the dark corners of the secondary market. To understand what slows down shortage purchasing so much, you first have to compare it to production purchasing in the primary market.

Primary Market: Fast but “Too” Lean

The primary market is efficient and fast. Comprehensive information, established relationships, and pre-negotiated prices all bring transparency and accountability to the purchasing process.

However, a problem occurs in a shortage, and that problem is “lead time.” Expert at managing their risk, franchised distributors and component manufacturers will not stock parts that are too expensive or not used broadly across their customer base.

When demand appears at the last minute, authorized channels can sell the needed component, but only with unacceptably long waits, which increases the odds their customers will have to turn to the secondary market. The real trick, then, is how to deliver franchised distributor quality parts without the lead times that force buyers to go grey.

There are two major time killers that trip up buyers: the false security of AVLs and the pricing dance. AVLs are not much help in finding trustworthy parts quickly. A buyer has no visibility into where their approved vendor really gets its parts. The AVL supplier may point to the latest standards or ISO procedures, but as noted in a BusinessWeek cover story, fake parts are so realistic that “it takes a forensic scientist to distinguish them from the real McCoy.” Unless the forensic scientists test every part of every shipment, you are not safe.

Unfortunately, if a buyer shows up with a large enough order, opportunistic brokers will bend the rules for the chance to make their quarter’s numbers in a single transaction. There is no standard in the world capable of stopping a broker from selling shady parts if the upside is big enough.

Another shortfall of AVLs is that rarely will shortages be filled from in-stock inventory sitting in the vendor’s warehouse. Informal statistics suggest independents have inventory in stock for only about 15 percent of their orders. Otherwise, they claim parts are “available” or at their “overseas warehouse.” This is usually code for their buying the needed parts from another broker.

Shortage buyers also move slowly because of variable pricing. Brokers make their money by exploiting information asymmetry: they know something the buyer does not. Prices in the grey market are based on how badly the buyer needs the parts. If the buyer sounds stressed or needs the parts on very short notice, the price will go up. Way up.

Making things worse, to avoid sending out a false demand signal, shortage buyers will contact only a few potential suppliers, even though that limits their ability to find the part they need quickly.

Trust enables speed. Openness and transparency make deals happen quickly. In the shortage market, though, a way to deliver an efficient negotiation does not exist. Brokers will exploit buyers at every turn, and that slows down everything.

Conclusion

Buyers face a changing landscape and need to adapt their practices to protect themselves. The risk from the grey market is greater than it ever has been. Leaner, longer and faster supply chains are increasingly vulnerable to sophisticated counterfeit components, and the risks are growing exponentially. Not many firms will be able to make this transition to the new reality. Will your current suppliers be able to? Will you?

More tips and best practices to come addressing the Seven Challenges for Electronic Component Shortage Buyers.