Companies around the world are wrestling with once-in-a-generation changes to global business, and nowhere is that playing out with more intensity—or importance—than global supply chains. Yes, the key shortages that made headlines and ignited demand-based inflation around the world have subsided, but that doesn’t mean we’re out of the woods. Far from it.
Truly unprecedented changes are everywhere as a unique series of macroeconomic, technological and political trends converge. The U.S. “decoupling” from China amid rising political tensions. The sprawling growth of the electric economy. The surge in demand for microprocessors as they become embedded in virtually every product on the market. And a wholistic rethinking about inventory levels, supplier access and the just-in-time philosophy that beggared so many firms during the Covid demand whipsaw of 2021-22.
The key is being ready—and cleareyed about the future. And there are few folks out there who know about how to navigate all of this better than Phil Gallagher, CEO of Avnet, the world’s leading technology distributor and solutions provider. Founded in 1921 and HQ’d in Phoenix, Arizona, Avnet is the $26.3 billion (2022 revs) lynchpin of world’s global electronics component supply chain, with more than a million customers in 140 countries.
If you’re touching something with a chip or a wire in it right now, chances are Gallagher’s team touched it at some point along the way—and, increasingly, helped the manufacturer re-design their supply chain to make it happen with more speed, efficiency and resilience.
Chief Executive reached out to Gallagher (who we’ve talked to before) in early August to get some tips for other CEOs about where the world’s supply chains are headed—and what they should be doing to prepare. The following was edited for length and clarity.
The economy is still rallying despite the Fed’s best efforts. It just keeps going on and on. What are you seeing in the supply chain these days? What should we know that you know? What should we see that you’re seeing out there, given that demand is just not slackening?
We are in the center of the technology supply chain. We’re that middle guy that I call an upstream, we’re dealing with all these top semiconductor technology companies in the world downstream to hundreds of thousands of different customers across every single vertical from consumer, to PC, the automotive, transportation, defense, aero, medical, industrial. So, it really is an exciting place.
If you look at the application of electronics in the supply chain around industrial, just look around your house, your car, your e-bike, your thermostat, your security system, it wasn’t the way it was. Your La-Z-Boy sofa has electronics in it, right? Your dump trucks, golf carts, we could go on and on. And what’s happened is that pervasiveness of electronics and content is helping to keep this thing still moving. So, we’re just not seeing the typical cyclicality or seasonality, there’s so many mixed signals.
Is the ability for you and your suppliers to service that demand a function of new resiliency? Is it something else that’s kind of greasing the wheels a little bit here? Because I’m not hearing the “I can’t ship 100,000 Ford F-150s because I’m missing a chip in the windshield wiper” stories lately.
The lead times have come in and taken care of some of that shortage of supply, but not across the board. There’s still long poles in the tent out there of products: high-end controllers, certain technologies are still difficult to get. So, although there’s some oversupply there are still some chips and components that are not. But your word resiliency is a good one—and adaptability. What we’re seeing as one of the outcomes of the last three to four years is supply chains moving around. Where customers and/or suppliers you had inventory more de-centralized, now, based on all the breakdowns in the past several years, starting with COVID, the Suez Canal, and the fires in Japan, and the freeze in Austin, the Asia tensions, the political uneasiness, we’re having more and more customers want that inventory closer to them.
I get the question, “is everybody moving out of China?” No, I’m one of the ones that say no, I don’t think that’s going to happen. But there is China plus one. In other words, if [a company is] expanding manufacturing capabilities, they might move to Vietnam, or South Korea, or India, or back to Guadalajara, or in the U.S. And with that, the supply chain has to move. They have to be adaptable. If they want local or regional inventory, we’ll set up a logistics center or a third-party logistics company to help manage that inventory closer to their point of manufacturing. We have more locations today than we did three years ago just because of inventory moving around and us needing to get that closer to the point of use.
Nearly every one of the CEOs reading this have got a chip in something, or rely on a chip in something. Can you give them some tips about how to get better at this? What are you telling suppliers about how to be better these days?
I think the pendulum swung way too much to just-in-time and lean. It doesn’t have to be just-in-case either, but somewhere in between. What people realize is that a missing 25-cent chip holding up a $500,000 dump truck is not a really good idea—and that’s a real example. We’re in the middle. So, we service for our suppliers into the customers. As they get asked to do more complex things, my question to them is, “why would they do that if they can lean on us to go do it for them?” I mean, that’s what we do for a living. I think people need to understand what their core is, what’s core to us might be context to a supplier, right? And what’s core to a supplier is R&D, manufacturing, marketing, sales. To some extent, we do that, too. But supply chain, hey, that’s what we do for a living.
In a way, it’s been a silver lining for us because we’ve always known what we do is differentiated. And now you have customers and suppliers on both sides saying, “We need to take advantage of some of your capabilities around our supply chain.” We’re bringing in more and more [supply chain] architects because you don’t just flip the switch. That’s the other thing. People say, “Oh, I’m gonna redesign my supply chain. You know, it’s pretty complex. You don’t do that in a couple of weeks.
So, a couple of large, let’s just say a large automotive guy that typically didn’t deal with us before, they’re now leaning on us to go help them build that supply chain. And it takes upwards of 18 months in some cases. It’s very, very complex.
What I said to them is, “Is this going to be convenient amnesia?” I think the other lesson learned is, [as] things start to become more readily available, everybody goes back to the old ways. That’s always a danger, and I think that’d be a huge mistake. I call it out. I’ve been around long enough to see it because we’re not going to waste our time. And the response is: “No, no, no, we are not going let this happen again.”
Help us all look forward. Essentially, you’re in the oil business these days, if chips are the new oil, right? Where does this go from here? Because you’ve got a change in the components that are inside of everything. You’ve got a relocation of the chip factories, the foundries to the U.S. And then on top of all of that, you’ve got just this pure electrification revolution going on in nearly every aspect of life. How do we all swim in that? Give us a tip about where we’re going over the next 10 years, and how do we get better at doing all of this?
It’s going to get, I don’t want to say worse, before it gets better. This is all good, okay? It’s just that the investments have to continue to catch up with the applications. And where a lot of the investments are going in semiconductors is in the higher, newer technology stuff, right? Some of my concern, what we’re looking at is a lot of the core customers we service in industrial, in medical, defense, aerospace, they don’t have 18-month cycles—like in a PC or a mobile phone—these things are 10, 15, 25, 30 years of age, and it’s older technology.
I would say anyone in manufacturing of defense, industrial, where the lifespan of that product is 10, 15, 20, 25 years old, they need to be really planning ahead because there isn’t as much investment going into that type of technology as there is the new sexy chips for consumer. That would be the biggest tip I’d give: be sure you’re looking ahead and covering yourself, because product is going to continue to be tight in that space.
But the applications are just going to continue to [grow]. IoT, sensors and controls. How’s this going to help our environment? How can we get smarter around analytics somewhere? You haven’t asked about ChatGPT. Where is artificial intelligence? I think that’s all going to play in how we use applications to make us smarter, and better, and more efficient.
You run into CEOs at cocktail parties, what’s the thing they ask you? What do you tell them?
Well, in the last three years, they’d come with their list of parts they need, and I’ve become their chief expediting officer. So I avoided those for a while. But kidding aside, they did, though.
If you haven’t relooked at your supply, if haven’t relooked at your supply base, do that because we see how much it costs when you don’t. And don’t just outsource everything. I think so many companies—large companies—that I got calls from had no idea where their parts were because they outsourced, they outsourced, they outsourced. They had no idea. They lost the transparency. You have to have what we call a control tower to see where are your parts, what are your needs, what are your what-ifs from a drop-in standpoint, from a supply and demand standpoint. And we can really help them.
So now is the time to take a breath and build that control tower while there’s time?
I would, yeah. That would be my recommendation, for sure. And look at multiple sourcing of products. Now’s the time to do that. Try not to get locked in with any one technology either.
Other final thoughts?
Stay optimistic. It’s an exciting time. You look around the world, there’s a lot of unrest. Control what you can, don’t worry about what you can’t control. I’m a realist, but I’m an optimist about our future. I think it’s exciting. America’s manufacturing is doing pretty well. I am seeing companies come back into the Americas, the U.S., Mexico. Really positive signs. It’s still pretty robust. Even with interest rates going up, they can’t seem to cool it down. It’s a high-class problem.