By Jonathan Cassell, Lead Analyst at Supplyframe Commodity IQ
The Supplyframe Commodity IQ Lead Time and Inventory Indexes are both expected to rise in Q3, reflecting the ongoing decoupling of supply chains from China.
The Commodity IQ Lead Time Index, encompassing all electronic commodities tracked by Supplyframe, is expected to rise by 11.1% sequentially in Q3. Meanwhile, the Commodity Inventory Index is projected to increase by 9.0%.
These expected increases would represent the second consecutive quarterly rise for the two indexes. In Q2, the Commodity IQ Lead Time Index surged by 134.2%, while the Inventory Index moved up by 8.9%.
In theory, inventory and lead time trends should move in opposite directions. A rise in inventory levels should result in increased availability, spurring a reduction in lead times. Conversely, stockpile reductions should diminish supply levels, causing lead times to extend.
However, the reality of the electronics supply chain is actually quite different. In practice, inventories and lead times move in the same direction quite frequently on a monthly or quarterly basis. When both measures rise, particularly for two consecutive months, it can serve as an indication that the electronics supply chain is undergoing stress.
In Q2, the supply chain faced multiple pressures. The combination of rising demand in anticipation of tariffs, low supplier factory utilization and ocean shipping cancellations caused the Supplyframe Commodity IQ Lead Time Index to surge at a record rate, even exceeding the historic rise seen during the start of the Covid-19 pandemic.
At the same time, stockpiles rose in Q2, as buyers built up inventory before additional tariffs were expected to be imposed. However, despite the increase, stockpiles remained at low levels by historical standards in Q2, with the Commodity IQ Inventory Index score at 49.4, which is well below the baseline level of 100. This low level of stockpiles contributed to rising lead times.
Although inventories are expected to rise again in Q3, they are still projected to remain low by historical standards. The Commodity IQ Inventory Index is projected to be at a level of 53.8 in Q3, well below the baseline.
Meanwhile, the Commodity IQ Lead Time Index is expected to rise to a highly elevated score of 236 in Q3.
As buyers seek to decouple from China due to tariffs, they are creating separate supply chains for Chinese and non-Chinese products. This phenomenon is contributing to lengthening lead times and rising inventories. The creation of separate Chinese and non-Chinese supply chains can increase supply chain complexity, as the establishment of new stockpiles in multiple locations leads to redundant inventory.
Moreover, as many buyers strive to reduce or eliminate their reliance on Chinese suppliers, they are turning to sources located in other nations that lack China’s advanced logistical capabilities, resulting in rising delivery lags.
A simultaneous increase in inventory and lead times is expected in Q3 for many key commodity categories, including capacitors, resistors, diodes and optoelectronics.
Amid current circumstances, procurement organizations are advised to continue building up their buffer stocks to ensure component availability during Q3 amid extended lead times and uncertain market conditions.