Update on Lead Times and When We Can Expect Normalcy

The worldwide supply chain crisis, beginning with closures in 2020, spiraled into a multi-year problem for the hardware industry. Due to severe chip and other component shortages, lead times turned from weeks to months. 

Many anticipated that 2023 would show some progress in return to the pre-pandemic pandemic level of lead times. The good news is that lead times have reduced significantly by the start of the second half of 2023. 

However, supply chain challenges haven’t completely subsided, and things may not return to normal until 2024. As lead times improve, more challenges that can pressure the supply chains may be waiting around the corner. 

In this article, we will discuss the following:

• The current state of lead time delays in the second half of 2023.
• Challenges in the near future that vendors and suppliers must prepare for.
• How to deal with lead times.

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Long Lead Times and Shipping Delays Subsiding

The most recent earning calls from the CEOs of major network vendors like Cisco, Juniper, and Arista indicate supply chain delays are finally reducing. All the major network hardware manufacturers shipped more than they had in the last few quarters, and they’re also reporting reduced backlogs. 

During a Q2 2023 earning call by Juniper Networks, CFO Kenneth Miller told analysts that from a backlog perspective, “clearly” backlog was coming down as the company expected it to this year.

“I'll tell you, it came down a little bit more than we expected, given that the order weakness that we called out in Q2. So backlog is coming down. However, it still remains about three times what we would normally expect in kind of a pre-pandemic historical level,” Miller said. “I still expect it to remain elevated as we exit the year at approximately two times kind of normal historical level. So it's coming down quickly, but it still remains quite elevated.”

Cisco, the world’s leading network equipment manufacturer, also drew a similar picture about lead times in its earnings call. It reported that the backlog was reducing, but they expect some delays to continue into 2024. 

“The aging of our backlog has continued to improve as the supply situation normalizes, and as expected, increased customer deliveries reduced our year-end backlog to roughly double historical levels as we enter fiscal '24,” said Scott Herren, the company’s CEO, in its earning call for Q4 fiscal year 2023.

He also emphasized that despite the delays in the recent past, cancellations were relatively lower, showing strong demand for Cisco products. 

Ita Brennan, the CFO at Arista, also touched upon the improving supply chain conditions during the vendor's Q2 2023 earnings call. 

“On the supply side, we expect to continue to ship against previously committed deployment plans for some time, targeting supply improvements where most needed, but also careful not to create redundant customer inventory,” she said.

Strong Financial Performance

As the leadership at major network vendors drew a positive picture of lead times in their earning calls, the financial data supported their statements. 

Nearly all major vendors, including Cisco, Arista, Aruba, and Juniper, reported strong earnings in the quarter ending on June 30. These substantial revenue numbers resulted from more sales and order fulfillment. It indicates that supply chain issues are starting to subside as experts had expected going into 2023. 

For instance, Cisco’s Q4 2023 revenue was up 16 percent year-on-year at $15.2 billion. Similarly, Juniper Networks' revenue in Q2 2023 was reportedly $1.43 billion, with a 13 percent increase year-on-year. 

Even though economic uncertainties marked 2023 in the tech industry and the world, these network vendors posted strong earnings compared to last year and 2021, when they were deep in the supply chain crisis. 

With supply chain bottlenecks resolving and chip production accelerating, these vendors could deliver backlogged orders. 

Return to Normalcy Not Before 2024

While the latest release of quarterly earnings of major network vendors brings some good news, the language of the CEOs indicates things aren’t exactly where they need to be. In other words, a total return to normalcy in production and lead times may not be achieved until next year. 

The extreme backlogs from the prior two years may require more time. Miller, the CFO of Juniper Networks, said it will put some pressure on 2024 revenue growth.

“The backlog is a tailwind in 2023. It will be a headwind to 2024 as the backlog — we will not have as much elevated backlog entering next year as we did this year. It's going to require us to have a recovery in bookings and orders,” Miller said. “The good news is I expect that we will have a recovery in orders. I expect next year to be a strong bookings year for all of our verticals as we kind of go through this backlog digestion period and react to the current lead time.”

There are similar sentiments at other vendors, who expect the lead times to normalize by early 2024. 

New Challenges Ahead for Hardware Vendors

While network and data center hardware manufacturers like Cisco, Juniper, and Arista have managed to reduce lead times, they will likely experience growing demand going into 2024. The biggest driver of the demand for new equipment from these manufacturers is artificial intelligence (AI). 

Generative AI has overtaken the general consumer market with applications like ChatGPT and Bard. However, the impact is expected to crossover to enterprise hardware and software sections. 

Manufacturers like Cisco are already eyeing the enterprise AI market as they recently unveiled the Silicon One processors that support AI operations. As GPUs are the preferred processing components for AI workloads, some vendors work closely with GPU makers like NVIDIA. Earlier this year, Dell and NVIDIA announced Project Helix, a portfolio of AI products designed to advance enterprise use of the technology. 

The interest in AI-centric hardware, including servers and storage, will drive demand. Although the near-term goal for vendors is resolving lead time issues, they may face such issues again if they’re not proactive with the production approach, particularly with hardware. 

The lessons from the past must be applied to ensure supply chain bottlenecks don’t reappear. Thankfully, chip production is expected to increase with consorted efforts from manufacturers and governments. Nevertheless, hardware manufacturer leaders must ensure supply chain issues don’t slow progress in AI innovation. 

Dealing With Lead Times

As mentioned, lead time delays aren’t entirely over. Some businesses may still be waiting on their orders from last year. Others approaching their next refresh cycle may be uncertain about updates because of expected delays. 

Even though the 2021-22 supply chain crisis was a big cause behind significant delays in the supply of critical hardware components, lead time delays aren’t uncommon in this industry. One surefire way to tackle these issues is working with a procurement specialist like PivIT. 

At PivIT, we were able to help many of our clients circumvent long lead times, thanks to our supplier connections and massive standing inventory. We understand the importance of timely delivery of equipment in ensuring business success. 

We work twice as hard to reduce lead times and procure hardware from major vendors, with the option of maintenance to support legacy devices while you wait for your new equipment. Learn how PivIT can help you deal with long lead times today!