A Tale of Two Manufacturers, and the Last Time Buys Between Them

With the current electronic component shortage crisis, the relationships between OEMs and contract manufacturers are of the utmost importance. Continuing to conduct business as usual is no longer an option. Success can only be achieved by building better relationships across all levels of your supply chain — and if there’s a disconnect, everyone is impacted.

Especially in a market with near-historic demand, component manufacturers are going to be highly restrictive with their inventory offerings. Limited production capacities necessitate concentrating on what’s going to be the most popular, which leaves OEMs who depend on long-term legacy components out in the cold. This places increased importance on contract manufacturers to help their customers maintain business continuity.

Without the right strategy in place, however, a contract manufacturer’s efforts to maintain such continuity can create unnecessary friction with the very customers they depend on.

An Obsolescence Problem

It all starts with obsolescence.

“Component obsolescence has always been an issue for buyers in the defense, aerospace, and medical equipment industries,” says DigiKey. “Equipment built by OEMs in those industries tends to have long lifecycles that outlast the life spans of the semiconductors and other components that are critical to those systems.”

Obsolescence is an issue all markets must overcome — but in these industries, where OEMs are often required to support products for well over 10 years, the effects can be devastating. Once these components transition toward end-of-life (EOL), their prices can skyrocket 15 to 20 times the original value on the open market.

This leaves OEMs at a crossroads; either they must accept the loss (to the detriment of their working capital), or risk not maintaining their long-term service commitments.

But when the time comes for a component to be unexpectedly obsoleted, it is not the OEM who usually knows first, but their contract manufacturer. As the entity primarily responsible for the final assembly of the product, they are the ones with the closest link to their suppliers. So close, in fact, that they usually are the first to know when Product Change Notifications (PCNs) are issued.

When such a situation occurs, the contract manufacturers will then notify their OEM customers of the impending obsolescence. The next step, however, is up in the air — and where contract manufacturers too often miss an opportunity to provide their customers additional value.

A Sticky Situation

What a contract manufacturer can’t do is make the last time buy on their customer’s behalf — or at least not without putting their own financials at significant risk. Contract manufacturers typically operate on very thin profit margins, often as low as five-to-six percent. Thus, they don’t have the working capital or ability to fit the bill for such a large investment. In a typical situation, this means the CM has no option but to call on the OEM to front the money.

Now, OEMs are further capable of such investments, but no one likes to sacrifice valuable working capital unless absolutely necessary. The resulting back-and-forth creates friction between the contract manufacturers and OEMs, and the resulting strain has the potential to delay production well past the last time buy date, as well as permanently damage long-established working relationships.

Imagine if the contract manufacturer had another alternative to making such a call. What if they could offer their customer a solution that doesn’t impact either company’s bottom line?

This is exactly what the EDX Last Time Buy Solution can do.

A Last Time Buy Solution

The contentious debate over who will ultimately pay for a last time buy is not necessary. EDX will bear the cost of the last time buy so neither the OEM or the contract manufacturer has to. We will buy, store, and fulfill 10 or more years of last time buy inventory to support even the longest production and service commitments.

Our solution has been proven to preserve working capital, reduce inventory carrying costs, and drastically improve business continuity. Both contract manufacturers and OEMs know that a last time buy is an imperative investment, but no one wants to open the checkbook. OEMs love our solution because they get to pay by usage, as needed, for their inventory over the next decade, while contract manufacturers get to offer a unique solution that customers will remember them by.

Our Last Time Buy Solution creates a new path where both contract manufacturers and OEMs can walk away from the negotiating table satisfied. This creates the happy ending that both sides want, and very much deserve.

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