The Obsolescence Problem In Your Supply Chain

Obsolescence is one of the greatest challenges for today’s manufacturers – but it can be overcome.

A manufactured product, regardless of industry or function, is, quite literally, the sum of its parts. And each end product, crafted from a wealth of electronic components, semiconductors, and peripheral products, reflects the designs and labor of dozens, even hundreds, of manufacturers.

Some of these manufacturers are well known, but many others have names unrecognizable to the average consumer. The further you zoom in on a product, the more names you’ll see.

Take the latest iPhone X, for example. Obviously, Apple is the company we all associate with this product – but the deeper we dive into the components to create Apple’s latest coup, the more the Apple brand fades in prominence. The acclaimed IR camera, arguably the phone’s most popular feature, is designed by Sony and built by contract manufacturer Foxconn. The flood illuminator, which helps the phone’s Face ID technology register your smiling mug in the dark, is, in fact, an IR Emitter supplied by Texas Instruments – which itself is built on an application-specific integrated circuit (ASIC) and single-photon avalanche diode detector from ST Microelectronics.

The number of interactions between original equipment manufacturers (OEMs) and original component manufacturers (OCMs) required to create a quality product today is simply astonishing, and their ability to initiate, monitor, and fulfill the obligations of these interactions on a daily basis is a true testament to the ingenuity of the human spirit.

The Lifecycle Mismatch Between Products and Their Components

In a perfect world, these manufacturers would all work in harmony to ensure that each component required for the assembly of a product can be supplied for the product’s entire lifecycle. Unfortunately, the firm hand of capitalism dictates the production needs of OEMs and OCMs alike. Just because a product is expected to have a 10-year lifecycle doesn’t mean that the critical components required to continue its production are manufactured on the same schedule. In fact, most components are produced on a lifecycle equal to roughly half of the product they support.

When an OCM, for whatever reason, decides to cease production of a component, that component is then classified as approaching “obsolescence,” although that term can be misleading. When we consider a household item obsolete, we are often implying that that particular item has outlived its usefulness.

As any OEM will tell you, in the world of manufacturing, that couldn’t be farther from the truth.

The Causes of Obsolescence

While the lifecycle is drastically shorter, the production of a component largely mirrors that of any other commodity – and as such, it rests on the changing winds of consumer demand. If there are many products that require the same component for extended lengths of time, and it makes financial sense for the OCM to continue production of that component, then of course they will continue to do so. But inevitably the production cycle must run its course – often to the detriment of a sizable client pool.

The typical production cycle of an electronic component can be easily visualized on a bell curve, as illustrated in the graph below:

This is an easy story to tell, and it’s one that anyone who has completed an Econ 101 course knows well. The story of why a component trends into obsolescence, however, is far more complex.

As every component is different, every component will have a different reason why its continued production would not be profitable. These reasons range from the mundane to the catastrophic. While by no means a full list, here are a few examples:

• Supply and demand has simply shifted out of the products favor. If a low sales volume is no longer enough to cover the manufacturing costs, then it’s time for the OCM to phase the component out of production. If the product is expensive to craft, the loss of a even a few buyers might be enough to push a component toward obsolescence.

• The market for the component has become too niche to maintain a profit. Sometimes an OCM will design a part with a wide spectrum of applications, but OEM engineers neglect to take advantage, thus stunting original projections for rapid growth.

• If a manufacturer is experiencing financial hardship, it may decide to exit several different markets (even profitable ones) to concentrate on its core competencies. Intel, for example, once exited the memory market to focus on microprocessors – where they controlled an 80 percent market share.

• Innovation from competing manufacturers has decreased the OCM’s market share below sustainability. This is particularly common in electronic component markets, where consumer demand for smaller, faster components with low power consumption grows by the day.

• Political instability, natural disasters, or “acts of God” have forced the OCM to close vital production facilities.

OEM Options Post-Obsolescence

Useful doesn’t even begin to describe the impact critical components can have on an OEM’s products and monetary budget. When a critical component on their bill of materials (BOM) approaches obsolescence, engineers and project managers alike find themselves at a crossroads. After all, just because a component has reached end of life (EOL) does not mean demand for the OEM’s product has decreased. Here are the most common paths OEMs take when confronting obsolescence:

Discontinue the Product. For large-scale manufacturers, this is almost never an option, and doing so can have incalculable consequences on consumer goodwill.

Find a New Supplier. The availability of this option largely depends on the nature of the component. If it is a replaceable generic component, this can be a viable option – but complications can arise if the new supplier can’t deliver on the OEM’s desired quantities, or if the price point is significantly higher. If demand for a component rises and the number of suppliers decreases, then a price hike can be expected.

Redesign the Product. While hardly an ideal scenario, if discontinuation is the only other course of action, this may be the lesser of two evils. Redesigning a product with alternative components can cost a manufacturer millions in precious working capital, and may result in an extension of the product’s original lifecycle to recoup the losses.

Negotiate a Last Time Buy. Ideally, when an OCM decides to cease production of a critical component, they will notify customers with a PCN (Product Change Notification). In this case, OCMs will give OEMs a small window of time to purchase the amount of inventory necessary to complete their product’s lifecycle and ensure business continuity. Of the options available to OEMs facing obsolescent components, this is usually the best one.

Last Time Buy Disadvantages

As the overall lifecycle of components grows shorter by the year, LTBs are quickly becoming the new normal for OEMs across multiple industries. But even the smoothest LTB transaction has drawbacks – some of which can be difficult to overcome without proper procedures and infrastructures in place.

Carrying Costs

Once an LTB purchase has been made, OEMs then face the issue of maintaining that new inventory as long as needed to complete the product’s lifecycle – which could be months to several years. If held on- site, storage alone can add as much as 25 percent annually to a part’s total cost. These companies are designed to be manufacturers, not storage specialists; when they are forced to do both, it might result in a cost far greater than their original budget allows. Some components also require highly specialized handling and storage procedures. Die and wafer materials necessary for the creation of ASICs, for example, require nitrogen-enriched cabinets designed to reduce humidity. If these materials are stored improperly, an OEM or EMS provider risks forfeiting several years’ worth of business continuity in an instant.

Working Capital

LTBs cannot be bought on a payment plan. When a bulk order is placed, the OEM is required to pay upfront for the entire purchase – a cost originally meant to be distributed throughout the lifecycle of the product. In some cases, the order can also be made by the electronic manufacturing service (EMS) providers who assemble the product on behalf of the OEM. Most EMS providers operate on razor-thin profit margins of only 5-6 percent, so any investment made in the name of long-term revenue is going to be a significant blow to their short-term bottom line.

Proper Notice

One of the largest hurdles facing OEMs regarding LTBs is their ability to know they’re occurring. Some OCMs give clients a 12-month window to secure their inventory, but that’s not an industry standard. In fact, of the hundreds of thousands of parts approaching obsolescence every year, over 40 percent have an immediate LTB date. Even more shocking, when an OCM decides to end production of a component, there’s an almost 50% chance that they won’t notify buyers at all! But even with a full 12 months’ notice, many OEMs struggle to finalize their orders in time. Should this occur, some will have no choice but to turn to third-party sellers, who often mark up prices knowing the market is in their favor.

Counterfeit Components

This is only a disadvantage if the OEM fails to make a necessary LTB, or if their LTB inventory proves insufficient down the road, but it’s important enough to deserve a mention. Not every third-party seller has procedures in place to trace a part’s origins to the OCM. Without traceability, there’s no guarantee that the part is authentic. The counterfeit market has grown leaps and bounds in the last several years, and the further an OEM ventures away from a component’s source, the greater chance that at least a portion of their inventory – and the quality of their products — will be compromised.

Excess Inventory

Trying to estimate inventory needs for a product years in advance is not an exact science, and rarely does a manufacturer purchase exactly enough. As already mentioned, underestimating can result in the OEM or EMS provider entering the open marketplace occupied by third-party sellers. To avoid this, it’s always better to overestimate inventory needs when faced with an LTB. But this presents another problem: what to do with excess inventory. Lot bids are a common solution, but it’s not uncommon for some items sold this way to be discounted 95 percent. If the amount of excess is significant, minimizing losses for pennies on the dollar is hardly ideal.

Obsolescence Solutions

Despite these issues, obsolescence is a fact of life for manufacturers – and this rising trend isn’t going anywhere. But the true danger OEMs and EMS providers face regarding obsolescence isn’t obsolescence itself.

The true danger is the false assumption that there’s no better way to combat obsolescence than what manufacturers already do.

This is where EDX comes in.

EDX manages the entire life cycle of electronic inventory needed to support the production and service demands of our customers. LTB services can provide convenience, but they do very little to get to the root of the obsolescence problem. If your supply chain partner does not provide your business with obsolescence solutions, then you aren’t doing much more than brushing the problem under the rug and hoping no one will notice.

The EDX Solution to obsolescence does not begin with LTBs. It starts long before that – at the very beginning of a product’s lifecycle.

BOM Monitoring Solutions

BOM monitoring is not new to the manufacturing industry, and many companies already have some form of monitoring process in-house. But while any monitoring is better than none, these systems will fail more often than succeed without two fundamental qualities: technology and experience. All EDX customers who enroll in the BOM Monitoring Solutions program will have full access to:

Big Data Technology. EDX’s BOM monitoring technologies are backed by over 8 billion rows of current and historical data on over 25 million unique electronic components, semiconductors, and peripheral products collected over the past decade. With this in hand, EDX not only can notify their customers if a component is being phased out of production, but it can predict obsolescence long before the EOL process begins. This service allows OEMs and EMS providers the ability to forecast component shortages months in advance, and weigh their options accordingly without being forced into an LTB, or the open market, on short notice.

Unrivaled Experience. EDX is not the only company in existence with access to Big Data – but what separates EDX’s service from what companies can do in-house is the experience EDX has analyzing it. The detail that Big Data can go into about a component is vast, but only certain data points reveal trends toward obsolescence. If you don’t know where to look, it’s very easy to get lost in the minutia. Over time, EDX’s team has perfected this art to the point where they will not only spot trends, but will verify the status of a part by directly contacting the OCM. Remember, almost 50 percent of EOL parts are not accompanied by a PCN for buyers – so instead of dedicating time, money, and manpower toward the daunting task of seeking out obsolescence, EDX customers can put these resources toward more pressing tasks that actually grow – not just maintain — their business.

Last Time Buy Solutions

At the point in a product’s lifecycle where LTBs becomes necessary, EDX has Last Time Buy Solutions in place to combat each and every LTB issue OEMs and EMS providers face on a regular basis.

Preserve Working Capital. Instead of having customers produce up to 10 years of working capital upfront, EDX will purchase all necessary LTB inventory on the customer’s behalf. Then, on a schedule determined by the customer, they will distribute it anywhere in the world as needed. If the LTB inventory needs to be stored and carefully distributed over a 10-year period, then that equates to 10 years’ worth of usable capital the customer can keep on their books to hire new employees, design new products, and even expand into other markets. How exactly they use that newfound financial flexibility is up to them, but making that decision is infinitely preferable to having hundreds of thousands of dollars in company assets locked away in inventory that may not even be needed for years.

Save on Carrying Costs. EDX is renowned for its commitment to innovation, and their state-of-the-art storage facilities are a big reason why. In addition to maintaining both ISO 9001 and AS9120 certifications, as well as a dedicated staff with extensive training in inspection, ESD, and MSL packaging protocols, they also offer customers the option of storing sensitive, high-value components in a climate-controlled, fireproof, weatherproof, EMP-proof vault chamber – a first in the supply chain industry. This vault also contains ECD cabinets rated as “best in class” for die and wafer banking. Taken together, these amenities can guarantee up to 10 years of business continuity while saving OEMs and EMS providers an average of 42 percent on carrying costs.

The New Supply Chain

At EDX, we don’t offer services for overcoming the problems posed by components reaching obsolescence. We offer solutions. There’s a reason for that.

EDX Electronics Headquarters

Services are temporary. Solutions are forever.

EDX has always believed in providing the latter, and that’s what has driven us to the forefront of our industry. The manufacturing process continues to evolve by the day – and the more it changes, the more obvious it becomes that obsolescence is not being addressed with the care and attention it deserves.

The first step on our journey is to educate our customers on the grave threat obsolescence presents to their business model. The second step is to show them a better way to manage their products through all phases of the inventory lifecycle.

The third step is to implement our solutions into your business. We look forward to speaking with you.

Additional Solutions:

For more information about our Inventory Exit Solutions designed to reclaim excess inventory investment, click here.

For more information on Custom Storage & Fulfillment Solutions for LTB inventory you already own, click here.

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