Consumers browsing the shelves at your local retailer rarely glance behind the curtain and see how their buying habits affect all levels of the manufacturing supply chain. It’s a fascinating story to tell, and one that has profound implications for the future of not just the manufacturer supplying product to retailers, but for the component manufacturers that make such revolutionary products possible.
Everything is connected. If an equipment manufacturer wishes to introduce their vision to the masses, they are going to need component manufacturers to do so. But with each passing year (as this year’s turnout at CES confirmed), competition to capture the imagination of the consumer is tougher than ever – and that competitive drive to reach the apex of their industry has a direct correlation to the rapidly diminishing life cycle of electronic components.
We are living in the golden age of the startup. Small, ambitious companies now have the means to (with a little ingenuity) not only compete with some of the most recognized brands in the world, but in some cases even overtake them. As history has repeatedly shown, if a product is good enough, consumers will usually buy it regardless of the name on the box.
And when they do buy, they buy big. Consumers now spending over $1,000 dollars annually on electronic products. With pieces of the pie that large on the table, the potential earnings for manufacturers are greater than at any time in recent memory.
While it’s not the only reason, that earnings potential is the driving force behind OEMs’ insatiable desire for components that exhibit increases in speed, reductions in feature size and supply voltage, and innovative new approaches in interconnection and packaging technologies. After all, the faster, sturdier, more efficient products OEMs can put in front of consumers, the better their chances are of exceeding forecasted sales targets and attracting investors.
Component manufacturers, of course, are more than willing to comply to meet these OEM demands in the name of increasing their client base – but it comes at a cost. In an effort to offer customers newer, faster, more efficient components, OCMs must inadvertently shorten the life cycle of each subsequent component generation.
Think about it this way: every component that is produced has several built-in opportunity costs. How much manpower does the production of the component take? How much do the raw materials cost? How much space does the manufacturing process take in the factory, and how many machines are required? If an older component has a dropping demand as a result of OEMs moving toward something more advanced, the opportunity cost of keeping that older component in production eventually becomes too great of a burden for the OCM to bear. Usually, this results in the difficult decision to transition the component toward obsolescence, often at the expense of a few valuable customers who aren’t prepared to adapt their supply chain accordingly.
As of today, the average life cycle of an electronic component or semiconductor is approximately 3-6 years. For some industries that update or redesign their products annually, this might be acceptable – but in others, such as the healthcare industry, certain products require the support of component manufacturers for 10, 15, even 20 years and beyond. As you can imagine, this is a supply chain hurdle that is affecting more and more manufacturers by the day – and all signs point to the discrepancy only getting more pronounced as technology continues to evolve.
When discussing an OCM’s decision to transition a component toward obsolescence, it’s important to remember that OCMs do not take this decision lightly. In some cases, OCMs might even accept a degree of loss manufacturing a component past its natural life cycle if it means maintaining a long-standing customer relationship. In the automobile industry, for example, OEMs will often require OCM partners to sign a six or seven-year agreement to provide a component, even if rising opportunity costs demand the component life cycle be far shorter.
Quite often, though, supply and demand are not the only variables that need to be considered when such a decision is made. To an extent, there are certain analytical models available that OCMs can use to gauge just how long a component’s life cycle will be, but sometimes it’s what could never be predicted that tips the scales toward end of life.
For example, imagine that an OCM is based out of a country experiencing an unforeseeable catastrophe such as a natural disaster or political uprising. In recent years, many component manufacturers have transitioned operations to less developed countries – a win-win that reduces manufacturing costs while bringing much-needed economic prosperity to poverty-stricken nations. But by making such a transition, OCMs (and by extension their OEM partners) must accept the added risk to businesses continuity that comes with it. Should Murphy’s Law rear its ugly head, it would obviously play a significant factor in a component’s life cycle.
There are also times where all the market projections and analytical models in the world cannot foresee a bad businesses decision. A component could be designed by an OCM for mass market consumption, but once the returns start coming in, it may become clear that its consumer base may be simply too niche to maintain a profit. Despite a wide range of applications, if OEM engineers neglect to take advantage of a component’s potential, it may force the OCM to take steps to discontinue what is not performing.
Facing such a such a vast life cycle discrepancy, it usually falls on the OEM to adapt to the decisions their suppliers make. After all, just because a component has reached end of life does not mean demand for their products in the consumer market has decreased in any way.
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 life cycle and ensure business continuity.
None of the options listed above are what any OEM would consider ideal, but in most industries, a last time buy is typically the best course of action. EDX has long built its reputation on helping navigate some of the world’s premier equipment manufacturers through this process with the help of our one-of-a-kind Last Time Buy Solution.
The life cycle discrepancy between electronic components and their corresponding products is not going away, and most signs point to it only growing for the foreseeable future – but having a Last Time Solution in place has been proven time and again to be the best way to ensure long-standing OEM and OCM relationships remain positive and prosperous. These two sides of the supply chain depend on each other, and when they are in sync, everyone from the raw materials supplier to the final customer browsing the store shelves stands to reap the rewards.
At the end of the day, what could be more important than that?