Like death and taxes, obsolescence is inevitable, however, the risk can be mitigated through clear communication, resource planning and finding a trusted partner
It is easy to underestimate the economic impact of managing a product life cycle poorly. In many cases, this is due to inaccurate forecasting and poor communication from manufacturers, as well as weak internal systems and processes. The consequences often result in obsolescence, which can lead to increased procurement and carrying costs, lost revenue and inventory write-downs.
Unfortunately, obsolescence is a common occurrence in the world of electronic components. As technologies continue to evolve, improvements can render parts outdated and obsolete and can negatively impact cost and operations. It typically occurs when a part is replaced by one that is more superior, for example, it’s faster or smaller.
According to Moore’s Law, the number of transistors on an integrated circuit will double approximately every two years. This has became a self-fulfilling prophecy as technology manufacturers focus on increasing processing power in order to stay ahead of competition. While consumers benefit from faster, sleeker products, the negative implication for the producer is obsolescence.
Communicate clearly
It is estimated that millions of electronic components are retired or become obsolete each year. The most common problem for the end user is the lack of notification when a product is about to be phased out. Some manufacturers do an excellent job of proactively providing a roadmap to new technologies and alerting customers to approaching product changes or discontinuation. Oftentimes, however, this communication falls short due to fragmented organization, the number of components used in production, employee turnover and the number of parts that go end of life each year.
Consequently, buyers and engineers become aware of the situation when they go to procure the part. In most cases, this is too late, and creates a disruption in technology and the process, which presents a myriad of challenges.
A product is classified as end of life (EOL) based on a number of different scenarios. It may occur because a manufacturer is changing the part’s design, in which case a part change notification (PCN) should be disseminated to buyers. Or, a manufacturer is discontinuing a part altogether; therefore a manufacturers discontinuation notice (MDN) should be circulated offering a last time buy (LTB).
Although manufacturers can be well-organized and dutifully notify buyers of changes, there are resources that allow buyers to proactively monitor parts on their own as well. Such notification sites provide solutions by sending emails regarding product changes automatically based on a company’s bill of materials (BOM). That said, there is no substitute for constant communication with suppliers and OEMs. Going directly to the source of production is a sure way to stay abreast of any changes that may affect supply continuity.
Get independent assistance
When faced with end of life product, many buyers will turn to independent distributors for help. Independents can provide a vital resource for hard to find parts and shortage situations, smoothing out the ripples in the supply chain. One such distributor is Fusion Trade, which regularly assists customers faced with obsolescence and last time buys.
Fusion vice president, purchasing/EMEA sales manager, Tobey Gonnerman, said: “We encourage OEMs to implement preventative measures to protect against EOL surprises. Closely managing sole-sourced devices and keeping buffer stock are two obvious actions.
“Utilizing our resources can also be a logical and critical step in the process. Fusion provides market intelligence and supply options to OEM partners that their internal resources are ill-equipped to generate on their own. Expertise in the network of distribution channels and widely varied customers for a particular device are what Fusion relies on to add value and provide options to end customers. OEM product managers stay ahead of, or get smart quickly about, the devices on their respective radars.”
Obsolescence costs money and should be discussed in any organization, regardless of advanced planning systems. While the exact amount can vary, up to five per cent of a company’s material can be expected to go obsolete each year. Therefore, it would be prudent to reserve two to three per cent of the cost of goods as a reserve. While this may seem steep, it will take the sting out of unforeseen circumstances when a price premium is required to source alternatives or more expensive parts.
Due to the complexities and costs associated with this problem, many companies have created teams dedicated to managing solutions. These groups are experts in life-cycle planning, engineering solutions and sourcing obsolete parts.
Minimize the impact
Once a product is definitely going end of life, the most effective step to take is to identify and source a substitute product, engineer a new component into your product, or secure supply through the end of the product life cycle. These are all generally known and accepted alternatives, however, each have costs and risks associated with them.
Finding a substitute can be tricky, particularly in the defense and aerospace industry where the cost and complexity of substituting a new part can be daunting. An engineering redesign is often infeasible due to costs associated with labor, production downtime and added retesting and re-qualification. Further, there are no guarantees as to how long the new component will be produced.
Be creative
Securing remaining product via last time buys is a common solution to managing a product that is going end of life. While every program is unique, independent distributors generally procure inventory with an agreement from the customer to buy the parts back in scheduled orders over a predetermined period of time. They typically store the parts and manage the inventory.
Vice president trade for Fusion Trade, Carleton Dufoe, said: “When a customer comes to Fusion with a last time buy situation, the first thing we do is try to find inventory of the part or potential substitutes. Our internal database with over 10 years of history allows us to search on customer internal part numbers.
“We also have experience in managing last time buys for customers who don’t want to carry inventory on their books for an extended period of time. Fusion drop ships product globally, based on customer needs. We also have the ability to liquidate inventory should customer demand decline.”
Trust in testing
When a source of supply has been found, it is essential to verify quality. Hard to find parts are often targeted by counterfeiters, so proceed with caution. These issues can be mitigated using rigorous quality processes and advanced testing technologies.
Not all independent distributors can provide these resources, due to the restrictive costs associated with counterfeit detection. Therefore, partnering with a larger player can bring more assurance. Make sure your source has a strong vendor rating system and is a member of industry associations such as IDEA and ERAI, which offer certification programs designed to reduce counterfeit parts and mitigate risk.
Chief operating officer of Fusion Trade and president of IDEA, Paul Romano, said: “Quality is often the number one concern when dealing with obsolete product because in most cases the only option is the open market. Fusion works extremely hard to help eliminate that issue.
“We have invested in people, training, equipment and testing, including our anti-counterfeit screening and analysis labs located in Wilmington, MA and Hong Kong. Further, we have developed reporting and communication protocols that make the process transparent and give the customer critical information about what they are receiving. As a result, many customers turn to Fusion to vet product from other independents.”
Fusion undergoes numerous customer audits each year and provides guidance to customers who have not set up audit and selection programs for independents so they can begin the process.
Paul continued: “The key is to find and develop trusted independent suppliers you have audited and have built a track record with. Everyone is faced with procuring an obsolete part at some point. The trick is to line up and vet suppliers way before that happens. If you haven’t done that, you need to start now.”