Obsolescence Insurance, a New High-Margin Business for EMS Companies
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Recently EPS and Verical.Connect have focused on the issues of counterfeit mitigation and the recent (9/21/2015) proposed amendments to the 2012 Defense Federal Acquisition Regulation Supplement (DFARS). A common theme is the continual raising of the quality bar. The proposed amendments to DFARS this year mirrors this raising of the bar and clearly lays forth the processes, expectations, and responsibilities for U.S. Department of Defense (DoD) contractors and sub-contractors that buy electronic components.
In the new DFARS proposed amendments, these requirements are now extended from the traditional military/aerospace specification standards to include COTS component sourcing for DoD. To consider the impact of these issues on the semiconductor and electronics industry, EPS asked a few central questions of Matt Hartzell, chief administrative officer for leading independent distributor, Smith & Associates, as well as Kirk Wehby, chief operations officer also for Smith & Associates.
EPS: Given that DoD standards and DFARS unofficially influences commercialized sourcing standards and procurement strategies, what effect do you think the 2015 DFARS proposed rules will have on the industry?
Hartzell: In years or decades terms, to some extent the changes are already going on. However, I just have a difficult time thinking that a deeper impact [on the commercial sector] will happen anytime in the foreseeable future because we live in a free marketplace. We simply cannot regulate away who buys from whom. It used to be caveat emptor [buyer beware] was the guiding principal where buyers had to lookout for what they bought, but more recently there are more consumer laws on the books requiring buyers to do X but sellers need to do much more of Y to not endanger people. We see these issues swing back and forth like a pendulum: best pricing, safe product, freedom to choose, certainty and insurability of products, etc.
When you talk about a marketplace, you talk about multiple decisions that go into purchases and sales; that includes the balance of provenance, deliverability, pricing, and trust. So, I don’t think that a DoD regulation is going to ripple down and change the industry. I think it affects it, but… it’s a little bit like saying the tail is wagging the dog – the industry has already been affected, there’s already been lots of consolidation with small businesses falling by the wayside. If you don’t have the ability to insure, to show a major builder or manufacturer that you have all of the certifications [and operations in place] to meet their requirements, you won’t make it on their AVL.
Kirk Wehby, chief operations officer, Smith & Associates
Wehby: I think it [DFARS 2015 Proposal] is a good foundational process, but we all know, whether a necessary evil or not, as some would call it, the open market is a viable option for a purchasing strategy when handled appropriately. It is all going to evolve to include the elite independents that can manage to those standards, like Smith & Associates. The distributors who are doing what they say they are doing, investing in people, equipment, and processes, they won’t have a problem. These sourcing goals always start very strong, but then when you can’t get the parts it opens a small door. That small door is the elite independents that have the certifications and then these independents, including Smith, are allowed to prove ourselves during the process.
I think evolution will definitely continue, but I also don’t see it as an easy step to get through this door. At Smith, we’ve seen it with certain customers who run you through the ringer with audit processes and specifications on how things are to be done and that rigor is similar to the DFARS requirements. It [DFARS 2015] is a good foundation, but when the rubber meets the road, and there are parts that cannot be sourced through the authorized Trusted Suppliers, then they will have to deviate and it should open the doors for the elite independents who have invested in meeting the strictest requirements and processes.
In the commercial sector, there is such a focus on cost that it will be tough for DFARS to raise the bar in the commercial industry the same way as for DoD. I think the effects in the commercial sector will really depend on what is being sourced and which quality standards are demanded. Do I think there’ll be a push back for more quality and a push back to the supplier? Yes, but I think the DoD is really at a point where this is not a cost initiative, this is a security interest.
On the commercial side, if you’re competing with people buying from independents for a better price with the same quality and you locked your door to independent sourcing, you’re setting yourself up for failure – it’s not apples to apples there. Once you get into the military/aerospace only market, it is and should not be a cost issue, so this is not a cost reduction initiative, rather it’s about controlling the parts at all cost for mil/spec. That goal, however, is not part of any commercial initiative in today’s commercial electronics marketplace [outside of certain sectors like oil & gas, automotive, aerospace, and similar].
Click here for part 2.
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