How to Weaken the Link Between Component Shortages & Counterfeits
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Manufacturers of long-lifecycle products have been trying to “manage” component obsolescence for decades. The decision to end a device’s useful life (EOL) is solely in the hands of original component manufacturers (OCMs). Therefore, equipment manufacturers (OEMs) have been largely forced into a reactive, rather than proactive, stance in terms of obsolescence management.
The challenges have grown—rather than decreased—with the evolution of the electronics supply chain. The classic long-lifecycle equipment markets include defense, aerospace, and medical. In the heyday of the U.S.’s defense buildup—the 1980s—component makers designed specialized components (mil-spec) because there was more-than-adequate demand. As demand slowly waned, equipment makers turned to commercial off the shelf (COTS) components because they were plentiful and less expensive than mil-spec parts.
This decision raised risk levels for certain segments for the supply chain. When mil-spec parts were plentiful, risk was mostly attached to supply not meeting demand. As COTS became the preferred source of components, risk took on financial, legal, trade, maintenance, and sourcing dimensions for OEMs. Forward-looking companies are considering tools, such as data collection and analysis, to better manage all these areas of risk.
How did we get here?
OCMs proactively sent EOL notices during the 1980s, according to Dale Lillard, president of Lansdale Semiconductor Inc., a provider of aftermarket semiconductors and services to the electronics industry. “If an OEM was buying off a qualified manufacturers’ list (QML), component makers would send those customers an EOL notice so they could buy as many parts as they thought they’d need. That process was effective at the time,” said Lillard. “The only time an OEM couldn’t get adequate supply was when – as an example -- a factory burned down, and inventory was destroyed. Chip makers knew there was demand for specialized, ruggedized parts, and would design circuits that worked in extreme environments.”
End-users of these devices – largely in the defense, aerospace, and naval markets – maintained the equipment they bought. “Raytheon wasn’t asked to maintain its missile systems,” Lillard explained. “[The armed services] bought components and would switch out their own circuit boards if needed.”
Fast forward to today. EOL notices are posted industry-wide. OCMs manufacture few mil-spec parts. OEMs are now sourcing COTS devices. Although on paper, these devices can tolerate extremes, there are very few guarantees of performance over a span of decades. As a result, said Lillard, OEMs and their subcontractors have now become responsible for maintaining and repairing equipment.
This creates several problems for these OEMs. When parts go EOL, they’re now competing with consumer, automotive, and other industries for leftover parts. Commercial devices are obsoleted more rapidly than parts going into mission-critical systems, so EOL events are increasingly common. To secure the parts they think they’ll need, long-lifecycle equipment makers must spend cash, upfront, to buy EOL inventory. This is in direct contrast with the just-in-time and build-to-order financial models most manufacturers have adopted.
Another option is to partner with an after-market manufacturer such as Lansdale, which is authorized by OCMs to distribute their parts. Lansdale buys EOL inventory; but it also procures masks, die, and IP from OCMs and re-manufactures devices. The downside for OEMs, explains Lillard, is lead-time—chips take 18 to 20 weeks to manufacture, no matter what.
The authorized aftermarket also guards against counterfeits, which are common in military-grade components. Counterfeiters buy commercial or even defective parts and re-mark them as ruggedized. The U.S. Department of Defense has changed its sourcing rules to combat that problem.
What we can do
End-customers could be incentivized to offset EOL expenses, said Lillard. “Let’s say Raytheon offers a 10-year warrantee on its missiles,” he said. “They could ask the U.S. government to pay above the equipment price for something like a maintenance contract. That would enable Raytheon to buy the replacement part its needs – it takes money to do this type of thing.”
Suppose a costly part from Xilinx is slated for end-of-life, Lillard explained. “Every time Xilinx obsoletes something, it causes a lot of heartache. But manufacturers are hesitant to buy expensive EOL devices purely on spec. Unfortunately, the U.S. military is not in the position to tell its subcontractors how many systems they are going to buy.”
This maintenance arrangement could benefit brand owners, Lillard added. “All carmakers guarantee their products for a period,” he pointed out. “If something goes wrong, you go to Ford or GM to fix the problem. If a car can be guaranteed, why not an F-35?”
The electronics industry’s ability to collect and analyze data could make the EOL process more transparent. OCMs could digitally communicate with specific customers rather than posting industry-wide notices that might be missed. Consumption data could be used to forecast future demand for EOL parts. Regenia Sanders, principal of EY’s Supply Chain & Operations practice, said ‘digital’ has almost unlimited potential in the supply chain. “Professionals entering the industry aren’t just interested in technology – they’re interested in in how to use information in the form of analytics and get the data that helps fuel decision-making and insight,” she said. “We call it the difference between doing digital and being digital.”
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