Executive Briefings

Product Lifecycles Create 'Gap' in Electronics Supply Chain Filled by Unauthorized Components

Widely divergent lifecycles for electronics products are creating increasing demand for obsolete and end-of-life components, which sometimes end up being sourced from the gray market. Let's look in detail why that is happening and how product lifecycles are creating a gap in the electronic components supply chain that is in danger of being filled by counterfeit components.

Product Lifecycles Create 'Gap' in Electronics Supply Chain Filled by Unauthorized Components

Tale of two lifecycles

At its simplest level, the conflict between the original component manufacturer's and the original equipment manufacturer's product lifecycles sometimes creates gaps which result in excess supply or unmet demand.  Upon introducing a new component, a component manufacturer quickly ramps production to take advantage of market demand at the time of peak profitability for the new component. However, if forecasts are not aligned, this may result in the first type of "lifecycle gap," where supply outstrips demand, and excess product becomes available in the market. As product sales slow and the component reaches the end of its lifecycle, the manufacturer begins to scale back production and may begin the process to "end-of-life" (EOL) the component.  This potentially creates the second type of "lifecycle gap," where buyers continue to demand a key component but it is no longer available from the supplier.  The EOL phase of a particular component is often difficult for customers because it can cause a disruption in their manufacturing flow and planning and result in significant financial impact, particularly for customers with long product lifecycles such as the military or medical industry.  Manufacturers who EOL their products do not move a component into its EOL phase without much planning, as they must weigh the risk to their customer relationships against the ever increasing costs of keeping older lines running and supported. But at some point the costs simply overshadow the revenue generated. It is as this cross point, when OEMs and other buyers are unable to satisfy their demand for the now end-of-life and obsolete components that they often turn towards sources other than the original manufacturer and its authorized and franchised distributors to procure the product they need. This is when the trouble begins.

Industry needs are diverse

This lifecycle scenario varies across industries as product lifecycles in the electronics industry fluctuate widely, from a couple of years for consumer electronics to sometimes over 20 years for military and aerospace electronics.  In general, the lifecycle for consumer electronics is shrinking due to changing tastes, demand for increased capability, and intentional product obsolescence on the part of manufacturers, whereas in other areas, such as military/defense, lifecycles are lengthening due to economic impacts, heavy upfront investment that is recouped over several years, and a growing awareness of the environmental impacts of constantly changing electronics versions. 

"¢ In recent years, Apple has become the poster child for the rapidly shortening lifecycles of consumer electronics. In late 2012, when the company launched the iPad 4, just seven months after debuting the iPad 3, customers expressed their frustration on social media and with their wallets, as sales lagged behind those of the iPad 3 at its launch. While the iPad 4 contained several enhancements over its predecessor, the differences were not great enough to justify the short lifecycle of the iPad3. In this and other consumer electronics examples, lifecycles are compressed because of competitive pressures and marketing imperatives, rather than true technological advancements. Still, the impact on the electronics supply chain is the same. Component manufacturers keep up with the demands of the consumer electronics industry, which generates significant profits, by introducing ever newer components to chase market demand. If manufacturers don't keep up with burgeoning demand, consumer electronics OEMs will turn towards other sources.

"¢ Military and defense electronics illustrate the flip side of the lifecycle issue, with extremely long lifecycles resulting in a component supply gap. A June 2012 study by the Lexington Institute revealed that a key argument against the then-imminent cuts in the defense budget due to sequestration was that the military desperately needed to upgrade weapons systems that, in some cases, have been in place for more than three decades. While that is an extreme example, it is true that many defense projects, which require extensive development times and billions of dollars to produce, are expected to remain in place for several years. The military product lifecycle is much longer than that of consumer products. Some of this is by design, not just due to budget pressures. Projects are increasingly designed with a lifecycle design philosophy that emphasizes sustainable design and an improved maintenance program. Long-term (up to 15 years or more) access to electronics components is part of this philosophy. Defense and aerospace projects may need much older date code, obsolete, or end-of-life products and, as a result, buyers are seeking a supplier that offers manufacturer-direct access to these products, as well as the ability to hold parts in a safe and controlled environment for processing in the future. When these parts are unavailable, this gap between supply and demand opens the door for gray market product to enter the military supply chain, which increases the chances of counterfeit products being present. This has led, in the case of the military electronics components supply chain, to increased oversight by government regulators.

What is a buyer to do?

The "lifecycle gap," created by lack of supply from the manufacturer combined with sometimes urgent requirements to support older products is forcing buyers to look for alternate sources, including brokers and/or the gray market suppliers who exploit the needs of buyers for obsolete and end-of-life components. This makes it easier for counterfeits, or at least unauthorized components, to enter the supply chain. This is not a small problem. According to a 2012 study by market research firm iSuppli, 12 million counterfeit parts were reported in the last 5 years, and 57 percent of counterfeits reported from 2001 through 2012 were obsolete or end-of-life components.  Moreover, a May 2012 report by the Senate Armed Service Committee confirmed that an "overwhelming majority" of the more than one million counterfeit parts identified in an investigation of the DoD's supply chain were sourced from independent electronic parts distributors.  Eliminating obsolete and end-of-life parts is not feasible, as they are vital to ongoing projects. The iSuppli research comes to the same conclusion: ""¦it's unrealistic or technically infeasible to economically eliminate the use of all obsolete parts." Counterfeits and the gray market pose significant risks and long-term impact on suppliers including decreased revenues, harmed brand reputation, and increased liabilities.

Clearly a better solution is required. Fortunately, buyers have an alternative in the form of franchised E&O (excess and obsolete) distributors that maintain a comprehensive range of components to meet the needs of buyers for longer-lifecycle products. An authorized or franchised distributor with guaranteed traceability back to the original components manufacturer is as good as purchasing from the manufacturer itself. These distributors can also store inventory from the manufacturer in compliance with industry regulations and standards giving both the manufacturer and the buyer comfort that parts are handled and stored in the correct way.  Markets are fickle and forecasts are often wrong, so manufacturer and OEM lifecycles will never perfectly conform. Fortunately, with franchised distributors creating a more secure supply chain that meets the lifecycle demands of both the original component manufacturer as well as their buyers, they don't have to.

Source: Components Direct

 

Keywords: supply chain risk management, electronics supply chain, counterfeit parts, end-of-life components, obsolete components

Tale of two lifecycles

At its simplest level, the conflict between the original component manufacturer's and the original equipment manufacturer's product lifecycles sometimes creates gaps which result in excess supply or unmet demand.  Upon introducing a new component, a component manufacturer quickly ramps production to take advantage of market demand at the time of peak profitability for the new component. However, if forecasts are not aligned, this may result in the first type of "lifecycle gap," where supply outstrips demand, and excess product becomes available in the market. As product sales slow and the component reaches the end of its lifecycle, the manufacturer begins to scale back production and may begin the process to "end-of-life" (EOL) the component.  This potentially creates the second type of "lifecycle gap," where buyers continue to demand a key component but it is no longer available from the supplier.  The EOL phase of a particular component is often difficult for customers because it can cause a disruption in their manufacturing flow and planning and result in significant financial impact, particularly for customers with long product lifecycles such as the military or medical industry.  Manufacturers who EOL their products do not move a component into its EOL phase without much planning, as they must weigh the risk to their customer relationships against the ever increasing costs of keeping older lines running and supported. But at some point the costs simply overshadow the revenue generated. It is as this cross point, when OEMs and other buyers are unable to satisfy their demand for the now end-of-life and obsolete components that they often turn towards sources other than the original manufacturer and its authorized and franchised distributors to procure the product they need. This is when the trouble begins.

Industry needs are diverse

This lifecycle scenario varies across industries as product lifecycles in the electronics industry fluctuate widely, from a couple of years for consumer electronics to sometimes over 20 years for military and aerospace electronics.  In general, the lifecycle for consumer electronics is shrinking due to changing tastes, demand for increased capability, and intentional product obsolescence on the part of manufacturers, whereas in other areas, such as military/defense, lifecycles are lengthening due to economic impacts, heavy upfront investment that is recouped over several years, and a growing awareness of the environmental impacts of constantly changing electronics versions. 

"¢ In recent years, Apple has become the poster child for the rapidly shortening lifecycles of consumer electronics. In late 2012, when the company launched the iPad 4, just seven months after debuting the iPad 3, customers expressed their frustration on social media and with their wallets, as sales lagged behind those of the iPad 3 at its launch. While the iPad 4 contained several enhancements over its predecessor, the differences were not great enough to justify the short lifecycle of the iPad3. In this and other consumer electronics examples, lifecycles are compressed because of competitive pressures and marketing imperatives, rather than true technological advancements. Still, the impact on the electronics supply chain is the same. Component manufacturers keep up with the demands of the consumer electronics industry, which generates significant profits, by introducing ever newer components to chase market demand. If manufacturers don't keep up with burgeoning demand, consumer electronics OEMs will turn towards other sources.

"¢ Military and defense electronics illustrate the flip side of the lifecycle issue, with extremely long lifecycles resulting in a component supply gap. A June 2012 study by the Lexington Institute revealed that a key argument against the then-imminent cuts in the defense budget due to sequestration was that the military desperately needed to upgrade weapons systems that, in some cases, have been in place for more than three decades. While that is an extreme example, it is true that many defense projects, which require extensive development times and billions of dollars to produce, are expected to remain in place for several years. The military product lifecycle is much longer than that of consumer products. Some of this is by design, not just due to budget pressures. Projects are increasingly designed with a lifecycle design philosophy that emphasizes sustainable design and an improved maintenance program. Long-term (up to 15 years or more) access to electronics components is part of this philosophy. Defense and aerospace projects may need much older date code, obsolete, or end-of-life products and, as a result, buyers are seeking a supplier that offers manufacturer-direct access to these products, as well as the ability to hold parts in a safe and controlled environment for processing in the future. When these parts are unavailable, this gap between supply and demand opens the door for gray market product to enter the military supply chain, which increases the chances of counterfeit products being present. This has led, in the case of the military electronics components supply chain, to increased oversight by government regulators.

What is a buyer to do?

The "lifecycle gap," created by lack of supply from the manufacturer combined with sometimes urgent requirements to support older products is forcing buyers to look for alternate sources, including brokers and/or the gray market suppliers who exploit the needs of buyers for obsolete and end-of-life components. This makes it easier for counterfeits, or at least unauthorized components, to enter the supply chain. This is not a small problem. According to a 2012 study by market research firm iSuppli, 12 million counterfeit parts were reported in the last 5 years, and 57 percent of counterfeits reported from 2001 through 2012 were obsolete or end-of-life components.  Moreover, a May 2012 report by the Senate Armed Service Committee confirmed that an "overwhelming majority" of the more than one million counterfeit parts identified in an investigation of the DoD's supply chain were sourced from independent electronic parts distributors.  Eliminating obsolete and end-of-life parts is not feasible, as they are vital to ongoing projects. The iSuppli research comes to the same conclusion: ""¦it's unrealistic or technically infeasible to economically eliminate the use of all obsolete parts." Counterfeits and the gray market pose significant risks and long-term impact on suppliers including decreased revenues, harmed brand reputation, and increased liabilities.

Clearly a better solution is required. Fortunately, buyers have an alternative in the form of franchised E&O (excess and obsolete) distributors that maintain a comprehensive range of components to meet the needs of buyers for longer-lifecycle products. An authorized or franchised distributor with guaranteed traceability back to the original components manufacturer is as good as purchasing from the manufacturer itself. These distributors can also store inventory from the manufacturer in compliance with industry regulations and standards giving both the manufacturer and the buyer comfort that parts are handled and stored in the correct way.  Markets are fickle and forecasts are often wrong, so manufacturer and OEM lifecycles will never perfectly conform. Fortunately, with franchised distributors creating a more secure supply chain that meets the lifecycle demands of both the original component manufacturer as well as their buyers, they don't have to.

Source: Components Direct

 

Keywords: supply chain risk management, electronics supply chain, counterfeit parts, end-of-life components, obsolete components

Product Lifecycles Create 'Gap' in Electronics Supply Chain Filled by Unauthorized Components