March 1, 2017

Why Is Component Obsolescence Changing? – The Future of Obsolescence Management

When the Restriction of Hazardous Substances Directive (RoHS – a legislative move across EMEA to restrict the use of hazardous materials in electronics) was introduced in 2003, there had been a huge volume of work in the preceding years to understand the harmful substances involved and their effects on human health and the environment. However, one of the key outcomes, the reluctance of many manufacturers to continue the production of affected components regardless of exemptions (exemptions allowed the continued use of certain RoHS materials in certain use cases – for example, exemption 7b allowed for lead solder in certain signalling and communication equipment), was largely ignored for a number of years due to the prior power of the component-buying OEMs (original equipment manufacturers) in the marketplace.

The reason for this disconnection wasn’t ignorance or apathy; it was simply that OEMs had been conditioned to believe that their requirements for new technology and provision of components would continue to win in the decision making process regarding discontinuance and market support that OCMs (original component manufacturers) employ every day.

In fact, the decision making process by large OCMs was unchanged for decades, as the development of technology was matched by demand from OEM clients. Transistors have been shrinking for 50 years, in line with the boom in thirst for electronics and electronic capability. Generally speaking, as technology developed, natural wastage took care of any obsolescence problems; if manufacturers discontinued products it wasn’t really a huge problem, because the consumers of that old technology had moved on to new things or simply didn’t exist anymore.

As time moved on, we started to see environmental regulations take over as the prime driver of obsolescence. This again wasn’t a real, crushing issue (outside of primarily the aerospace and defence market, where the use of lead is vital) because it was predictable and communicated well. Any new regulations that have been introduced have long lead-in and evaluation/consultation times to enable users to substitute components, or to find alternative ways to continue business. The point is that either technology development or environmental regulation is predictable, publicised and communicated well enough to give realistic coping mechanisms to component users.

In stark contrast, we now find ourselves reeling from two years of sustained consolidation and M&A activity in the electronics supply chain. Through 2015 and 2016, almost $200bn was spent by OCMs acquiring each other. By its very nature, this is hugely problematic because merger activity cannot be communicated or publicised by an OCM or planned for by consumers of components due to stringent financial market checks and measures to protect against fiscal impropriety. Deloitte tells us that one of the first jobs after an acquisition is product line rationalization, and it’s this uncertainty that may, over the next three to five years, cause huge problems in obsolescence and availability in our marketplace, particularly for traditionally technologically demanding and expensive industries such as aerospace and defence, medical, power generation, industrial automation, heavy transportation, subsea service and exploration, and oil and gas exploration/production.

Compounding this, we can see from various studies that incidences of counterfeit components in the marketplace spike every time we see upticks in obsolescence notices from manufacturers.

Further, the algorithms and predictive analysis we rely on from online data services and educational think-tanks are largely useless at this point because M&A completely breaks the behaviour pattern on which these analyses are based. What’s the solution?

Fundamentally, organisations that use components from OCMs recently affected by M&A activity must immediately look inwards at their order books, stock manifests, engineering capability, second source identification and procurement teams to ideally pinpoint best practice and leading industry supply partners. At a bare minimum, they should outline where their key risks lie, and take steps to mitigate those risks both up and downstream in their supply chains.

I mentioned that OEMs are neither ignorant nor apathetic towards these problems, but may simply be too far removed from this M&A activity to feel anything other than insulated from risk by their supply chain. Frequency of build and purchase of affected components by OEMs may simply be too far apart in time to receive timely alerts of obsolescence or other issues.

At Converge we are taking this risk to our customers very seriously, and have developed unique, innovative analysis tools to help our clients understand not only the data, but also the context within which their needs exist globally. Good decisions rarely get made under pressure, and we aim to give our customers the control over their decision making process.

By contextualising the needs of our clients in both availability and technology, we can support global operations in realistic, immediate ways to ensure continued supply as well as mitigate risk of shutdowns and, more importantly, brand damage.

Our worldwide teams can help you understand the risks you now face. Please contact us at any time for more information.

Keep innovating!

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  1. It was great article for me but one question ,what do you mean by EMEA, OEM?
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  2. Dear Arifur, EMEA stands for Europe, Middle East and Africa; while OEM means Original Equipment Manufacturer.