Where are the parts?
Buyers often must go fishing for alternate parts because the rate of product pruning doubled as suppliers weeded out low-margin, low-profit parts. Smart buyers are working harder with suppliers to map out product life cycles and avoid supply chain-busting disruptions.
By James Carbone -- Purchasing, 12/11/2003 2:00:00 AM
It is a myth that electronic components only become scarce during an upturn when demand for parts skyrockets. During the most recent downturn many buyers at major OEMs scrambled to find parts because demand outpaced supply.
The parts in question weren't leading-edge DRAMs or Intel microprocessors. Rather they were older semiconductors based on mature technology. Often the technology was still viable, but demand for parts was weak. Many suppliers either scaled back production of parts or ceased making the components altogether.
While component obsolescence is not a new issue in the electronics industry, it became a serious problem for many buyers during the downturn because of the number of parts that ceased to exist.
From 2001 to 2002 the number of parts that were obsoleted doubled, according to PCNalert, a company that tracks end of life (EOL) notices issued by component manufacturers and provides services to manage obsolescence and product change notice issues. In 2001 about 55,000 EOL notices for electronic components were issued. By 2002 that figure grew to 128,500, according to the company which keeps track of EOL and product change notices of more than 300 component manufacturers. Through October of this year electronic component companies issued about 160,000 EOL notices.
The parts being obsoleted tend to be chips that have a lot of transistors such as microprocessors and memory ICs which migrate to higher densities very quickly, says Cliff Frescura, vice president of solutions for PCN Alert.
Market matters
He says that during the downturn many parts were not obsoleted for technology reasons.
"It's not so much the change of technology of the device or the type of device, but what market the device was targeted at. Many parts used only by telecommunications were obsoleted," he says. Those parts include lower density DRAM and SRAM and logic and microprocessors.
"Telecom and networking are still hurting and see those EOL notices," says Frescura. "A part that is used across several industries and has better volumes is less likely to be obsoleted. If you take a part that can be used in automotive and medical, that part is probably safe," he says.
To no surprise telecommunications industry buyers have noticed an increase in so called "portfolio pruning" by component manufacturers. "Without a doubt parts have been obsoleted at a higher rate over the last couple of years," says Michael Massetti, director of supplier management for common components, Lucent Technologies.
One reason is the consolidation of suppliers during the downturn. "Companies disappeared or were acquired by others," says Massetti. "When that happens you get portfolio pruning. They look at profitability of parts and some of the long life cycles and decide not to make certain parts anymore," he says. Many component companies pulled the plug on low-margin, low-volume parts to concentrate on newer, higher margin parts.
Portfolio paring may affect telecommunications more than any other industry. Reason: Some telecom gear such as switching equipment is built for 10 or more years and is in the field for 20-30 years. "It is a big challenge in the telecommunications industry," says Massetti. "If a customer buys a base station from us for tens of thousands of dollars the customer expects it to be operational for a long time. All the capacity of the base station might not be installed right away. Over a three-year period, the customer may add caller capability, which increases the product's lifecycle," he says.
Massetti says to deal with obsolescence Lucent is proactive in nurturing relationships with key suppliers. "We try to have close relationships with suppliers and make sure we have a commitment from them for the lifecycle of our product," he says.
However, suppliers eventually stop making a part if they don't have sufficient volumes. "When that happens we ask for six to 12 months notice before they obsolete a part and 12- month availability for the part from the suppliers we have relationships with," he says. Most key suppliers provide that level of support. "In the cases where we have suppliers where we have more transactional arms lengths relationships, we don't get the same type of treatment," says Massetti. Notice and availability time is shorter.
Substitute wanted
When a component is obsoleted, Lucent will first try to find a substitute for the part either from its current supplier or from another. If there are no substitutes, Lucent may opt to redesign a board that contains the part and use another component, or make a lifetime buy of the part. With a lifetime buy, an OEM projects what its total demand for the part in the future will be and places one last large order for the component part with the supplier. Lucent usually makes a lifetime buy for two or fewer years and then develops an alternative such as redesigning a board in a system. In some cases if there is a short-term need for an obsolete component, Lucent will recycle parts. "We will go and find board in a customer's network and find out if they are available and if the customer is willing to surplus them out," says Jeff Rice, business director of special customer operations for Lucent. "The customer may be planning to migrate to a new product. So we will buy those circuit packs back from them, certify they are in good working order and use them to fill a gap for another customer," he says.
In some cases Lucent uses distributors to buy obsolete parts. Some distributors such as Rochester Electronics specialize in end of life parts. In fact Rochester has agreements with many chip companies to buy up whatever inventory there is for an obsolete part.
The last resort
OEMs prefer to find an alternate source for a part because lifetime buys are expensive. A lifetime buy can cost tens of thousands of dollars or more, plus the cost of inventorying the parts. Lifetime buys are often the last resort for OEMs.
One company that is trying to reduce the number of lifetime buys it needs to make is IBM. "IBM reuses computer designs from previous products so we don't have to incur the development expense with redesigning each and every circuit card," says Don Beauchesne, manager of electronic component procurement for IBM. "As a result we may get critical logic circuitry embedded within the computer systems that may extend over three or four generations of computer technology," he says. Those components may be obsoleted by suppliers and lifetime buys may be necessary. In addition, lifetime buys are needed because the lifecycles of some of IBM systems, such as servers, are long.
"IBM is committed to maintaining the customer's investment in their computer systems for years. We will continue to offer systems as long as we believe our customers need us to continue to invest in that supply," says Beauchesne. "So, we will engage in a number of end of life buys with suppliers where our competitors may be less inclined to do so."
A big problem with lifetime buys is determining how many parts will be needed. Buyers must project how long a computer system will be sold and what its expected sales volumes will be to determine how many of components about to be obsoleted will be needed.
"We conduct a 'where used' analysis of a component," says Beauchesne. The part may be used in multiple systems "In some cases we may have feature cards that are available to a computer system, but it may not be embedded in each and every system," he says. The cards may contain the part about to be obsoleted. Some of these feature cards have been around for five or 10 years. In some instances, the soon to be obsoleted part may be used in some systems that may have a short life cycle of two or three years.
Once the volume of parts needed for the lifetime buy and their cost is determined, IBM decides to either make the buy or redesign the board containing the part.
An ounce of prevention
One of the things IBM has done to try to reduce the number of lifetime buys is establish a catalog of the 48,000 parts it uses. "Adjacent to those parts we have certain attributes that characterize whether the part is recommended for future use in new products or has been end of lifed and is no longer recommended for use," says Beauchesne. Other parts are listed as preferred.
The catalog tells IBM's development engineers what components should be used and which should be avoided. The system has helped to reduce the number of end of life parts or potential end of life parts that get designed into IBM systems.
However, the end of life catalog doesn't always work, so IBM purchasers have a bill of materials (BOM) review system to identify parts that are not preferred or have end of life coding. "We will review well in advance of the release of a product for volume manufacturing the components that have been included in the design," says Beauchesne. "We review the BOM component by component and identify those parts that are nonpreferred. We then challenge the development community to select a component that is preferred."
However, even with the best planning, some parts will be designed into products and become obsoleted and not have a viable substitute available. Depending on the volume and the projected life cycle of the equipment that the part is used in, IBM will make a decision whether to make a lifetime buy. In some cases, distribution is an option. "If it is a standard part that has been end of lifed, we will avail ourselves to distribution," says Beauchesne. "If it is a unique part we will engage with our engineering organization to come up with a new design or make a judgment to withdraw the product entirely," he says. For their part, semiconductor suppliers know that when they decide to stop making a part it poses problems for their customers. Most suppliers try to give adequate notice so buyers can make plans.
Obsolete this
Many chipmakers have a methodical way of obsoleting parts. Case in point: National Semiconductor. National says it obsoletes about 5.3% of its 20,000 parts each year. Every month a list of potential parts to be obsoleted are generated, says Ian Andersen, director, central technology manufacturing group at National. "That suggestion is based on volume, margins, revenue, contribution activity. In addition, we contact our sites and ask them are there any particular processes or packages that have become an issue for us that we may want to prune," he says.
Becky Slama, director of demand planning for National, says parts identified for obsolescence are very low-volume and low-margin components. Age of the parts is not always a factor in determining what gets obsoleted. Some 20-year-old products continue to be moneymakers for National.
Once a part has been identified to be obsoleted any customer who has ever ordered the part is notified. "We give them a full year to give us their lifetime requirements. Then we have three months after that [so] they can still place orders for the part," says Slama. That policy is not set in cement. Sometimes National will support customers for another six months to a year.
National will suggest part substitutes and recommend competitors if National does not have an appropriate substitute. If a customer wants to do a lifetime buy, National will ship all parts within three months after the lifetime buy period. National sells its excess obsolete parts to Rochester Electronics for pennies on the pound. If Rochester resells the parts, National recoups a portion of the cost.
One chipmaker that seems reluctant to obsolete parts is Texas Instruments. TI recently announced an end of life policy which says it will keep managing a part as long as there is at least one customer for it.
"TI's policy sets us apart from our competition," says Thomas Lewis, TI's worldwide marketing manager for standard, linear and logic products. "We tend to be the last to obsolete a part. If we obsolete a part, there is no one buying it." In fact, TI re-released a previously obsoleted part by customer request, according to Lewis.
Typically, TI obsoletes 20-50 parts per year and issues EOL notices in the summer. However, this year TI did not obsolete anything. When a TI part is obsoleted, customers are given 12 months notice and can take delivery up to 18 months after the notice is issued.
Advantage: OEM
While dealing with obsolete parts can be challenging, it can be advantageous to an OEM, according to Beauchesne of IBM. "It can be advantageous in some sense because it causes purchasing organizations to review components used in a number of applications and see if there is a better offering. At the end of the day it forces us to move to new technology," says Beauchesne.
Portfolio paring by suppliers is an issue that won't go away during an upturn. Beauchesne says during the last upturn there "was a push by manufacturers to minimize the number of products they offer because they didn't have sufficient capacity at the time." They wanted to focus on parts that were most in demand and pared back the less profitable ones. The same thing will happen during the next upturn.
Another trend that will affect parts obsolescence is the move to lead-free parts, according to Frescura of PCNalert. The European Union has passed legislation that bans the use of lead in much electronics equipment with some exceptions. (See story in Oct. 23 issue p. 32)
"With lead we have a situation where it is not because technology changes or an industry has collapsed, but a legislative mandate that says you have to have lead free parts," says Frescura. "It means if you have lead in your parts they are going to be obsolete. How significant it will be is hard to say at this point." The lead ban goes into affect in 2006."
However, Frescura believes the worst of portfolio pruning is over and the number of end of life notices will likely decline in the coming years. "All the low hanging fruit has probably been captured by component manufacturers," says Frescura. "Their products lines have been rationalized to the point where there's not much more to prune."
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