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The Hunt is On: Obsolete
Connectors
By Lynda Nolen, Bishop &
Associates Inc.
Earlier this year, we ran an
in-depth article about the growing problem of
counterfeiting in the electronics industry. We learned just
how easy it is for counterfeit product to make it into the supply chain.
We discussed the various ways manufacturers can protect themselves from
becoming a victim of counterfeiting, and how distributors can protect
the manufacturers they represent and their customers. We focused on
products that are currently available. But what about product that has
become obsolete or discontinued? Obsolete inventory often presents an
entirely new set of challenges, both for the buyer looking for the
product, and for the owner in need of moving the product. Finding either
the exact product or an equivalent product that is form, fit, and
functionally equivalent, while reducing the cost of holding non-required
inventory, has provided counterfeiters with a lucrative market.
A key market driver of obsolete or discontinued products is product
lifecycle. This is particularly relevant in industries where products,
due to their substantial initial cost, are built to last for decades.
These industries include the automotive, transportation,
military/aerospace, and medical markets. For example, as reported in
Defense Industry Daily, the average age of an Air Force fighter is over
23.5 years. Yes, the aircraft has had a multitude of upgrades, but even
many of these upgrades were performed 10, 15, or 20 years ago. Aircraft
used for commercial travel are often even older, more than 30 years old.
Even in the automotive industry, where new models that offer numerous
additional comfort and safety features are introduced yearly, the
average age of vehicles on U.S. highways is still more than 9.5 years.
As reported by the U.S. Department of Transportation, the average age of
commuter rail locomotives is 18.4 years, with the number of years
escalating if you include heavy-rail passenger cars (21.6 years) and
commuter rail passenger coaches (18.9 years). If you look at just the
European railway network, which is not only the densest in the world,
but serves regions with the highest percentage of electrification, the
average age of locomotives is 27 years.
The military, aerospace, and medical markets are also extremely
vulnerable to obsolescence because of RoHS laws. All three of these
markets still use products containing lead due to lead’s proven ability
to perform in harsh environments. Yet most manufacturers, in an attempt
to fulfill RoHS requirements, have switched to non-leaded products.
Although an alternative is to solder-dip lead-free parts, this procedure
can be costly, and because a third party typically does the process,
potential warranty issues escalate because the original part has now
been modified. For these industries, another alternative is to switch
from commercial-off-the-shelf (COTS) to mil-spec-approved products.
Generally, this product is more expensive, but the advantage is that
these parts are rarely discontinued. One of the top military/aerospace
suppliers of mil-spec circular connectors told us, “In general we do not
discontinue products. We believe that if someone has trusted us enough
to design-in our product, than we have an obligation to continue to
support the product. The customer may not like the price, but I cannot
think of a part that we still do not make.”
Presented with these statistics, it is not difficult to see that demand
for discontinued product is not going to go away any time soon. In fact,
as companies, consumers, and governments strive to stretch depleting
revenues, the requirements for discontinued products is going to
escalate. Economic conditions will also be a key driver in the amount of
excess inventory OEMs and CMs are willing to carry. With most OEMs
experiencing a drastic decrease in end-equipment requirements since
third quarter 2008, many are now looking at ways to reduce inventory
levels.
How can purchasing personnel avoid the hassle of sourcing obsolete
inventory, while preventing counterfeit inventory from entering their
supply chain? Of course, being able to project needs for a specific
length of time is of great value, as is the ability to assure multiple
sources. But even these tactics can be of little value 20 years after a
product introduction. Making end-of-life buys has a number of
disadvantages; tying up valuable capital is probably the greatest.
Having a strong and broad network of franchised distributors is another
resource. But as Pat Wastal, senior vice president of Avnet Electronics
Marketing Americas’ Product Business Group, said, “Requests for obsolete
or discontinued product constitute less than 1 percent of Avnet EM’s
incoming calls. If a call does come in, Avnet will always see if there
is a direct replacement or functional replacement.” At first, this would
indicate that the market for obsolete or discontinued products is very
small. But since we know this is not true, what it does indicate is that
most buyers realize that if a product has been discontinued by the
manufacturer, the chances of one of their franchised distributors still
carrying inventory is highly unlikely. Wastal feels that “manufacturers
do give them significant notification when they are going to discontinue
products, and that Avnet EM has a process in place that notifies sales,
at the line item and customer level, on discontinuance or part change
notification (PCN) with appropriate replacement information, allowing
Avnet EM to notify customers of pending discontinuance.”
With traditional supply chain avenues exhausted, what other alternatives
do purchasing personnel have? One alternative that has become quite
popular in the last decade is the use of suppliers that specialize in
obsolete or discontinued products. Suppliers specializing in obsolete or
discontinued electronic components can help purchasing personnel locate
product, and also help them dispose of inventory they no longer require.
Established in 2001, one such supplier is 4-Star Electronics. Located in
Orange County, California, 4-Star Electronics has been recognized by Dun
and Bradstreet four years in a row as one of the fastest-growing
electronics component distributors in the industry. Jake Wilson, chief
operating officer and marketing manager for 4-Star, explains what has
made 4-Star so successful.
Lynda Nolen, CS.com:
When a customer is looking for an obsolete part, how do you locate the
product if it is not in your inventory?
Jake Wilson, COO and marketing manager, 4-Star Electronics: First
off, we have a number of proprietary or exclusive channels we use to
acquire parts that our competitors don’t have access to. Our supply
chain is a global network of OEMs, CMs, component manufacturers,
franchised distributors, independent distributors, and liquidators. We
purchase in large volumes, which allows us to negotiate great prices and
pass them down to our customers.
CS.com: Describe your typical customer. And, when you do purchase
excess inventory from this customer, is there any particular type of
paperwork you require upon delivery?
Wilson: We receive inventory lists from all types of customers,
including OEMs, CMs, franchised distributors, liquidators, and component
manufacturers. Most of the time it’s CMs and OEMs looking to sell off
parts that were bought for a project that is now discontinued or were
overages from previous projects. We issue a purchase order, and the
seller signs a “release-of-ownership” document. We typically agree upon
an inspection period to screen the lot and spot-test items for
authenticity.
CS.com: Do you check the reputation and validity of the company you
are buying the products from?
Wilson: Absolutely, we screen all our vendors and also rate them
based on a number of values. We take extreme caution when buying from
new vendors, and require all vendors to complete a vendor survey and
additional measures are taken depending on the dollar value of the items
purchased. We also use a number of accredited industry websites to look
for reported incidents and referrals from other distributors.
CS.com: How do you verify the authenticity of the product?
Wilson: We have invested over $250K over the last year in
counterfeit and authenticity-screening devices. Our quality control
department is equipped with the latest in technology to help ensure our
customers receive only 100 percent authentic and new product. Beyond
this equipment, we utilize industry standard screening techniques and
are a part of multiple industry associations that focus on combating the
counterfeiting issues in our industry.
CS.com: When you purchase excess or obsolete inventory from a
manufacturer, do you do it on a direct-buy basis or a consignment basis?
Wilson: We
have different arrangements with every manufacturer. We are franchised
for a couple lines, we handle excess inventory for a few lines, and we
have hundreds of direct-buy agreements with original component
manufacturers throughout the world.
CS.com: Do
you follow a “first in, first out” procedure, or do you look at date
codes on products to determine how to rotate your inventory? How do you
handle disposing of product that is no longer sellable? And what
guidelines do you follow to determine a product’s shelf life?
Wilson: We
don’t follow a first in, first out policy. Our customers usually dictate
what date code they would like to buy. We inspect and test all parts
before they leave our facility. So, if we take an order for a part that
has a date code of 8845, and we have had them for eight years, we will
inspect each part and repackage them if they pass our quality control
(QC) process. We scrap all parts that fail our inbound or outbound QC
process; we have relationships with local recycling companies that
handle our scrap inventory.
CS.com: As one of the industry’s leading suppliers of obsolete
products, if you were to break out the components by product type, what
percentage of each product type is most sought-after?
Wilson:
Semiconductors are requested 60 percent of the time, connectors are 25
percent, passives (resistors, capacitors) are 10 percent, and the
balance, or miscellaneous, is 5 percent.
CS.com: Do you feel that the excess or obsolete inventory market
carries a high number of counterfeit parts? Have you even been sold
parts that later turned out to be counterfeit?
Wilson:
Unfortunately, over the last three years, our industry has been flooded
with counterfeit parts, mainly originating out of Asia. This is a huge
problem that is estimated by industry experts to be approximately $200
billion annually, or at nearly 10 percent of all electronic equipment
sold worldwide. It’s a very complex problem, since the companies that
are counterfeiting continue to prosper with the support of a number of
companies in the United States that knowingly buy and sell counterfeit
and refurbished parts as new and original. Recently there have been a
number of arrests made in the United States of owners of fairly large
companies knowingly dealing in counterfeit parts. There is a growing
effort by associations, like the ERAI, IDEA, GIDEP, to name a few, that
are working together to help educate and combat this problem. Our
company has a very tight quality control process that allows us to
screen out and reject substandard and counterfeit parts. Although we
have received counterfeit product a number of times, we have yet to ship
parts and receive an RMA (return material authorization) request from a
customer due to our parts being deemed counterfeit. It’s tough, because
very reputable CMs and OEMs have counterfeit parts in their inventory
right now, and they don’t even know it. They bought them in the broker
market before they really knew there was a problem. We will find when
buying excess inventory from these companies that about five percent of
the products are substandard or outright counterfeit, and we scrap them.
This is a new issue that is now being factored into our cost of doing
business.
CS.com: I have been in the warehouse of an ISO9001: 2000-certified
major supplier of obsolete and hard-to-find electronic components. I
will be honest with you: The place was a shambles, with boxes falling
apart due to age, piece-parts haphazardly placed on shelves, and
inventory that is well beyond its shelf life. How do you assure that
this doesn’t happen in your warehouse?
Wilson: I
have also visited some of these places and was shocked. If a company is
ESD-certified, you will see the difference. ISO is easy to achieve, and
is mostly documentation to support processes, but ESD certification is
more representative of industry standard warehousing. If a company is
ANSI/ESD certified, they will have a very orderly warehouse. We store
all our parts in ESD bags and moisture-sensitive parts are baked and
sealed for storage. We have all the equipment in house to ensure our
inventory is stored properly.
CS.com: Do you think that society’s quest for better, faster,
smaller, and lighter [products] has created an abundance of obsolete
inventory?
Wilson:
Yes, this is the nature of the beast. It is great for us; it is what
keeps our business model viable. Companies like to keep inventory levels
as tight as possible and this puts excess inventory back into the
market. It also creates shortages when companies go to build and can’t
get product with lead-times to meet their production schedules. We offer
consignment programs to take inventory off our customers’ books and are
able to ship to them when they need the parts for production.
Vitual Marketplaces
In addition to suppliers such as 4-Star, another market channel is
growing in popularity: The virtual marketplace or online trading
platform. Virtual marketplaces help buyers obtain obsolete inventory and
fulfill shortages. Most virtual marketplaces offer a way for companies
to sell surplus, yet usable inventory. A fairly new company offering
this channel to market is Verical. Based in California and established
in 2007, Verical was co-founded by Joe Ruef and John Brown. Brown, vice
president of marketing and strategy, discussed the concept behind
Verical, the types of customers they serve, and how their system works.
CS.com: What particular service is Verical offering to customers and
what type(s) of customers use your service?
John Brown, V.P. of marketing and strategy, Verical: Verical enables
global high tech companies to trade excess inventories to one another in
a secure and reliable fashion. Through our transparent marketplace,
sellers can get market value for their inventory (and therefore avoid
the huge write-downs they face when dumping excess), while buyers get
full and reliable information, including market price, transit time, and
item pedigree rating.
When a buyer has a shortage and cannot get parts from the supplier in
time, they come to Verical before going to the gray market.
Counterfeiters love to target obsolete parts because they know buyers
have few options. Verical shines a spotlight on parts across the primary
supply chain, so buyers can get their hands on trustworthy parts, before
they go gray.
CS.com: Was this a segment of the supply chain that Verical felt was
not being satisfied by current options? Was it a segment of the supply
chain that was more vulnerable than others to counterfeiting?
Brown: The gray market today is being exploited by counterfeiters.
Because of the nature of the market, it is impossible to provide the
visibility and control needed to keep counterfeit parts out of the
supply chain. Those companies with a greater exposure to the shortage
market are more vulnerable to counterfeiting—for the most part, that
means the second-tier OEMs and contract manufacturers who are forced to
turn to the gray markets for last-minute requirements more often than
their larger counterparts.
CS.com: Who came up with this idea?
Brown: Our
CEO and co-founder, Joe Ruef (pronounced “roof”) spent 12 years in the
secondary market and was a leader on many of the counterfeit-detection
best practices commonly in use today. In 2003 and 2004, he noticed that
counterfeit parts were becoming so sophisticated that visual inspections
with digital microscopes couldn’t catch all of them. He realized that it
was simply not possible to filter fake parts out of the gray market
reliably. For a counterfeit-free market, you need to get parts straight
from the source.
I am Verical’s V.P. of marketing and strategy and the co-founder, and I
had previously worked in the Department of Homeland Security. Because it
is impossible to perform 100-percent physical inspections on millions of
containers passing through U.S. ports every day, U.S. Customs looks for
containers without reliable information about their contents and
history. Since legit items have vast data about their history from
multiple sources and counterfeit items do not, Customs can quickly focus
their attention on the items with incomplete information. It is very
hard to identify bad products, but much easier to identify the good
ones.
We started talking about how to use information from the legit supply
chain to filter out counterfeit electronic components, and the result is
Verical.
CS.com:
Based on preliminary research, I understand that the inventory is
physically not in a warehouse you own, but rather stays with the current
owners. If that is the case, how do you assure when a customer comes to
you, that the inventory is truly what they are saying it is? Do you send
someone out to physically inspect the inventory? Do you require a copy
of all paperwork associated with the inventory to be sent to you? How do
you confirm that the paperwork is authentic, that the parts are
authentic?
Brown: In a transparent marketplace, sellers know they are fully
accountable for the items they sell. This is a major departure from what
happens in today’s gray market. If a company is a franchised distributor
or original component manufacturer, we do not require an inventory
audit. For an OEM seller, we use a bonded third-party auditor to perform
a 100-percent count of the inventory to make sure it is there and in
excellent condition.
Our pedigree rating system is an objective, rules-based tool for letting
the buyer know everything we know about a part’s history. The further
back in a part’s history we are able to establish a part’s chain of
custody, the higher the score. An OEM that provides no information will
see a 1-star pedigree rating next to their parts. If we are able to
match a part to a specific purchase order, and we both know and trust
the franchised or OCM vendor, the item earns a 2-star rating. If that
vendor can confirm the P.O. or is the seller of a part, those parts will
receive 3- and 4-stars respectively.
You cannot eliminate risk, but you can manage it through information. A
3-star pedigree tells the buyer they face the same amount of counterfeit
risk they would if they were buying directly from a franchised
distributor.
As for faking paperwork to sell counterfeit parts, that is a felony in
the U.S. and we have a complete paper trail. Transparency and
accountability are very powerful deterrents to would-be criminals.
CS.com: I
realize part of the incentive for sellers is to move inventory they are
not using, but what percentage of your inventory is really obsolete vs.
just inventory that a customer no longer has a use for? Do you feel that
in the case of inventory that is not discontinued, but no longer
required, that you are potentially eroding a manufacturer’s price
schedule?
Brown: We
actually support manufacturer price points, and that’s why we have the
support and participation of component manufacturers. Today’s gray
market is full of fake parts and uncertainty—that scares buyers and
depresses their willingness to pay. Full information gives them
confidence. Think of the difference between buying a certified pre-owned
car from a dealership vs. buying that car from Craigslist. Which one
would you pay more for?
We put a lot of effort into the marketplace design in order to gain the
participation of component manufacturers, franchised distributors, and
their major customers. A poorly designed market will not succeed if it
doesn’t support the interests of key participants. We don’t compete with
franchised distribution, and we don’t want to. We are a secure and
reliable source of inventory for shortage buyers to go to before they
resort to the gray market.
CS.com: What percentage of the product on your website is
connectors? Do you think certain products lend themselves better than
others to this type of sale?
Brown: Our
inventory is a broad mix and always changing. Connectors are our number
one category, with almost four times as many part numbers as the next
largest class of components. Obsolete parts, or those subject to long
lead-times, are very well suited to Verical, but companies trade all
types of components over our marketplace.
CS.com: Do
you not feel that by maintaining both the anonymity of the buyer and the
seller that you could potentially be making it easier for counterfeit
product to get into the supply chain?
Brown: Not
at all. We know precisely who everyone is and where every shipment comes
from.
In a quick review of Verical’s inventory, it was interesting to note
that the majority of the connector inventory was commercial products.
Brown did indicate that although this is true at the present time, they
do intend to get involved with mil-spec products. It was also noted that
if identical product were offered from different customers, that
although the initial quantity shown would reflect the combined total of
all parts listed, buyers would see discreet listings with unique prices,
pedigrees, date codes, etc.
Although the number of reputable market channels available for locating
and procuring obsolete or discontinued inventory has been growing, there
still lies the risk of receiving counterfeit parts. What makes it even
more possible for this to happen, now and in the future, is that as the
economy rebounds after its precipitous drop, neither manufacturer nor
OEM is likely to be prepared, leaving buyers scrambling. So how can you
be certain that you are working with a reliable and reputable company?
First and foremost, ask questions and be informed. The more information
you have about the parts and the company you are dealing with, the less
likely your chance of receiving counterfeit products. Jake Wilson
advises, “If all your regular suppliers are coming up empty, then look
for suppliers with the following qualifications:
If
these qualifications are met, you are in good hands. If a company has
invested in quality certifications and memberships in associations, they
are one of the good guys!”
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Lynda Nolen
Product Specialist, Bishop & Associates Inc.
Lynda Nolen has been in the interconnect industry for over 30
years. She has worked in sales, sales management, marketing, and
product management for such companies as TRW Electronics
Components Group, Sunbelt Components, Cinch Connectors, Arrow
Electronics, PEI Genesis, and Delphi Interconnect. Nolen has
extensive experience in competitive cross-referencing, drawing,
web and catalog review, new product introduction programs,
harness and connector assembly programs, account management, and
customer service programs. Lynda received her Bachelor of Arts
degree from Roger Williams University in Rhode Island in 1979,
and has completed various electrical engineering courses.
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