As the overall Lifecycle of components grows shorter by the year, last time buys (LTBs) are quickly becoming the new normal for OEMs across multiple industries. To keep a product in production for its entire lifespan, manufactures must find a way to work around the lifecycle mismatch between components and the products they create. (To read about this lifecycle mismatch in more detail, click here.)
In a perfect world, this process would be seamless. OCMs would inform customers of their intention to discontinue a component with a product change notification (PCN), an order would be placed to cover the manufacturer’s needs, and business would continue without a hitch – at least until the OEM’s next product begins its lifecycle.
But we do not live in a perfect world. Managing last time buys, even in the best of situations, is rarely a smooth process. There are dozens of variables in play – and if even one of these dominoes falls the wrong way, it could have profound consequences for your product, your business, and your profit margins.
If you are prepared to make a last time buy, below is a brief list of the most common hurdles you can expect to face. Each of these can be overcome – but without proper procedures and infrastructures in place dedicated specifically to last time buy management, your odds of reaping the success predicted by your original business plan are slim. Treat each point mentioned here with care and proper foresight, and your company will find itself in a much stronger position to innovate, grow, and ultimately reach the pinnacle of its industry:
1. Proper NoticeOne of the largest hurdles facing OEMs regarding LTBs is their ability to know they’re occurring. Some OCMs give clients a 12-month window to secure their inventory, but that’s not an industry standard. In fact, of the hundreds of thousands of parts approaching obsolescence every year, over 40 percent have an immediate LTB date. Even more shocking, when an OCM decides to end production of a component, there’s an almost 50% chance that they won’t notify buyers at all! But even with a full 12 months’ notice, many OEMs struggle to finalize their orders in time. Should this occur, some will have no choice but to turn to third-party sellers, who often mark up prices knowing the market is in their favor.
2. Working CapitalLTBs cannot be bought on a payment plan. When a bulk order is placed, the OEM is required to pay upfront for the entire purchase – a cost originally meant to be distributed throughout the lifecycle of the product. If your company requires millions worth of critical components to complete your product’s lifecycle, then that’s exactly how much you can expect to pay. In some cases, the order can also be made by EMS providers who assemble the product on behalf of the OEM. Most EMS providers operate on razor-thin profit margins of only 5-6 percent, so any investment made in the name of long-term revenue is going to be a significant blow to their short-term bottom line.
3. Carrying CostsOnce an LTB purchase has been made, OEMs then face the issue of maintaining that new inventory as long as needed to complete the product’s lifecycle – which could be months to several years. If held on- site, storage alone can add as much as 25 percent annually to a part’s total cost. These companies are designed to be manufacturers, not storage specialists; when they are forced to do both, it might result in a cost far greater than their original budget allows. Some components also require highly specialized handling and storage procedures. Die and wafer materials necessary for the creation of ASICs, for example, require nitrogen-enriched cabinets designed to reduce humidity. If these materials are stored improperly, an OEM or CM risks forfeiting several years’ worth of business continuity in an instant.
4. Excess InventoryTrying to estimate inventory needs for a product years in advance is not an exact science, and rarely does a manufacturer purchase exactly enough. As already mentioned, underestimating can result in the OEM or CM entering the open marketplace occupied by third-party sellers. To avoid this, it’s always better to overestimate inventory needs when faced with an LTB. But this presents another problem: what to do with excess inventory. Lot bids are a common solution, but it’s not uncommon for some items sold this way to be discounted 95 percent. If the amount of excess is significant, minimizing losses for pennies on the dollar is hardly ideal.
5. Counterfeit ComponentsThis is only a disadvantage if the OEM fails to make a necessary LTB, or if their LTB inventory proves insufficient down the road, but it’s important enough to deserve a mention. Not every third-party seller has procedures in place to trace a part’s origins to the OCM. Without traceability, there’s no guarantee that the part is authentic. The counterfeit market has grown leaps and bounds in the last several years, and the further an OEM ventures away from a component’s source, the greater chance that at least a portion of their inventory – and the quality of their products — will be compromised.
The Value of a Supply Chain Partner
Last time buys require a commitment that stretches far beyond a single purchase. In fact, a proper plan to manage last time buys affects all phases of the supply chain cycle. If your infrastructure does not consider the burden proper handling and storage, upfront payments of working capital, and excess Inventory can have on your bottom line, then it’s time to look into the Supply Chain Solutions offered by EDX. These include:
• BOM Monitoring to stay ahead of, and confirm, obsolescence with the help of Big Data.
• Last Time Buy Solutions to secure up to 10 years of LTB Inventory without spending any working capital.
• Custom Storage and Fulfillment Solutions for LTB inventory that guarantees long-term business continuity.
• Inventory Exit Solutions to market and sell Excess Inventory at maximum value.
To see a Last Time Buy Solution in action, click here.