A last time buy, as does every Supply Chain decision, always comes down to money – money tied up, money spent, money saved, and money made. Going further, any decision that comes down to money must also be taken within context of time. If I spend this amount now, how long until I see return on my investment? If I choose to save in the short term, will that decision cost me more in the long term? Is there a path available that allows me to save now without sacrificing future profits?
The traditional perspective of last time buys can be distilled down to at least one of those questions. By dedicating a portion of working capital toward a large, upfront bulk purchase of critical electronic inventory, OEMs can ensure the lifecycle of their product against any market shortage or unforeseeable disruption. Besides catastrophes such as hurricanes and floods, these disruptions could also include unexpected end of life designations, extended lead times and allocation statuses, and, in some industries such as healthcare, the need to submit design alterations to a governing body for approval (FDA, FAA, etc.).
This is an accurate depiction of the benefits of last time buys, but are additional factors consider, as well. If these issues are not considered and appropriately addressed before the last time buy is made, your conversations will often revolve around money lost instead of money gained.
What should you talk about when you talk about last time buys? Well, quite a lot. When the time comes to make your next last time buy, make sure these points play a central role in your OEM’s internal discussions:
Committing to such a large quantity of inventory also means accepting responsibility for maintaining that inventory for as long as the product’s lifecycle dictates. This could be a matter of months, a few years, or even a couple of decades depending on the expectations of the industry – and the vast scope of electronic components available on the market means there is no one-size-fits-all solution for every last time buy.
A generic MLCC chip, for example, typically composed of ceramic-based alloys and packed on a tape reel, is susceptible to gradual oxidization over time if stored improperly. In this case, an indoor, climate-controlled storage environment away from salt, chloride gas, alkali, or other corrosive materials is absolutely critical.
Raw die and wafer, by comparison, while capable of being safely stored for extended lengths of time, require even more stringent storage specifications to minimize humidity and ESD. Before considering a last time buy, ensure that your company’s infrastructure is capable of meeting the exact storage requirements of your inventory – for as long you need it.
Once that last time buy has been successfully moved to storage, it is a fallacy to assume the inventory represents nothing more than potential profit; it just as easily can be a continual strain on your bottom line for as long as it’s in your possession. Calculated as a percentage of the component’s original value, the factors that can influence annual carrying costs include employee handling costs, taxes, depreciation, and cost of insurance. There are less quantifiable factors needed to be taken into account, as well, such as the potential profits lost dedicating limited warehouse space for long-term storage. Speaking to the Wall Street Journal, Walter Kemmsies, chief economist at Moffat & Nichol Inc., indicated that current warehouse utilization rates are hovering north of 95 percent. As interest rates continue to climb, warehouse managers are going to struggle to increase capacity to match consumer demand and storage needs.
Should the opportunity cost associated with inventory storage far outweigh production revenues that can be realized immediately, the OEM is going to be hard-pressed to commit to anything other than minimal warehousing space without the aid of a Supply chain partner. Last time buys are often made quickly, but not taking carrying costs into account before the transaction can be an expensive miscalculation.
“On-hand” electronic inventory is only useful if it is on-hand at the time of assembly. Globalization of the modern supply chain has been extremely beneficial to the world economy – cheaper sourcing, an influx of jobs and capital to less-developed countries, price reductions for middle-class consumers — but the trade-off has been a marginal increase in supply management risk. A supply chain with a wide global footprint necessitates complete transparency between all parties to minimize supply chain dangers such as IP theft and counterfeit components.
There is also the increased probability of experiencing disruptions of the more catastrophic variety such as natural disasters and political turmoil – either of which can grind even the most sophisticated supply chain to a complete halt. If your company is questioning your supply chain’s ability to properly fulfill critical electronic inventory securely, in accordance to rigorous ISO 9001-certified processes, and on a strict production schedule, this is something that requires immediate attention before your next last time buy.
The Last Time Buy Puzzle
It is easy to consider a last time buy a singular transaction, but as you can see, its costs can live on far beyond the date of purchase if attention is not paid to all the elements between purchase and final assembly. It’s a daunting task for any OEM to tackle alone, and unfortunately, it’s also a task that will only become more common as component shortages continue to worsen. A little preparation, and a little help from a Supply Chain Partner who specializes in resolving such concerns, can go a long way.