As the supply chain struggles against eroding profit margins, retaining the value of each and every component is essential. One of the least utilized benefits in the electronics channel is authorized distributor scrap.
“Scrap” is actually a misnomer. When components stop moving or their date codes approach expiration, distributors have the option to use their suppliers' scrap allowance to refresh their inventory. Scrap is not necessarily expired product. Diminishing demand, product transitions, poor forecast signals, and delayed or cancelled orders all contribute to what amounts to inventory buildup. But even electronics components have a shelf life, and devices with aging date codes need to be removed.
All of those devices represent an investment by the component supplier and the authorized distributor. Slow-moving inventory takes up valuable warehouse space. Parts have to be stored, maintained, and accounted for — and they may be in demand elsewhere in the world.
Also, as products age, their value diminishes. Not only are these products worth less than when they were new, but pulling them off the shelf, shipping them back to suppliers, and accounting for returns add costs to the process.
For many companies in the supply chain, selling excess or aging products into unauthorized channels for pennies on the dollar makes sense. Component brokers that follow market cycles often buy excess inventory below market price and mark it up when demand rebounds.
Expired products are often re-marked as fresh components.
Scrap also contributes to the problem of counterfeiting. Expired products are often re-marked as fresh components. Counterfeiter technology has advanced to the extent that date codes can be changed. Chips can be blacktopped, and visual inspection is inadequate for counterfeit detection. Scrap is a leading source of product to the gray market. Re-marking a device is easier and less expensive than manufacturing a fake from scratch.
According to an October report from the market research firm IHS, reported incidents of counterfeit electronic component parts in 2012 were “maintaining the record pace set in 2011.” In the first eight months of last year, counterfeit incident reports averaged 107.3 per month, versus 107.1 in 2011. On a sequential 12-month basis, IHS reported a total of 1,336 verified incidents for transactions involving at least 834,079 purchased parts. These figures are considered conservative, because purchased parts reflect only a subset of all reported incidents.
Waldom Electronics, a master wholesale distributor that sells only to other distributors, has developed a service that helps recoup a portion of scrap's value. The Product Recovery Program directs authorized distributor scrap allowances and stock rotations to a secure warehouse, where product is thoroughly screened for labeling, traceability, packaging, and date code compliance — all at no cost to the supplier.
Price integrity is maintained through a cost-plus pricing strategy developed in collaboration with each supplier to eliminate the market price erosion that would otherwise undercut the authorized channel. Waldom shares the recovered value with each supplier, and the process is made fully transparent by a private extranet website customized to each participating supplier. Excess supplier stock is eligible for the same benefit in Waldom's Factory Excess Express program.
Master distributors can also expand the market for excess inventory. Because they sell to other authorized channel partners, inventory can be marketed to thousands of customers. Staying within authorized channels, whether for scrap or excess, is the only certain way to retain the value of excess components and reduce the entry of counterfeits components into the supply chain.