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Recovery Programs: Turning Gray to Green

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.

Afterlife
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.

Scrap component sources contribute to the problem of counterfeiting.Expired products are often re-marked as fresh components.

Scrap component sources contribute to the problem of counterfeiting.
Expired products are often re-marked as fresh components.

Counterfeit threat
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.

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11 comments on “Recovery Programs: Turning Gray to Green

  1. William K.
    April 23, 2013

    I find the assertions in the article to be quite interesting. Of course many would say that the ideal business plan would be to carry only the products that the customers will purchase, and to only have as much stock as the customer will purchase. Indeed, if that could actually happen that way it might deliver a maximum profit, and one could then go out of business with no loss. But it should be quite clear that implementing such a plan would require knowledge that not even the customer is privy to, and so that plan is not quite workable. 

    The consideration of parts getting old and losing value is an interesting one, since many kinds of parts don't really age internally, at least not in the electronics business. Fresh fish and vegetables are a decidedly different area. The main real deterioraqtion of parts that I am aware of is in the solderability property, where the surface oxidizes and becomes less likely for a good solder connection to be made. That is a potential problem that proper packaging can minimize but not prevent. And of course there is the fact that many parts become obsolete as the fads change and some features are no longer in fashion. That sort of aging is a real problem and there isn't much that can be done about it. 

    Of course the parts purchased with borrowed money do keep on costing as they sit on the shelf, no question about that. I suspec that these are the ones that cause the real grief, as the anticipated purchases fail to happen as desired. Stockholders are getting upset with the board for purchasing things that did not provide the instant profits so highly sought after. And there is that constant cost of the borrowed money. So here is a suggestion, but it involves changing the whole game around in a radical manner: Instead of every cent of sales going to pay off the shareholders, how about some investment into the business, so that inventory is not based on financed funds? Spend some of those profits on inventory and have a wider realm of stock, even items that may not be in the top ten products purchased. The cost of non-borrowed capital is less, and so the burde of stock that did not sell just yet is less. And perhaps folks will purchase that stock if they see that it is available.

  2. ddeisz
    April 24, 2013

    William,

    While the storage of some components will work, storage of capacitors for example, may not.

    It never makes sense for a publically traded company to acrue inventory that may or may not sell. Regardless of good intentions, inventory is deemed a bad thing for publically traded companies. It's deemed a build-up due to poor demand or poor forcasting or both. Keep in mind the market dynamics for long-term systems are completely out of synch with semiconductor commercial timeframes and commercial volumes. These two timeframes are an order of magnitude out of synch now. The semiconductor market for long-term systems is continuing to shrink in comparison to the commercial markets which drive the revenue.

    Driven by those market dynamics, semiconductor companies are incentivized to never have overages upon finishing their LTB purchases. More and more often, once an LTB event is done post EOL, there is no more product to be had. Even if that product could be had in wafer form, the packaging is custom and EOL as well.

    While the article calls out an offering, market dynamics isn't favorable for the business model.

    As an alternative, Rochester Electronics is a fully Authorized post-EOL supplier of semiconductor components. We are the largest supplier with this specialty. Our abilities range from finished goods storage to fully authorized replication of products from OCM design archives.

    Dan Deisz

    Rochester Electronics

  3. Eldredge
    April 24, 2013

    It seems like, on the customer end of this process, the customer can be assured tht they are receiving non-counterfeit product, potentially at a bargain. Is that an accurate assumption?

  4. rederringer
    April 24, 2013

    Hello, Eldredge. Thank you for the question. You are correct, the program described in the blog provides end users with authentic product. This is one major benefit to the end user, while another is having immediate availablity to product that might otherwise be scrapped. A program with integrity, however, maintains market resale of the recovered product.

  5. HM
    April 25, 2013

    Yes the way our society is getting completely dependant on electronics gadgets, and also how fast technology innovations are done, the ewaste or scrap is also increasing. Actually governments must make it a moral and business responsibility of the component manufacturer to safely dispose off the component that are or can no longer be sold. This also would be a money making thing. Governments must give some subsidy and encourage it.

  6. rederringer
    April 25, 2013

    Hi, HM. Thanks for your comment. You bring attention to another important element of a viable recovery program; reducing the environmental impact of component scrap. Suppliers not only get some “green” in terms of cash from otherwise scrapped product, the other “green” benefit relates to being eco-friendly.

  7. FLYINGSCOT
    April 25, 2013

    I wonder how many markets there are?  There is the main one and then if the product does not sell or it does sell and is returned ther are many alternative markets to push those products on to.  I suppose this may continue until a product is eventually scrapped.

  8. William K.
    April 25, 2013

    ddeisz, that is what I meant, since it appears that publicly traded companies are indeed running on borrowed money, and that in addition the very farthest that any of the directors is able to see is the next quarterly profit report, beyond that there is no looking, let alone seeing. I once worked at a company like that, where the concept was to not have any inventory at all, not even a single #4 lockwasher. It was a terribly miserable place to be for anybody with any creative thoughts at all, since there were no resiurces available to do anything creative with. It is quite pitiful to see a bunch of allegedly mature adults unable to focus on anything besides the daily profits. As it continued to move in that direction those of us who had the ability to leave did leave, often un-announced and without even saying goodbye.

    I have no idea as to the status of TPI today, and I really don't care, either.

  9. casper2345
    January 13, 2014

    It is true that the rate of each product diminishes with time. There are also various sources that give up the product illegally to make better profit. I have been collecting information on such topics and this is a cool article .

    http://www.pbxsystemnow.com

  10. katejohn
    November 9, 2015

    yeah i also agree that the way our society is getting completely dependant on electronics gadgets, and also how fast technology innovations are done, the ewaste or scrap is also increasing. Actually governments must make it a moral and business responsibility of the component manufacturer to safely dispose off the component that are or can no longer be sold. This also would be a money making thing. Governments must give some subsidy and encourage it.

  11. ehtisham
    April 13, 2017
    Completely awesome posting! Bunches of helpful data and motivation, both of which we all need!Relay welcome your work. 

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