Sequestration Impact for the Supply Chain, Part 1

Unless Republicans and Democrats see eye-to-eye on government spending over the next couple of days, a practice called sequestering is going to kick in.

Under sequestration, all government agencies will see their budgets automatically cut by between 9 percent and 13 percent to save an estimated $85 billion. Even if sequestration is somehow averted, budget cuts will be a reality in 2013.

Defense spending is always targeted during budget discussions because it is a big-ticket item — $46 billion is slated for 2013. Several things happen when defense spending is cut: Initiatives like the 1980s “Star Wars” systems are put on indefinite hold; existing orders are cut back or frozen; and organizations seek to extend the life of equipment they already own. In the Department of Defense, this means everything from IT equipment to unmanned drones and communications systems.

Military/aerospace equipment already has a longer lifespan than consumer items and used to require specialty components. As component quality has improved and prices have declined, government procurement agencies increasingly have been using “commercial off the shelf” (COTS) parts to avoid premium pricing. Consumer products, however, refresh themselves every six months; military and aerospace equipment is designed to last decades. Inevitably, long-life equipment requires repair.

Taking stock: Rapid turnover in consumer goods means components may be  discontinued. This means government procurement needs a solid end-of-life plan.

Taking stock: Rapid turnover in consumer goods means components may be
discontinued. This means government procurement needs a solid end-of-life plan.

Government procurement problem
The rapid turnover in consumer goods means the components manufacturers use may be discontinued by the supplier. This puts government procurement in a tough spot — parts to maintain and repair long-lived equipment may not be readily available.

Inventories of end-of-life (EOL) or obsolete goods are often acquired by companies speculating that demand for these devices will eventually spike as supply declines. For devices used in military applications, companies can command a price premium for such parts.

Buyers have several choices when a part goes EOL. Sometimes, EOL buys are made by authorized distributors that hold that inventory for customers.

Buyer beware
There are independent distributors — also referred to as the gray market — that purchase EOL inventories but are not authorized by suppliers. (There are a number of risks associated with this practice that we will discuss in our next post.) In fact, the National Defense Authorization Act (NDAA) was enacted in part to guard against procuring parts that can't be traced back to the original manufacturer.

There are also solutions provided by companies such as Rochester Electronics. Rochester is 100 percent authorized on all products by original component manufacturers (OCMs) to sell EOL factory-direct finished goods inventory.

In the event inventory runs out, Rochester has the die, masks, IP, and authorization necessary to continue the manufacture of the part. If other options aren't available, Rochester can re-create a component to the same specs as the original.

There are a lot of uncertainties in today's supply chain, but there are also ways to reduce the risks associated with EOL components and limited sources of supply.

2 comments on “Sequestration Impact for the Supply Chain, Part 1

  1. Brian Fuller
    March 1, 2013

    Well, the U.S. awoke in one piece this morning, but time will tell what the true impact of the cuts will be. 

    Have you and your companies (a question to all readers) spent the day getting a sense from suppliers and customers how they expect to be affected?



  2. FreeBird
    March 4, 2013

    I don't think we'll feel an impact for 3 to 6 months. Several interviews with folks from the DLA and DOD said existing orders will go forward, but after that….no one is sure. They have also reassured contractors and vendors to the government they will get paid. But I think the government will hold on to exisitng equipment for as long as possible, and the MRO market will reap the benefits.

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