Sequestration will undoubtedly have an impact on the supply chain as budgets tighten and the lifespan of high-end equipment is stretched a little longer. In our last post, we discussed how parts for maintenance, repair, and operations may become scarce and expensive. Today we'll examine the risks associated with sourcing these components.
US government procurement agreements require that a certain portion of the government's spend is directed toward “minority-owned/disadvantaged businesses.” This category includes businesses owned by women, ethnic minorities, and veterans. These businesses often specialize in military components because demand is virtually guaranteed.
When a component is declared at its end of life (EOL) by a manufacturer, remaining inventories of that product are put up for sale. Small companies with very little capital can acquire these components. Because the high-end equipment used in military and aerospace applications has a longer lifespan than consumer goods, it's a safe bet that some of these EOL components inevitably will be in demand — by the US government.
Watchdog agencies have concluded that sequestration will have significant impact on these small businesses. The Coalition for the Common Defense did a quick estimate on the state-by-state impact of sequestration. In New York alone, 379 businesses that did business with the Department of Defense in FY 2011 were owned by women. For those businesses, the total loss of revenue if the budget cuts go through is more than $50 million.
According to the Coalition:
New York defense prime contractors earned over $7.59 billion in 2011 protecting America, but now they face 18% revenue cuts under Sequestration — starting in 2013.
New York defense contractor revenue losses could be greater than $1.37 billion — each year.
Although most of the businesses that specialize in military components buy and sell factory-made devices, they aren't authorized by component manufacturers as sales agents. Not being fully authorized means they are not audited, held accountable by, or have a financial relationship with the original component manufacturer (OCM). This will negate OCM product warranties — suppliers extend warranties only through authorized agents — and heighten the risk of counterfeits being procured.
The National Defense Authorization Act (NDAA) is in part targeted toward counterfeit avoidance. Among the provisions, the NDAA requires companies to be able to trace the provenance of their components back to the OCM. Many component makers won't acknowledge products bought and sold outside of authorized channels. It is yet unclear how effective the measure will be.
Sequestration may actually aid in paring down unauthorized sources. The Defense Logistics Agency (DLA), for example, currently procures 5,962 microcircuits from more than 200 different suppliers. In fact, there are significantly fewer than 100 fully authorized sources of 5,962 product from which the DLA should source.
Sequestration will require procurement agencies to be very careful with the dollars they spend, and this will have a positive effect: As buyers gravitate toward authorized sources, the risk of procuring counterfeits is significantly reduced. Regardless of where government agencies procure their products, sequestration will limit their spending and extend the life of vital equipment. Sourcing parts for maintenance, repair, and operations will become a significant challenge.
There are several EOL solutions provided by companies such as Rochester Electronics, including authorized product sales on all products by OCMs.
And if inventory runs out, some even have the die, masks, IP, and authorization necessary to continue manufacturing of the part.
It brings a little certainty into a world of uncertainty as we figure out the real impact of the government cutbacks.