Sequestration Impact for the Supply Chain, Part 2

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.

Lifespan issues
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.

Anti-counterfeit measures
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.

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

  1. SemiMike
    March 5, 2013

    Why are pro-cut people saying the sequestor only impacts < 5% and any business can cut 5%.   Its really more than 14% for those programs impacted, as it only impacts discretionary spending, not required spending.  Ask anyone if a 14% cut for schools is good idea, for example. 

  2. Brian Fuller
    March 6, 2013

    Good points… I don't know about you, but I've yet to come across a clear picture of the impact on electronics. Most of the high-profile cuts are people (meat inspectors, TSA staffers, White House tour guides). 

    Anyone seen a good analysis yet this week?


  3. SemiMike
    March 6, 2013

    The games continue, and now its the favorite of the Libertarians, the shut down of government and possible default for first time in history…again.  Perhaps the sequestor games are forming up as partisan legislation (GOP going for its favorites, Defense etc, the Democrats going for its favorite, Education, infrastructure, and elimination of tax loopholes. ) and those will be subject to Obama Veto of course.

    So the big weapon of the GOP is shutdown as done during the Clinton years by Newt's team.   So the Kabuki Theatre goes on for both parties.  And the ratings will be by the voters in 2014.  So each party is trying to label its opposition not only as evil but also as incompetant and “bought out by lobbyists” etc. 

    However, the Governors may weigh in when the sequestor impacts federal payments to states for education, et al.

    So look for very painful, on purpose painful, cuts as we approach the debt ceiling's flag on loan payments for money ALREADY SPENT.

    As engineers, regardless of party, we tend to think in terms of impact on R/D, Nasa, Drones vs F35's, reducing Corporate taxes for those companies that create jobs in US (or just abolishing all corporate taxes, but increasing capital gains taxes to compensate, which could impact a lot of tax lawyers. ) That might bring back all those overseas profits and jump-start jobs in US instead of Asia.

    All of these issues will be covered by one party or the other, in ways that have current sequestor pain illustrating the issues, most likely.   And out of all this, each government department will draft Plans A, B, and C to cover the most likely scenarios over next quarter and beyond.  And of course slowdowns (4 day work week) and late payments (with penalties?).  

    Frankly, I plan to write to GOVERNORS right away as possible allies (and possible future Presedential candidates).

    Sooooo…we will see.  WSJ and NYT will highlight the action, but of course talk radio and TV will highlight the extremes.  Enjoy the show!!!


  4. Brian Fuller
    March 9, 2013

    @MClayton200, really well (and entertainingly put)… as a citizen, the Kabuki is sad to watch, but only until you realize that the vast majority of people get out of bed every day, put their clothes on and do something productive. The push the rock downfield. 


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