This is not a scam in the traditional sense. In this case, the victim companies are knowing, if not willing, participants. It all starts with good intentions. A progressive individual in the supply chain organization decides to add flexibility clauses to a contract with a supplier or EMS provider. The numbers look good and the clauses seem reasonable and everyone is happy. There is a sense of security because the company is entitled to certain demand flexibility – it is written in black and white after all. Unfortunately that is where the tragedy begins. Rarely is there any follow-up to ensure that the infrastructure to support the flexibility numbers is actually in place nor are there any measurements of flexibility established. Everyone gets busy and falls into a state of “don’t ask, don’t tell.”
In the end, the problem with this state of denial is that you do not have a real flexibility protection plan. Unfortunately this becomes most apparent when you need it the most - when there is some spike in demand or some disruption in supply. A single catastrophe makes this readily apparent and may bring you unwelcome attention.
For the supply chain, that catastrophe may come in the form of the European directive on the Reduction of Hazardous Substances (RoHS). In this directive, companies have to eliminate or greatly reduce the use of six substances. Eliminating some of these substances like lead (Pb) will result in some fundamental changes to components and manufacturing processes. In the coming months, the electronics supply chain will go through a significant transition. This turmoil will create risk, which will translate to supply problems, which will lead to revenue problems. If you ever needed real protection in the supply chain, this is the time.
Here are some practical steps you can take on this issue:
1. Assess your current flexibility protection. Do you have flexibility or buffer programs established with your supply partners? If not, that is another problem. If so, what is really behind your flexibility arrangements? What tangible assets or actions support the numbers? You may not like the answers but it is better to have a realistic assessment. Find out what is working – it will not all be bad news – and what is not working.
2. Determine how badly RoHS might affect you. Even if you have products that do not need to be fully compliant because of an exemption, you could be caught up in the move to RoHS. Determine what will change with RoHS and check with suppliers and EMS providers on their state of readiness. When will samples be ready? When is volume production available? What is the outlook for capacity and supply? What extra steps are being taken to insure quality of new parts and processes?
3. Protect your most important products. Chances are you will not have the time or the resources to create robust protection plans for all of your products. When it comes to flexibility, a half finished plan offers no real protection. It is better to focus on the top products in terms of revenue, margin, or strategic value and make sure you can implement a through plan.
What has happened to this point has happened. While you may have fallen into the common trap of depending on flexibility arrangements that never went further than ideas on paper, you have a chance to correct the situation. The RoHS transition will be a test of your preparedness. The ultimate grade for your effort will be how well you protect your company’s revenue stream. The window of opportunity for action is closing so act now.
Symphony Consulting specializes in establishing flexibility plans that meet a company’s needs while minimizing inventory exposure. If we can be of assistance in your efforts to protect your company, let us know. Symphony also teaches a workshop in major US cities on RoHS/WEEE and the Supply Chain. You can find more information by visiting our website www.symphonyconsult.com