Ruminations … Chapter 2: Circuitous Paths

The introduction to this series of essays included a brief a discussion of the movement of parts among the more prominent players within the electronic part supply chain. The following diagram includes a depiction of the flow of parts from Original Component Manufacturers (OCMs) to Authorized Distributors to Original Equipment Manufacturers (OEMs) and to Contract Manufacturers (CMs).

The_Supply_Chain_IDEA2014

[ Diagram courtesy of the Independent Distributors of Electronics Association (IDEA) ]

In addition to this orderly one-way flow through the supply chain, parts can also follow circuitous paths.

In the first chapter, I discussed one such example where parts take a temporary detour from the authorized supply chain — The RMA return. If the Authorized Distributor’s system for handling returns from customers should fail, counterfeit parts can pollute the authorized supply chain.

rma_return_flow

In this chapter, I will discuss another form of a product return with an even more circuitous path — The Stock Rotation.

A Distribution Agreement between an OCM and its Authorized Distributor may include limits on the time period the Authorized Distributor may supply product in inventory. Once product in inventory reaches the limit specified by the OCM, the Authorized Distributor must return “date code expired finished-goods” to the OCM; the OCM and its Authorized Distributor execute a stock rotation.

Now lets add another player to this process — The Authorized Aftermarket Supplier. The Authorized Aftermarket Supplier is part of the authorized supply channel and performs one or both of the following:

  • Authorized manufacturing, where the Aftermarket Supplier is authorized by the OCM to produce and sell parts, usually due to an OCM’s decision to discontinue production of a product.
  • Cloning, where the Aftermarket Supplier reverse-engineers a product and sell this product under its own brand. In this scenario, it is itself an OCM.

An OCM’s relationships with an Aftermarket Supplier can encompass the transfer of finished product, unconsumed materials and intellectual property (the recipe needed to continue production). The Aftermarket Supplier then sells finished product OEMs, CMs and distributors. Now lets add some complexity.

The OCM may establish business relationships where the Authorized Distributor transfers “stock rotation” material to an Authorized Aftermarket Supplier instead of returning this material to the OCM. The Authorized Aftermarket Supplier then sells this product to OEMs, CMs and distributors; and provides stock rotation accounting data to OCM. The Authorized Distributor may have subsequent demand and acquire some of this material back from the Authorized Aftermarket Supplier. The following diagram illustrates this rather complex combination of business relationships.

Stock Rotation

In the first chapter of this series, I described one example of how the authorized supply chain can be, and in fact was, contaminated with counterfeit parts. Though some of these parts were supplied to two customers, the counterfeit part quality escape was contained and did not affect the customers’ products. This event, as rare as such an occurrence might be, not only aroused concern among the defense contractor community, it also got the attention of Authorized Aftermarket stakeholders. If Authorized Distributor inventory is contaminated, counterfeit parts could also find their way into Authorized Aftermarket inventory by way of a stock rotation.

In the scenario illustrated above, the Authorized Distributor may have subsequent demand for the same product and acquire some of this material back from the Authorized Aftermarket Supplier. The Authorized Distributor could receive the same counterfeits twice — once from its customer associated with a contaminated RMA return, and again from its Aftermarket Supplier associated with a contaminated stock rotation. Settling on responsibility and damages associated with a counterfeit part quality escape would be an interesting challenge — could the Authorized Distributor hold the Authorized Aftermarket Supplier to account for counterfeits it allowed to escape in the first place? I would love to be a fly on the wall while an Authorized Distributor and Authorized Aftermarket Supplier exchanging roles as buyer and seller settle on terms and conditions for the future — would the Authorized Aftermarket Supplier accept a “counterfeit free shipment” clause from the Authorized Distributor when the integrity of stock rotation material is in question? How is supply chain traceability sustained throughout this circuitous path?

When I reflect on the potential for counterfeit part contamination via RMA returns and stock rotations, I think of household plumbing. The user community depends on the authorized supply chain to regularly perform sewer backup risk assessments and ensure backflow protection devices are in order.

H Livingston

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5 thoughts on “Ruminations … Chapter 2: Circuitous Paths

  1. Special thanks to Dan Deisz for helping educate me on the stock rotation process and assisting with the graphic illustration included in this essay.

  2. Chuck Amsden says:

    Most Distribution Agreements do not allow Returns on Stock Rotations. Many MFRs scrap stock rotations and returns. Your paint brush is too wide. There are many many Distributors and MFR that don’t fit your paradigm above.

    • Hello Chuck,

      I am aware the three-way business relationship illustrated here may not be very common. The intent here is not to paint a broad brush, but to illustrate how the supply chain is more complex than most of us in the aerospace and defense industry know … including the authorized supply chain.

      Henry

  3. Steve Ingardia says:

    And I know for a fact that at least one of the two major Franchised distributors does in fact still take convenience returns and resells to their defense customers. I have only heard of one that doesn’t, so I would be interested to know who the others are.

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