How to manage obsolete components in Third Party Contract Manufacturing

The obsolescence of materials is a problem that is often perceived as burdensome, as it can cause significant damage in production if it is not treated in time and in the most appropriate way.

The speed of innovation is usually a considerable element, as it is the need for companies producing raw materials to precisely manage their offer, increasing or dismissing product lines in order to preserve the essential and delicate balance between market demand and availability.

A raw material does not always become obsolete for reasons of technological advancement: it often happens, in fact, that the material is still perfectly suitable for use from a technical point of view but still suffers from a sharp drop in market demand or, on the contrary, it is set aside by the producer himself for reasons of unsustainable marginality or of priority assignment to other materials.

What happens when you have to manage an obsolete component in the case of a third-party production order?

In Contract Manufacturing, the management of the obsolete component occurs in concomitance with two possible scenarios, each with a different impact on the start and the fulfilment of the production order.

Scenario 1: Customer identifies and manages obsolescence prior to issuing the production order

In this case, the customer tracks BOMs internally and is therefore autonomous in quickly identifying any problems related to the obsolescence of one or more materials.

• If the purchase of the materials is made by the customer, the customer himself will activate the market search for the best replacement component in relation to any obsolete component.
• If the purchase of materials is made by the Production Partner, the customer must communicate the identification of obsolescence and it will be the Production Partner itself that activates its supply chain to initiate the purchase of suitable materials, available and with a conforming date code.

Scenario 2: The Production Partner identifies and manages obsolescence when taking over the production

In this case, the Production Partner identifies the obsolescence hazard during the analysis of the customer's BOM. The countermeasures are therefore initiated in a joint operation between planning and purchasing, both activating their resources to manage and solve the problem, with the purpose of meeting needs that range from maintaining the economic impact to limiting the possible delay in production. In this scenario, the Client does not actively participate in solving the problem, but relies on the Production Partner, who deploys his resources and his network to face the emergency and guarantee the success of the production order entrusted to him.

Which of the two scenarios allows for a reduction of the impact on the production order?

At first glance, the impact on production would appear to be greater in the second scenario, in which obsolescence is detected when the order has already been submitted. However, the apparent delay generated by this scenario should not be misleading.

In fact, it is necessary to take into account that the Production Partner, who is managing this risk for a good percentage of the productions that he carries out on behalf of third parties, certainly has processes aimed at implementing an optimal solution that is reliable, fast, and economically advantageous (or at least economically neutral).

The supply chain of a Manufacturing Company that handles purchases for itself and for Client companies will likely be broader and more diversified than the Customer's supply chain, and therefore will have the ability to research in multiple markets and on multiple fronts.

Very often, experience in handling similar issues represents an advantage capable of flipping the cards and restoring order in full compliance with the estimated production completion date, which is definitely a primary focus in a typical Third Party Contract Manufacturing context.