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The electronics industry's compliance blues
Staying one step ahead of the latest compliance acronym is taxing the distribution industry, but smart players are figuring out how they can work this directive-laden environment to their advantage.
By Barbara Jorgensen, Contributing Writer -- Electronic Business, 4/17/2007
| See also:
Electronic Business' annual ranking of the Top 25 North American Electronic Component Distributors |
Staying one step ahead of the latest compliance acronym is taxing the distribution industry, but smart players are figuring out how they can work this directive-laden environment to their advantage.
The key is information, and distributors are in a unique position to exploit it. The biggest players (see chart, "Electronic Business Top 25 North American Electronic Component Distributors") in the industry carry hundreds of product lines and can tap directly into their suppliers' product specs, pricing, inventory, and technology road maps. Now distributors need materials information as well. Suppliers aren't always making this easy (see story, "The channel challenges the Berry Amendment"), but distributors believe that if they make information easily accessible, customers will vote with their pocketbooks.
At the heart of the matter are regulations that require documented proof that a box of components, for example, is compliant with domestic and/or foreign regulations. Take RoHS: Distributors have to declare that their shipments to the EU are free of lead, mercury, and other banned substances. This is an overwhelming task—some distributors ship hundreds of thousands of components per day—complicated by the fact that distributors have no direct control over what materials go into a component. Suppliers do. But the distributor's name is on the box, so customers—and regulators—look to the distributor for proof that the shipment is compliant.
"The pressure on distributors to provide information for RoHS, the Berry Amendment, and other mandates is becoming more and more burdensome," says Rod Spear, director of total quality at distributor TTI, "but the ability to provide that information is a key consideration for customers."
China's environmental initiative (also known as "China RoHS") could make Europe's RoHS look easy. The European Union initially asks whether or not a shipment is compliant. If it isn't, additional details, such as what substances are present, are required. China RoHS wants to know up front what materials are contained in a product and how much of those materials is present. Although it's unclear whether these requirements apply directly to electronic components or to distributors, the channel is nonetheless getting prepared. "At some point, a customer is going to need information about the hazardous materials in its products, and it has to get it from somewhere," says Spear.
Distributors would like to be the central source of this information: They can aggregate data from a variety of suppliers and offer customers a one-stop shop for components as well as materials information. But the channel is facing several obstacles, and some of them originate with suppliers.
"Suppliers' systems simply haven't been designed to handle the flow of this kind of information very well," says Craig Conrad, senior vice president and chief marketing and strategic planning officer for TTI.
Distribution systems can—partially out of necessity. When RoHS became a reality in the channel, many component suppliers were reluctant to provide two separate identification numbers for leaded and unleaded versions of the same device. In part, suppliers cited the impact such a change would have on their information systems. But distributors have to track and store the devices separately, to prevent mix-ups: Customers' manufacturing processes for leaded and unleaded components aren't always compatible, so distributors developed their own numbering schemes and invested in the IT to manage them.
The channel may also assume some degree of risk by vouching for products they don't even make. "The question is how we provide the information without assuming the liability for that information," says TTI's Spear. "I am not sure people are paying enough attention to that."
Distributors have so far been able to handle materials declarations the same way they handle warrantees: Suppliers pass their warrantees through the distributor to the customer. Ultimately, the supplier is responsible for the performance of the product and/or the accuracy of information. This has worked out OK with the "yes or no" compliance requirements of the EU. But the channel is less comfortable with vouching for the materials breakdown of components. Many suppliers don't have that information at their fingertips, and even if they did, they would be reluctant to share their "secret sauce" recipes with competitors or the Chinese.
"It's going to be hard to get a component breakdown—suppliers will have to invest some money and resources to pull that together," says DeWight Wallace, president of catalog distributor Newark.
To date, when distributors cannot get materials information directly from their suppliers, they'll go out and find it and let the end customers know that the information is "to the best of our knowledge." But distributors point out that RoHS has yet to be tested, so it's unclear if that disclaimer is sufficient. "There's no noticeable enforcement of RoHS right now; at least, there have been no public announcements of companies being slapped on the wrist," says Steve Schultz, director of strategic planning and communications for Avnet's logistics unit.
Some in the channel believe that the ability to provide instant materials information will differentiate them in the market. "The period of the last 20 years has been all about the physical distribution business, moving products from place to place," says Conrad. "The value added moving forward is all about the information business. Just getting parts there is not good enough."
Conrad believes that, all things being equal, customers will migrate to the distributor that provides information seamlessly. Customers are already making such choices among their commodity vendors. "If you have three capacitor suppliers on your approved vendor list and two of them can provide you the information you need, where are you going to go?" he asks. "All of them are selling the same thing, so this is one way to differentiate."
"I think the implication to distribution is very positive," he adds. "Although there is incremental cost for us, the customers have to ask themselves, 'Do I try to go to 60 different suppliers for information, or do I go to one distributor that can consolidate it?' As time goes on, it will be more cost-effective to use distribution as a clearinghouse than to use a broad range of suppliers."
Nobody doubts that the supply chain will face more environmental legislation. "The more global things become, the more compliance issues you are going to face," says Conrad. "The question is, Do you look at it as a cost or an opportunity?"
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The channel challenges the Berry Amendment A little-known mandate called the Berry Amendment has been causing major headaches in the distribution channel. The amendment—which was passed decades ago to protect U.S. reserves of precious metals—prohibits Department of Defense (DoD) contractors and their suppliers from using specialty metals in their military components unless those metals were smelted in the U.S. Until two years ago, the amendment had not been enforced beyond the prime-contractor and subcontractor levels in the supply chain. Now the government is insisting that all levels of the supply chain certify that the metals used in their components were smelted domestically. So distributors such as Avnet asked their suppliers for that information. "Many of them chose not to respond to our inquiry," says Bryan Brady, vice president and director of Avnet's defense/aerospace unit. "This presented a real challenge to distributors. Today, the military/aerospace business is completely a distribution business—most suppliers have pulled away from this market, because of these kinds of restrictions. So distribution picked up the business, but it's like fitting a round peg into a square hole." Even though defense contractors use commercial (as opposed to mil-spec) components in their systems, these components require specialized treatment—generally provided by distributors—to qualify them for military use. But suppliers that sell to the commercial market are unaccustomed to dealing with government bureaucracy. "The defense and aerospace industries speak a different language and have different requirements than the commercial marketplace," says Brady. "These mandates have teeth. In the commercial world, it’s a matter of satisfying customer needs; in the military world, the requirements are nonnegotiable." Many suppliers were unable—or unwilling—to share their materials makeup with distributors. Without that information, distributors were technically unable to sell to the DoD. This had a significant impact on distributors such as Avnet: The military/aerospace market accounts for 10 percent to 12 percent of Avnet's sales in the Americas. Trade groups such as the National Electronics Distributors Association began lobbying Congress to exempt electronics components from the rule. In the meantime, Avnet developed a "matrix" for its defense customers, showing just where in the certification process various suppliers stood. It was not an ideal solution, but it prevented massive customer fallout. Late last year, the industry was successful in getting an exception to the specialty metals clause as it applies to the purchase of electronics components by the DoD, and business is proceeding as usual. However, it's still unclear how the DoD will implement the exception. —Barbara Jorgensen |
| A quick guide to compliance acronyms
RoHS: Implemented in July 2006, Europe's Restriction on Hazardous Substances bans lead, mercury, and other substances from products shipped to the European Union. China RoHS: Phase 1 of China's environmental initiative, implemented March 1, 2007, requires that products be labeled to identify six hazardous substances; phase 2 requires the certification and testing of products. As of now, all the testing will have to be done in China by approved labs and may require full disclosure of materials. REACH: The Registration, Evaluation, Authorization of Chemicals (REACH) directive of the European Union is scheduled to phase in over the next several years. Although the onus of the requirements seems to rest with chemical producers initially, many believe that eventually each level in the supply chain will have to forward chemical information for 30,000 chemicals to the next level, aggregating along the way. SOURCE: NATIONAL ELECTRONIC DISTRIBUTORS ASSOCIATION |
