With the approach of the RoHS deadline, Electronics Weekly asks a number of component distributors how the plans of companies for compliance with the Directive is affecting purchasing practices in the supply chain

No one in the supply chain is underestimating the scale of the task facing all companies as the July 2006 deadline for compliance with the RoHS Directive approaches. It could be a bigger, more expensive issue for companies than dealing with the Millennium date change five years ago.

Suppliers and distributors have been tackling the issues of compliant product availability and component labelling for many months. With strategies in place many suppliers feel confident that they have the compliance issue under control.

Yet they are facing another problem. With the realisation of the approach of the cut-off for non-compliant components, many customers are being more reticent in their purchasing practices to avoid being saddled with non-compliant inventory they cannot use after July.

Gary Marsh

“For the electronics industry, the issues surrounding the RoHS Directive makes the Millennium bug seem like a walk in the park,” says Gary Marsh, MD at Solid State Supplies. “This represents the largest stock re-profiling exercise and component re-qualification exercise we have ever had to undertake. With so many parts involved across so many technologies and a deadline of 1 July 2006 to meet, common sense tells you this is bound to send some shock waves through the whole supply chain over the coming months.”

“Everyone from the top down is aware of the financial implications of sitting on what could be considered as obsolete stock in July, but educating customer and suppliers alike has been an uphill struggle in some cases,” says Doug Stead at Azzurri Technology.

There is a very real sense that the point of no return has been reached for UK companies on the route to full industry-wide RoHS compliance. As Gleichmann’s Mark Devenport points out: “There is a ‘strong smell of coffee in the air’ that a critical point has arrived for material pipeline for compliance date.”

As the spare capacity gets squeezed out of the supply chain as the deadline approaches, the main implication of this for suppliers and customers is lengthening lead-times. “Lead-times are fully extended at 18-20 weeks for many of our devices. There is no slack in the chain on RoHS compliant parts, and no excess inventory at manufacturers. In addition we, as with many distributors and OEMs, have purged much of our non-RoHS compliant stock and will only supply OEM supply pack quantities,” says Devenport.

Geoff Philpot

According to Geoff Philpot, MD at Focus, distributors and manufacturers alike are both understandably wary of the potential “wastage” of overstocked product. “Where a distributor would expect to hold maybe three times turns of a common component, this will be reduced to maybe as low as 12 times turns to protect against the pending obsolescence as the day approaches. This in turn will create a dip in supply against demand. This is compounded by the component manufacturers and the end user all working to minimise their exposure. I expect to see demand outstrip supply over the next 30 weeks,” says Philpot.

But the worst scenario of no action, low investment and total confusion does not seem to have happened. Ian Fantham at Astute says that he has seen very little effect in the supply chain except “a reluctance to commit to buffer stocks or longer term schedules”.

Distributors confirm that many of their franchises are actively moving to RoHS compliant parts. “Clear part numbering policies, active customer sampling programmes, even big green stickers on the boxes when they arrive at the warehouse – there’s been help and co-operation from all sides,” says Stead.

Yet there are worries, particularly among smaller, perhaps less well–resourced suppliers. “But don’t be under the illusion that the major suppliers have this in hand while the smaller start-up is floundering. In our experience, the opposite is often the case. No stock rotation policy, no clearly defined markings to distinguish what is RoHS and what is not,” says Stead.

This is definitely a concern for distributors. Inventory write-off seems to be inevitable for most suppliers and distributors, the only question is to what degree.

“There is no standard approach,” says Andy Kerr, product marketing manager at TTI Europe. “Some manufacturers are changing the part numbers of their components to identify compliant and non-compliant products, which potentially creates a dual inventory, while others are using date codes or labels to identify products which comply from those that don’t. To complicate matters further, in some circumstances, two different manufacturing locations within the same producer will use different identification methods.”

Kerr believes there is a “real possibility that come July 2006, end users, manufacturers and distributors could be left with non-compliant stock on their shelves”.

The only question which remains is how much stock and that may depend on how proactive companies have been. “We began the process of migrating our stock from non-compliant to compliant components 18 months ago,” states Kerr.

Greg Nicol

Greg Nicol, director of inventory management at Abacus Group, says the big challenge for distributors is the balancing act in maintaining a pipeline of non-compliant product to service customer needs when the compliant product is not available, whilst limiting the non-compliant pipeline value so that all liability is minimised when the compliant product is available.

“Although there is a significant and continuing increase in the number of devices that are available in RoHS compliant form, I would say the majority of bills of materials right now will contain devices that are not available in compliant form. In the light of this, customers are well advised to consult closely with their suppliers before imposing a switch-over date,” says Nicol.

The key thing is knowing that compliant versions of all devices will become available, or alternatives are identified, in time for any deadline. “A ‘transition period’ where exceptions are granted for specific, key devices that are challenging to source, may be advisable if this is feasible from a logistics and manufacturing standpoint,” says Nicol.

According to Chris Hinton, operations director at Arrow Electronics, another big problem facing the supply chain is a lack of co-ordination on standards for information requirements, particularly in relation to material declarations. “Some customers require data that are simply not available, while some suppliers make data available that appear to be useful but in truth are not – for example, a device may be described as containing a certain material with a mass in the range of zero to 0.23mg,” says Hinton.

The integrity and workability of the RoHS business process is affected by manufacturer part numbering practices more than any other factor. “Where manufacturers have changed RoHS specifications without part number changes, real pressure will be placed on purchasing processes, including purchase ordering, due to product identification problems,” says Hinton.

Georg Steinberger

In the view of Georg Steinberger, RoHS specialist at Avnet EM, it is not yet clear how much unsaleable, non-compliant inventory the industry as a whole will have to write-off. “If the problem can be contained to two per cent of the total inventory, that would probably be positive, if still massive,” says Steinberger.

“We will see occasional and individual availability issues, most probably not in commodity products, which are beyond 80 per cent clean, in volume, but in proprietary products. Customers need to think about this now, with lead times for many products moving out to 20 weeks,” says Steinberger.

Finally, there is a sense that the inventory issue is bound to resolve itself with a cost to all companies in the supply chain. “Very soon the supply chain partners will ask the customers to take full ownership of their security stock and other forms of bound inventory. It should be on each purchasers’ mind at the moment to check security stock, letter of intents, forecasts or frame agreements for hidden leaded inventory risks,” says Steinberger.

The general view of distributors is that overall the process should be manageable and Tony Frere, MD at DT Electronics is probably speaking for many when he says: “After the initial legislative confusion a couple of years ago, I think this has been going better than many people expected. Most suppliers have responded very positively.”

Paul Chinery, MD Dionics Many industry observers, including myself, felt that the fixed deadline of RoHS could present real supply chain imbalances as July 2006 approaches, with uncertain demand for RoHS compliant and lead inclusive components. Just how big the market for each will be is anyone’s guess at the moment. However, statistics from Dionics Environmental division for the third quarter revealed some surprising results. Of one hundred products analysed, 78 per cent were found to be exempt from RoHS and a further 67 per cent fell outside the scope of WEEE. Whilst these figures are far from exhaustive, they are nonetheless surprising. When one factors into the equation the various organisations that are unnecessarily converting product by exceeding the requirements of the legislation, it becomes extremely difficult to predict the short-term size of each market. Where the demand may actually originate raises the question of producer responsibility, notably within a typical OEM/CEM relationship. It is not uncommon for an OEM to simply inform their CEM they need to produce RoHS compliant products. Even if the CEM is the design authority, they have absolutely no legal responsibility to comply, as the OEM remains the ‘producer’ from a legislative standpoint. Even a component distributor may take a back seat, as a component is not considered to fall within the scope of the RoHS Directive. It is the application of a component that determines a need for compliance. It soon becomes clear that a lot of finger pointing is likely without the appropriate controls. RoHS responsibilities should be contractual, defining precisely who will do what. It may prove prudent for both parties to re-examine contracts, ensuring existing terms and conditions are still appropriate and that the defence of due diligence is available.