Electronic chips are at the heart of virtually all sophisticated equipment today from automobiles and medical equipment to consumer electronics like smartphones. So, when manufacturers must purchase electronic parts that are no longer available from authorized distributors, are obsolete, out-of-production or only available from overseas sources, they often face a moment of reckoning as to how much risk to assume.
The challenge is that most manufacturers rely almost exclusively on chips sourced from authorized distributors and so are unprepared – even out of their depth – when these components must be purchased on the open market.
Purchasing agents often search the internet for electronic component suppliers, many of whom are located overseas. However, it is important to navigate this market cautiously, as it can be filled with risks. Inexperienced purchasers may unknowingly engage with unfamiliar or disreputable sources.
For many companies this introduces a level of risk that, at a minimum, makes them uncomfortable. For others, it is simply unacceptable.
“Sourcing electronic chips online without knowing who you are buying from is as naive as trying to buy a genuine Rolex watch in a back alley,” said Mike Thomas, president and global general manager at Classic Components, a premier independent distributor based in Torrance, CA. “I have heard of suppliers disappearing after the manufacturer wires over the money [without delivering the parts] and some purchase bad parts they ultimately cannot use.”
Manufacturers who prioritize risk management can greatly benefit from collaborating with an independent distributor. By doing so, they can safeguard their production and reputation through the acquisition of dependable supplies of high-quality chips.
In contrast to authorized dealers, experienced independent distributors can utilize their extensive expertise and long-standing strategic relationships to explore alternative sources. These sources may include regional authorized/franchised distributors, direct connections with manufacturers or access to surplus/excess inventories from other customers.
“Experienced independent distributors play a crucial role in safeguarding manufacturers from the inherent risks associated with buying electronic chips on the open market. By acting as a buffer, these distributors help reduce the burden and potential liabilities that manufacturers may face when making these critical purchases,” said Thomas.
The initial step involves conducting a comprehensive survey with the manufacturer to gain a thorough comprehension of their unique specifications, which include chip age and the ability to trace it back to the factory. Subsequently, all potential suppliers undergo meticulous assessment, taking into careful consideration the reputation of their parts within the industry.
Should any red flags or other concerns emerge throughout this process, the independent distributor reserves the right to elevate the level of scrutiny to even greater heights, including implementing sophisticated product inspection procedures.
“A professional [independent distributor] has the resources and experience to assess the risk and evaluate the sources. Depending on the level of risk, they can take different mitigating actions, particularly when hard-to-get, older or obsolete parts are required,” said Thomas.
Manufacturers can then proceed with confidence, knowing that the parts are of high quality. The risk mitigation and quality assurance steps are meticulously documented, including detailed photographs and measurements. As a result of this comprehensive process, independent distributors frequently offer long-term warranties on these parts.
Protection from Open Market Risks
According to Thomas, the mantra in his industry to eliminate risk is “know your source.”
Over decades, independent distributors have developed a very sophisticated method of identifying and eliminating risk. To achieve this goal, industry-leading independent distributors such as Classic Components make substantial investments in managing global supply networks, evaluating and prioritizing suppliers, establishing preferred supplier relationships, implementing efficient Quality Management Systems (QMS) and procuring state-of-the-art inspection equipment.
The process begins with vendor qualification and management to ensure the independent distributor is collaborating solely with a reliable and approved supplier. A tiered Supplier Selection and Approval System is used to assess vendors against rigorous standards. Each supplier is categorized, thoroughly documented, regularly reviewed and subject to tier-reclassification based on events and patterns observed by Classic Components or reported by third-party sources.
These sources include instances of supplier non-conformance to product reliability and integrity, changes in quality status relative to industry standards, industry reports regarding overall vendor quality, alterations in financial conditions such as outstanding payments or accounting issues, shipping of substandard products or repeated occurrences of product quality issues. In response to any of these factors, indefinite suspension may be imposed.
“Internally, our vendors are evaluated and assigned a grade and ranking using an alphanumeric system, which depends on their distributor type. This encompasses original chip manufacturers (OCMs), authorized distributors, along with other traders and alternative sources,” said Thomas.
According to Thomas, when a manufacturer requests a part, an agent asks a series of questions and completes a flow-down risk profile form developed by the company. These questions determine the intended application of the chip, manufacturing date restrictions (day code) and material traceability requirements, which include proof of direct sourcing from the factory.
The systematic evaluation conducted by Classic Components to identify any concerns linked to specific parts, commodities, brands or vendors. The company’s supply chain and purchasing teams are some of the most experienced professionals in the industry and regularly undergo training to effectively utilize their system to detect potentially risky parts, identifying any discrepancies or other related issues. The company also adheres to established international quality standards such as IPC, ISO, JEDEC, AS and others when selecting and managing their suppliers.
“If there are any known issues associated with the part, a warning will be displayed,” said Thomas.
At this point, the independent distributor’s buyers will begin sourcing from vendors ranked by reputation and will negotiate the terms.
Classic Components also takes advantage of its regional relationships across the globe, whether through local distributors, manufacturing partners with excess inventory or authorized distributors.
Compliance verification, which includes visual inspection, testing and physical analysis of parts, serves as an additional layer of protection. Only parts that have undergone rigorous QA control, in accordance with internal controls and established international quality standards are shipped.
As part of routine quality checkpoints, technicians conduct inspections of external packaging. During these inspections, they carefully examine the packaging for various elements, such as original and sealed packaging, correct labeling, proper QC markings, accurate lot codes, consistent colors and fonts and potential bar code discrepancies.
During the inspection process, technicians carefully examine the internal packaging for various authenticating elements. These include but are not limited to the appropriate logo, labels, bar code, as well as desiccant, dry pack, moisture barrier bags and vacuum sealed antistatic bags.
The chip is scrutinized as well. This includes inspection for physical arrangement in packaging, surface-mount packaging damage, pin orientation, coplanarity, surface scratches, cut or bent leads, lead blemishes, discoloration, rust, tarnish, evidence of remarking, lot codes and country of origin, as well as evidence of sandblasting or blacktopping.
“To ensure the legitimacy and high quality of chips, the authentication process is considerably more comprehensive for items with higher risk profiles,” said Thomas.
“When it comes to products like medical devices, for example, there are numerous necessary steps involved that can be both costly and time-consuming,” added Thomas. “However, these steps are crucial in ensuring the safety and effectiveness of the final product. So, we perform in-house inspection and testing and we may call on a third-party partner to conduct additional testing.”
Upon completion of the process, Classic Components offers a comprehensive five-year warranty and flexible net terms for payment, which are not due until the manufacturer receives and assembles the parts. Furthermore, the distributor provides substantial insurance coverage for the chips, including $10 million for general liability to cover costs related to physical injury or property damage, $5 million for technology errors and omissions to address expenses arising from sub-standard material issues and $5 million for employee crime and dishonesty to cover costs due to part failures resulting from employee misrepresentation, forgery, fraud or counterfeits.
When manufacturers have an urgent need for quality chips but cannot easily acquire them or risk substandard electronic components, working with an experienced independent distributor that will fully mitigate the risk is a safe, cost-effective option.