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As the global semiconductor industry breaks ground on dozens of new fabs, there’s a side effect that chip makers don’t like to advertise: product obsolescence. Current supply chain dynamics could drive a large number of end-of-life (EOL) semiconductors into short supply.

Typically, when demand and margins for a semiconductor line start to decline, chip makers phase out production but give users the opportunity for a last-time-buy (LTB). The production volume of LTB devices is based largely on customer forecasts.

photo of obsolete electronicsBut nobody really wants to take possession of these chips. There’s an initial capital outlay for the devices followed by longer-term storage and warehousing costs. Businesses also face the risk that these parts may never be consumed. Distributors negotiate terms under which they’ll hold EOL inventory to support customers with long-lifecycle products.

More than 50,000 electronic component device types were obsoleted over the past decade, according to IHS Markit. When EOL devices aren’t consumed they are often sold into the open market which increases the risk unscrupulous organizations could re-mark or tamper with the devices.

Semiconductor manufacturers authorize specialty distributors to support obsolete products. These distributors often conduct last-time buys; receive chip makers’ IP, masks and die; and re-manufacture devices for end-customers. Many resellers that source from the open market can prove a component’s provenance or conduct tests to prove they are authentic.

Instant obsolescence

There may be no phase-out period for many chips manufactured today, experts warn. “First you have a capacity issue – foundries are booked three years out, so suppliers are working on their most profitable lines and filling standing orders,” explained Vern Densler, solutions engineer at Sourceability. “As new fabs come online they won’t be buying old wafer equipment. New foundries will be making new parts and see the older lines as less profitable and will stop supporting them.”

Some chip production lines, Densler added, have slowed down because of Covid and a global labor shortage. “Suppliers aren’t going to start up a line for a last-time buy. So, you’ve got instant obsolescence.”

Capacity for wire-bonded chips is low as well. Wire bonding uses precious metals – gold, aluminum and copper– that are in short supply and climbing in price. “Anything with wire bonding will be scrutinized,” said Densler. “Suppliers may make a part buy will they bond it and package it? We may see some package types just dropped.” Suppliers could also opt to use one package type as opposed to several. “Manufactures don’t always have time to re-tool lines for a different package.”

Problems with obsolescence are not new – electronic devices are discontinued all the time. For OEMs and EMS providers that want to support their product’s full lifecycle, EOL is a constant problem. Do manufacturers buy EOL parts outright and tie up capital?  What if the parts aren’t used? At the same time, redesigning a legacy product eats up engineering resources and incurs a variety of related costs.

Buyer beware

The current unprecedented semiconductor shortage has prompted stricter practices in the supply chain, such as no-cancel no-return (NCNR) orders. Engineers are now considering chip availability as they design new products. The cost of not having a component on hand is considerable – just ask the auto market. “De-risking” supply chains is getting a lot of attention.

Electronics distributors, which can deal with hundreds of component suppliers and thousands of end-customers, are in a prime position to collect and analyze market trends. Many provide intelligence to prospective buyers and existing customers. Sourceability, a hybrid distributor, recently launched Datalync which uses transactional data – rather than list pricing — to identify the highs and lows of prices paid, quantity pricing and availability trends.

Vern Densler of Sourceability

Sourceability’s Vern Densler

Inventory management has always been a hot button in the electronics industry as OEMs and EMS providers don’t want to warehouse parts. Despite the prolonged semiconductor shortage, there’s little indication OEMs and EMS are stocking up on inventory when they can get it. To de-risk the supply chain, said Densler, manufacturers can buy proactively, but just-in-time (JIT) still dominates the industry.

Other efforts include:

  • Look to see what parts are more readily available and switch to those devices. “Look at new technology versus old technology,” Densler said. “There will be a transition and if designers go with a new part, you know it will be out there longer.”
  • Look at the market segments using the component you need. Auto makers are using the same chips as consumer electronics companies which order in higher volumes. When semiconductors got scarce, auto companies were not first in line. Know which verticals are competing for parts.
  • Put out orders for the components that you need regardless of lead times. “You should at least be in the hunt,” said Densler. “That way you have a chance of getting parts.”

Current lead times — as high as 60 weeks – are still someone’s best guess, he points out. For standing orders, devices are shipped immediately from distributors when they come in. “The supply chain is taking care of standing orders,” Densler said. Arrow Electronics Inc. and Avnet Inc. on recent earnings calls reported they have been able to support customers despite constrained supply.

Inventory and pricing trends information, added Densler, can also help buyers decide if they should buy inventory when it’s available or wait for a possible price decrease. Market researchers report some components have dropped in price although overall, semiconductors remain a seller’s market.

Author: Barbara Jorgensen

Barb Jorgensen is editor-in-chief for supply chain publication EPSNews and has covered electronics manufacturing, procurement and business for more than 25 years. Barb spent most of her career with Electronic Business magazine and EBN; freelanced; and then founded online publication EPSNews with two industry veterans—Bolaji Ojo and Gina Roos. EPSNews was acquired by AspenCore in 2017.