True cost: Obsolescence can mean millions

Story

September 17, 2020

By Lynnette Reese

Dealing with military users who still want obsolete products is not a new problem for original equipment manufacturers (OEMs), who make more revenue on the latest products as users migrate away from mature products to faster, better versions. However, people don’t always jump quickly to the next revision because they can’t upgrade an entire system when one electronics card is no longer available. In the military realm, mature systems can remain in use for decades.

Maintaining old products makes it exceedingly more difficult for engineers to meet key customer demand (for these older products) while designing new revenue-generating products. A good customer may feel neglected and start thinking about migrating the entire account to a different supplier out of sheer frustration.

It’s unlikely to work smoothly with obsolete components. Electronics makers constantly obsolete parts, boards, and entire systems for new technology that provides a performance edge over the competition. According to the Obsolescence Management team, housed within the U.S. Army’s Aviation and Missile Research, Development, and Engineering Center, 70% of electronics are obsolete before a system is deployed, and one component can become obsolete in a weapon system’s life cycle as many as ten times.1 There’s a point where it’s unprofitable to continue supporting mature products. (Figure 1.)

[Figure 1 | At some point, the true cost of extending a product lifecycle becomes unprofitable for OEMs; urgent redesigns can be expensive and mature products can generate high inventory stocking costs. Otherwise excellent teams that deliver old, discontinued products can lose sight of profitability. (Image: GDCA, Inc.)]

The true cost of maintaining legacy products

Maintaining many legacy products ties up critical resources and is not worth the profit loss. The true cost of supporting older, low volume products can translate to millions of dollars in support, inventory management, and lost opportunity cost. Difficult decisions must be made around products at end-of-life (EOL). Only products sold to strategic customers or at high enough volume survive. When a product is deemed EOL, military programs must forecast demand far into the future and plan inventory space for a lifetime buy order. Other options may be to upgrade systems, find parts, or repair products themselves. However, there’s another option that few know about.

Maintaining older electronic products means handing off the headache to a Legacy Equipment Manufacturer (LEM). An LEM specializes in managing and engineering mature and already obsolete products. Like a cattle egret on the Rhino’s back, a symbiotic relationship can be formed between both OEM and LEM – accommodating obsolescence as a core competency – in manufacturing, repairing, and supporting legacy products for OEM customers.

A more cost-effective solution

The LEM’s cost-effective solution sustains older electronics products, extends the life cycle, and frees up engineers, production, and component buyers for innovating new product designs. Sales can maintain focus on selling the new rather than on placating customers. Production doesn’t get congested by supporting older products.

Ethan Plotkin, CEO of manufacturing company GDCA, Inc. (Livermore, California), states, “OEMs often continue to support old boards to avoid customer issues. Conservatively, 25% of overhead efforts are exhausted on less than four percent of sales revenue. Most of these sales are old designs. OEMs don’t make enough money to champion old designs – even if they increase prices.” GDCA does not reverse-engineer products, Plotkin notes; it enters into a secure agreement with the OEM to accept original design files and take it from there. Boards are built to fit, form, and function as the OEM originals. The OEM’s key customers – often the military – are no longer hindered by last-time-buy (LTB) notices.

Plotkin recalls a large company that agonized over ending the life of 80% of its legacy products following a strategic shift. Although many customers were upset by the EOL event, supporting these old designs was simply unprofitable. “[GDCA] accepted their legacy designs and their customers get more OEM-designed cards as they need them as well as support and repairs. It’s a win-win-win.”

Any engineer in their right mind would be skeptical. How can a company like that make money? LEMs are set up to provide sustainment services as a core competency. Sustaining the life of old products is different than new product development. The cattle bird and the rhino (see lead photo) operate differently, but together they both win in a symbiotic, mutualistic relationship. The smaller bird picks the parasites off the rhino’s back for its dinner. The rhino continues foraging over the new ground rather than trying to scratch insects off his back on a tree limb. This is a symbiotic, win-win relationship; routine sustainment activities that are normal operations for the “cattle bird company” are business exceptions for the OEM.

Late adopters to OEM products can migrate to the latest version at their own pace. Customers gain assurance that a product will not fall out of support, and OEM bandwidth is freed up to reduce time-to-market for other products, unlocking pockets of hidden revenue. Customers are confident to use OEM designs for future projects, no longer worried about products getting orphaned.

When asked how GDCA manages a new legacy product, Plotkin states, “GDCA works with OEMs on a case-by-case basis to license and then remanufacture mature designs, often without requiring requalification. We can’t accept every single legacy product, but we can offer solutions for most of them.”

Sustaining critical legacy products

Rochester Electronics is a component-level LEM that sells parts which have been EOL by many different companies. Rochester obtains remaining EOL components from a manufacturer for inventory, but also has the capability of manufacturing chips using information transferred directly from original component manufacturers. A symbiotic relationship in product life cycle management (PLM) with an LEM can remove frustration, reduce costs, and improve the OEM’s responsiveness and reputation. Customers may even remain unaware that an LEM is carrying the load for sustaining a critical legacy product.

An LEM should enter into a binding agreement to protect the OEM’s intellectual property (IP), receive design files, and take over supply streams and manufacturing. The OEM’s customers are happy, and OEM engineers can concentrate on what they do best. An LEM can comply with original commercial off-the-shelf (COTS) design and test specifications; participate in a counterfeit-avoidance program; and perform the manufacturing, repair, and customer support of legacy products.

For embedded board OEMs, optimizing product life cycle with a partner in a symbiotic relationship can remove the “ticks” that suck profits from ROI. Optimizing a product’s life cycle via an LEM allows an OEM to gain greater control of product profitability, optimize the product’s ROI to the fullest, and satisfy strategic legacy customers at no cost to the OEM. An OEM may even be able to negotiate royalties with the LEM. Contact a “cattle egret” – rather, a legacy equipment manufacturer – about starting a mutually beneficial, symbiotic relationship in legacy optimization to manage product life cycles.

Lynnette Reese has a B.S. in electrical engineering from Louisiana State University and has worked in embedded hardware and software for over two decades. She now freelances in technical writing and works with technology companies such as GDCA.

GDCA    www.gdca.com

Note

1 https://www.army.mil/article/167937/Managing_obsolete_products_could_save_government_millions/