Thursday, April 7, 2011

Continuity of Supply - Period of Availability / End of Life

With the period of availability or end of life rights the thing the Buyer needs to be concerned about is continuity of Supply, especially if you have something that is sole source with the Supplier. The second issue with end of life is it can force the Buyer to purchase significant quantities of materials to meet their on-going needs for both production and service. If the Buyer guesses wrong, you have a problem either way - not enough materials to meet the needs or too many materials that become obsolete.

What is a reasonable period of availability?  In most cases the Buyer will want availability as long as they have the need to purchase the product or service. From a Supplier’s perspective, they need to consider both the volumes and costs of the current product or service and whether it makes sense financially to continue to offer it for sale. In most cases they will have a replacement product that they want customers to migrate to.  If the follow on product meets all the Buyer’s needs and the price is right, most Buyers will migrate to the new product.  In situations where the new Product may not work for the Buyer, they will want the old one provided as long as they can. 

Any commitment to a term of availability is basically useless if the prices for those future periods are not established. The Supplier could price the product at levels making it financially unfeasible for the Buyer to purchase and effectively eliminate the commitment.  Periods of availability need to be tied to the commodity and product, as that will determine the frequency of change. If the entire market changes every three years with a new generation, expecting a long period of availability on the product probably isn’t likely unless you have huge leverage and huge volumes that would allow you to have production dedicated to your needs.

The biggest thing you want protection against is surprises that can affect availability. Normally the length of time required for an End of Life notice should address either:
  1. How long would it take to qualify another source and once qualified what is the lead time to purchase from the new source as that determines when alternative items will be available, or
  2. If you can't qualify another source, how long will it take to determine what the last time buy amounts would be for both any on-going production or service needs.

In negotiating end of life one of the important things to understand is what is causing the end of life. End of life can be caused by a Suppliers new product introduction, it could also be caused by a supplier or material Supplier to them doing an end of life on items the Supplier needs to make the product or perform the service. It could also result from the Supplier doing an end of life on specific processes that is used. The reason why you want to understand the reason is different actions may provide you with different end of life alternatives.  Its always best to hold any material at the lowest possible level in inventory without adding all the costs to it especially if you are unsure of the end of life volumes you need.  For example in semiconductor manufacturing a Supplier could be end of life their wafer fabrication process, but all the other steps after that required to produce the product could remain the same. Wouldn’t it be better to have the Supplier build and hold completed wafer die, for completing and use if and when you need them. If you guess wrong, you only pay for the cost of the die, not the fully assembled and packaged chip. 

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