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Harnessing technology in the channel
Prior experience makes compliance a little easier.
By Barbara Jorgensen, Contributing Writer -- EDN, 4/16/2008 7:00:00 PM
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In the U.S., the Sarbanes-Oxley Act (SOX) was passed to make businesses more transparent—and accountable—to regulators and shareholders. Although SOX must be followed by publicly traded companies, it's not mandated in the private sector. Nevertheless, many private companies have adopted SOX as a "best practice" or in anticipation of going public someday.
In the global market, environmental regulations require another kind of transparency. Companies that build and sell electronics to the European Union must demonstrate that their products are free of lead, mercury and several other harmful substances. The Restriction of Hazardous Substances (RoHS) is also being adopted in various forms in other major electronics market and is expected to become a global standard at some point in the future.
These mandates have taxed the resources of companies around the world. For distributors, some of these regulations are particularly onerous because of the staggering number of parts they ship every day. Identifying, collecting and managing materials information on the thousands of components they sell is a monumental task for distributors. But over the years, distributors have become adept at managing massive amounts of data using everything from simple barcodes to sophisticated IT systems and, of course, the Internet.
Information is key
"Most of the environmental regulations (RoHS, China RoHS, WEEE, etc.) have as their essential element the tracking and dissemination of information regarding the composition of the goods, the identity of the parties through the supply chain, etc.," says Wayne Brody, vice president and chief compliance officer at Arrow Electronics Inc. "We use our global network to collect that information from more than 600 suppliers of hundreds of millions of different components and make it available as an integral part of the sourcing or purchasing process to 140,000 customers.
"Much of the technology behind these efforts has been "home grown"—developed by distributors themselves. This has largely been out of necessity: a key compensation plan for the channel—known as "demand creation"—requires distributors verify a component sale has taken place, no matter where the sale is booked or how many other channels the components pass though first. Traditionally, distributors have had to establish that demand for a product has resulted in a fulfilled order or they don't get paid. Global outsourcing programs have made this task difficult—a product designed in Texas, for example, is manufactured in China. The manufacturer of this end product is rarely the same company that designed it.
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Now, that experience is helping distributors demonstrate compliance with various regulations. For example, when suppliers began manufacturing RoHS-compliant devices, many didn't change the base part number that identifies the component; they added a symbol that indicated the part was "green." Many of the systems distributors use to inventory, track and ship products couldn't accommodate a symbol, so in the system, two different parts looked exactly the same.
To avoid mingling compliant and non-compliant parts, distributors developed programs in-house that registered incoming parts, changed RoHS-compliant part numbers for in-house use; and then changed them back again when parts were shipped. This process was necessary because the EU's RoHS requires proof that an electronics product is RoHS-compliant, and the best way to demonstrate that is tracing a component from the manufacturer's factory through the product's final assembly. Since the material content of a component originates with the supplier, that information has to stay "attached" to the component no matter how many channels it passes through. The component's part number is the key to that information.
Another compliance focus in the channel addresses U.S., EU and other government concerns regarding worldwide technology transfer and tariff regimes, according to Arrow's Brody. "Here again, our massive technical capacity and dedicated compliance teams make it possible for suppliers and customers to ensure that the parts they need move around the world are in compliance with U.S., EU and other regulatory schemes, ensuring continuity of supply and the ability of our customers to sell their products down the line."
Arrow collects or generates compliance data for all the products it sells, secures licenses where necessary, and makes sure that customers are duly authorized to receive the product in question. Arrow utilizes its worldwide integrated systems in this process, Brody says.
Security practices
Because distributors conduct business with competing suppliers and competing customers, information security has been a priority for a long time. For example, before information was managed by computer, distributors physically separated an order going to Computer Maker X from and an order going to Computer Maker Y. Firewalls and virtual private networks have since replaced physical barriers with virtual barriers and orders are electronically transmitted and fulfilled.
However, information is still guarded very carefully. Distributors, for example, don't share point-of-sales (POS) data with one another. This data, which includes sales and customer information, is shared between distributors and suppliers. Some industry participants believe POS data should be compiled and used to identify distribution market sizes by locale, region or even nation. The industry remains divided over POS because distributors don't want to share the identities of their customers and numerical solutions—such as assigning customers an ID number—aren't standardized.
Automation has helped the channel increase efficiencies and collects the kind of information regulators seek. Warehouses use machines and conveyor belts to stock and move inventory; barcodes and scanners eliminate the need for manual input of part numbers; and stacks of paper have been replaced by electronic forms. "The process of retrieving content based on a regulatory or legal information request requires that companies know what they have, what they don't have, and where to find it quickly and exhaustively," according to a compliance white paper by Deloitte Development LLP and Sun Microsystems. "The ability to control and automate information retention and archiving can help companies mitigate risk and improve compliance be helping to maintain all pertinent records."
Inventory information is just the tip of the iceberg for the channel. Supplier and customer data is used a million ways by distributors—sales forecasts, purchasing histories, component substitutions and materials content are only a few. Compliance may be a by-product of the technologies distributors have adopted over the years. But some industry watchers note that the implementation of the EU's RoHS in 2005 was not as disruptive to the supply chain as many thought it would be. And the channel doesn't seem to be sweating the next wave of regulations.
