As the rapid obsolescence of computer and home entertainment products causes an increase in consumer electronics waste, U.S.-based manufacturers and component suppliers will have to develop new manufacturing and inventory management processes

Environmental regulations pose supply chain challenge: as the rapid obsolescence of computer and home entertainment products causes an increase in consumer electronics waste, U.S.-based manufacturers and component suppliers will have to develop new manufacturing and inventory management processes

Brian Albright

New European Union (EU) rules on the use of hazardous substances in electronic equipment could pose major logistics headaches for U.S.-based manufacturers and component suppliers. The electronics industry not only has to develop new manufacturing processes, but also will have to keep better track of components and temporarily manage separate streams of compliant and noncompliant inventory.

“It is much harder than it sounds to track the contents of every product,” says Judith Glazer, director in Hewlett-Packard’s process development, supply chain services, and product processes organization. “It’s a daunting challenge.”

The rules are a reaction to a growing electronics industry problem–the increase in consumer electronics waste caused by the rapid obsolescence of computer and home entertainment products.

“In 2001, electronics accounted for between 2% and 5% of the waste stream,” says Chris Newman, of the U.S. Environmental Protection Agency, Region 5. “The EU estimates that electronics waste is growing three times faster than any other waste stream.” Of the 40 million computers that became obsolete in 2001, only 10% were recycled, Newman says.

The EU has issued two directives, which will, in effect, become de facto worldwide standards. The Waste Electric and Electronic Equipment (WEEE) recycling directive requires manufacturers to provide the means for consumers to return electronics waste free of charge by Aug. 13 of this year. By Dec. 31, 2005, manufacturers will need to finance the return of 75% of all products.

The Reduction of Hazardous Substances (RoHS) directive, which takes effect next summer, requires manufacturers to limit the amount of hazardous materials (lead, mercury, cadmium, hexavalent chromium, and some flame retardants) in everything from cell phones and radios to desktop PCs. There are exemptions for some products, such as servers and networking equipment, which will be reviewed periodically and eliminated eventually, as “green” manufacturing processes improve.

An Industrywide Shift

Although many companies have never even heard of the two directives, they will force an industrywide shift in both manufacturing and supply chain operations. “No matter where you are organizationally or in the supply chain, this is going to change your life, guaranteed,” says Peter Lachapelle, vice president for content and supplier relationship management at i2 Technologies. “It won’t matter whether you’re exempt or not.”

Hewlett-Packard has developed a social and environmental responsibility initiative to address not only RoHS and WEEE, but also other supply chain issues, such as labor practices among its component suppliers. Glazer, speaking at the 2005 National Manufacturing Week show and conference in Chicago earlier this year, said HP engaged its suppliers early on regarding hazardous substances. The company had to augment its supply chain management software to handle the additional tracking requirements. “We need to know that all parts are compliant, and our product data management systems have to track down to the part level,” Glazer says. “We depend on our suppliers to have good control processes, and we’re working with them to make sure those processes are solid. But it’s a challenge.”

Although companies such as HP, Sony, and Apple have been proactive, a large chunk of the electronics supply chain seems ill-prepared for these changes.

“Every company in the electronics supply chain, from parts manufacturers to retail outlets, needs to have strategies to comply with these regulations,” according to a January report from AMR Research. “Right now the wrong questions are being asked by the wrong people in the development of these strategies.”

Many smaller companies and some raw-material suppliers may be unaware of the new rules. Based on the questions asked at an EPA session led by Newman at National Manufacturing Week, many sheet metal fabricators and other suppliers don’t even know what RoHS is.

“I’d feel more confident in a large supplier in the U.S. being compliant than a smaller one in, say, China,” says Eric Karofsky, analyst at AMR Research. “To put your trust in a component supplier right now is a big risk, and it’s a burden that some of the smaller companies can’t bear.”

“The majority of suppliers are several steps removed from the direct impact of this,” says Lachapelle. “The industry is asking them to make fundamental process changes, and that won’t be done overnight.”

Geoffrey Bock is an engineer with TUV Rheinland of North America, which runs a certification program for RoHS compliance. He works with medical device and monitoring device manufacturers, and from what he’s heard from his clients, there is cause for concern. “At the 20 or so companies I’ve consulted with, they’ve sent out questionnaires to their suppliers,” he says. “Only 20% responded that they’re compliant, on average. A large chunk–40% to 50%–don’t know. The rest didn’t respond at all.” Several companies have set up verification programs, via either third parties or internally, to test for hazardous substance levels in their finished goods.

Symbol Technologies, one of the largest manufacturers of wireless communications and automatic data capture equipment, has set up a Web site to collect information from its component suppliers about hazardous substance levels and compliance timelines. “The first thing everybody had to do was find out where they were at in terms of hazardous materials content,” says Tom Collins, senior vice president for supply chain operations at Symbol. “As we move forward, we’re going to have test results from all of our suppliers. If some don’t want to play, we will need to replace them.”

While RoHS is more of an engineering and information management problem, WEEE will be a massive reverse-logistics headache if not handled properly. Luckily, third-party providers and industry consortia are providing workable solutions. Individual countries also have recycling programs, often paid through taxes on recyclable items. Symbol is contracting with a third-party provider to handle its WEEE compliance, and is preparing for new product-labeling requirements. “By August, we need to label all equipment that is above the required levels on hazardous substances,” says Collins.

Take-back Costs

To save on take-back cost, many companies are donating or refurbishing equipment, or selling it on eBay. This not only generates some revenue or tax breaks, but also relieves the manufacturer of the end-of-life responsibility.

The transition to new designs based on the environmental directives could lead to inventory management problems as well. Manufacturers will need to know which product is compliant, which isn’t, and where it all went.

“A few companies I’ve talked to have said they’re going to stockpile their old stuff for repair purposes,” says Bock. “But if you do that, now you have to separate and organize those inventories, and you must have two different part numbers so that you can tell the difference. You really don’t want that.”

While introducing new part numbers can be problematic and expensive, managing mixed inventories with the same number will require IT systems that can track those parts that are compliant. “You have to separate those inventories to maintain outbound quality control,” says Jim Smith, senior vice president for warehousing and distribution worldwide at Avnet Logistics. “You have to identify those products inbound, in storage, and outbound. And people often assume products flow just one way, which isn’t true. Used or returned parts might come back in different packaging that doesn’t indicate RoHS compliance. How do you deal with that?”

The danger for manufacturers is that parts made with lead-free solder require a different manufacturing technique than leaded parts–especially where temperature is concerned. Lead-free solder can grow what are called “tin whiskers” that can cause equipment failure later in the part’s life.

At Symbol, all of the company’s components are serialized and tracked. “We’ll have pools of part numbers that will reflect what meets the new criteria and what doesn’t,” says Collins.

The company is not changing its part numbers for RoHS, however. “New part numbers ripple through the customer base and ripple through the field,” Collins says. “That just increases the complexity of all your inventory processes. The form, fit, and function of the part have not changed. If we use the same part number, it will be transparent to the customer.”

According to Collins, the new lead-free components will be backward-compatible with pre-RoHS equipment.

Inventory Tracking

Symbol is relying on its own inventory tracking technology to manage compliance. Others are considering additional types of tracking systems. Rockwell Automation, for instance, is considering using radio frequency identification (RFID) technology to keep track of where parts are headed. The company is currently conducting a series of RFID pilots for inventory control and work-in-process tracking.

“We are considering RFID to assist us in tracking where products are going,” says Ken Tinnell, practice leader for wireless warehouse and RFID solutions at Rockwell. “It could tell us where the product is, and its characteristics, which could assist with RoHS.”

Companies will need documentation to prove that all components in a given product are free of the banned substances, and end manufacturers such as HP and Dell will be on the hook for an audit trail that stretches all the way back into raw materials.

“Actually, just producing the necessary reports is a significant issue in regard to logistics,” says Karofsky. “You have to put the compliance information into a database and create a report, and then make sure the right report goes with the right packaging. This will differ by country, and there’s some confusion as to who owns the content as it’s transferred. A lot of distributors purchase in bulk and ship their products to other countries, so the manufacturer may not even know where the product was shipped.”

Inventory documentation will stretch beyond just RoHS compliance–it could even affect a company’s Sarbanes-Oxley reporting. “Under the inventory disclosure portions of Sarbanes-Oxley, if you can’t tell me with certainty that a part is compliant, how do you guarantee the value of the inventory?” Lachapelle asks. “You must have information to support the idea that those parts are still usable.”

A few software companies are trying to capitalize on this product data management problem. For example, i2 Technologies has partnered with Underwriters Laboratories to create verification services for its environmental compliance customers. The GoodBye Chain Group, an environmental services, software, and training company, provides a product called RoHS-WEEE.NET to help create an audit trail. An industry organization, the International Electronics Manufacturing Initiative, wants to develop a global depository of component material data.

Avnet Electronics Marketing, Americas, now offers i2 Technologies’ hazardous materials content data as a hosted solution via Avnet’s Promiere Component Selector or Bill of Materials Optimizer, or behind a customer’s firewall.

“Companies tend to put this chemical composition data in PDF files on their Web site,” says Smith. “We stock 300,000 SKUs. Can you imagine going to a Web site and searching for that information, when there’s no standardized reporting?”

Avnet offers basic content data free of charge, but also offers additional information for a fee.

For companies just getting started on compliance, Lachapelle suggests putting together a cross-functional team, and making sure the project has an executive sponsor. A decision has to be made early about whether to outsource compliance activities, or handle them internally.

“Measure the risk and the business drivers, and quantify your exposure,” Lachapelle says. “Understand the value impact as a company.”

“Make sure the entire company is aware of the gravity of the situation,” says Smith at Avnet. “If you don’t have a plan, get one.”

Legislation on the Way

Some 38 states in the U.S. are considering electronics recycling legislation, and California has already passed legislation requiring compliance with the EU rules. U.S. Senators Jim Talent (R-Mo.) and Ron Wyden (D-Ore.) have introduced an “e-cycling” bill that would give an $8-per-unit tax credit to companies that recycle at least 5,000 display screens or computer system units each year.

With several U.S. states, China, and the EU all developing slightly different regulations, manufacturers will have a difficult time navigating the requirements. Even within the EU, enforcement approaches will vary by country, as will penalties, which could include seized shipments, fines, and even jail time.

“I don’t think lack of standardization will be that much of a problem within Europe,” says Karofsky. “Most manufacturers will adhere to the strictest standards by default.”

Compliance is expected to cost the electronics industry billions of dollars–up to 2% of top-line revenue, depending on the company–but noncompliance could be equally costly. Consider Sony, which in 2001 estimated it lost $100 million in sales when Dutch officials seized a shipment of PlayStation game consoles because the cables contained too much cadmium.

“What’s challenging is that we have to simultaneously change our design, materials, and manufacturing processes, and most of the industry needs to change together,” says Glazer at HP.

There has already been some back-peddling in Europe, as the scope of the challenge looms larger. Several countries have moved back their WEEE compliance deadlines.

“I just hope manufacturers don’t take this as an opportunity to be more lax,” Karofsky says. “They should see this as a significant challenge, and they need to act right now.”

“I think this didn’t really hit everybody until this past quarter,” says Collins at Symbol. “I’m not sure everybody understood the full scope of what it meant for their businesses.”

The effect of these directives will be even broader than most companies understand, says Lachapelle. “People think that because their company is covered under one of the exemptions, they’re OK,” he says. “Actually, you may be even more affected.

“The telecommunications and server spaces are very much affected,” he says. “What happens when all the component manufacturers go lead-free, and the exempt OEMs can’t get the leaded parts they just designed into their new products?”

Company Information

AMR Research

Boston, Mass.

949-477-5353

www.amrresearch.com

i2 Technologies

Dallas, Texas

800-800-3288

www.i2.com

Symbol Technologies Inc.

Holtsville, N.Y.

800-722-6234

www.symbol.com

TUV Rheinland of North America

Newtown, Conn.

203-426-0888

www.us.tuv.com

Resources

International Electronics Manufacturing Initiative (iNEMI), www.nemi.org

National Association of Electrical Distributors, www.naed.org

European Union, europa.eu.int

*EU Directive 2002/95/EC, Restriction of Hazardous Substances (RoHS)

*EU Directive 2002/96 Waste Electrical and Electronic Equipment (WEEE)

COPYRIGHT 2005 Advanstar Communications, Inc.

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