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OBSOLESCENCE SENDS SHOCKWAVES THROUGH THE CITY
The analysts polled cover the defence, aerospace, transport, utilities and medical equipment sectors. COG's findings reveal that component obsolescence is recognised by more than half (55%) of the analysts polled as a business risk that companies need to manage effectively. However, less than a third (30%) factor the issue into their analyses, and only a quarter say companies give them any information on the obsolescence problems they face and how they manage them. Michael Trenchard, Chief Executive of COG, commented: "While it is encouraging to see that component obsolescence is now featuring on so many analysts' radars, it's disappointing that many organisations still do not seem to be actively volunteering information about this issue." Earlier research conducted by COG found that FTSE100 companies are not reporting on the risks associated with component obsolescence in their annual reports, even though listed companies should review their financial, operational and compliance controls and risk management systems annually, and report to shareholders that they have done so. "Organisations should provide more information on how they deal with obsolescence in their risk analyses, particularly those in the most vulnerable sectors," says Trenchard. "They may be unwilling to admit that it affects them at all, but taking a proactive approach should reflect well, rather than badly. It's how it's managed that counts." "As more and more companies begin to realise the potential pitfalls as technological change gathers pace, we expect to see obsolescence moving further up the agenda." According to COG, many companies who rely on equipment with long life expectancies could incur significant costs, both in financial terms and to their reputation, if a vital component within a piece of equipment becomes obsolete. This is because it can be very difficult to get replacement parts quickly or at all. Replacements can be many times the original cost and in extreme cases, the equipment may have to be put completely out of service or parts of it may need to be re-designed. Research suggests that, on average, sourcing a substitute part costs £13,500 and the cost of a major component redesign could be more than £300,000. This does not include any associated costs, such as down-time of equipment. COG says the problem is likely to get worse because component lifespans are typically now far shorter than in the past, since demand is mainly driven by the more 'disposable' consumer goods market, rather than Industry. Many of the analysts who recognised obsolescence as a business risk said the damage it could do to an organisation's reputation if not properly managed was likely to be as important, if not even more so, than the significant financial costs which could be incurred. For instance, Tube Lines was recently criticised for resorting to using eBay, the auction website, to source vital spare parts for its equipment. Comments Michael Trenchard, "Proactive obsolescence management can minimise costs, and even eliminate a problem altogether." "Organisations need to take the bull by the horns. If they plan ahead and keep an eye on parts availability, they are more likely to know where potential problems might occur. They can then take a considered view on whether and when to increase their stocks and/or update equipment, rather than being forced into action at the last moment."
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