Get the Lead Out!

If you work in the high-tech supply chain, you've probably heard of RoHS, the European Union's Restriction of Hazardous Substances directive. But for those out-of-the-loop, RoHS, which comes into force in July 2006, restricts the use of certain materials (lead, cadmium and mercury, among others) in electrical and electronic equipment. Compliance is not an option for most manufacturers, and the bottom-line impact of being out of compliance with these types of environmental laws can be significant: In 2001 the Netherlands famously held up shipments of Sony PlayStations into the European market until the Japanese firm replaced cables found to contain too much cadmium, costing Sony, by some estimates, upward of $110 million in lost revenues.

Of course, RoHS restrictions kick in next year, but the deadline may be much sooner for companies in the high-tech and electronics supply chain, according to John Quist, manufacturing director at San Jose, Calif.-based Cypress Semiconductor Corp., a $948 million supplier of high-performance digital integrated circuits. That's because many original equipment manufacturers in the industry have been mandating compliance as early as mid-2004 or sooner to avoid any hiccups during the transition to "green," or RoHS compliance.

Cypress worked over the past year to replace lead in its manufacturing process with nickel-palladium-gold (NiPdAu) in order to meet customer mandates, although the company maintains the capacity to satisfy customer orders that still include lead materials by working through contract manufacturers. Quist says that, to date, the transition to lead-free has been a wash on the expense side of the equation. NiPdAu costs more than lead, but moving to the new material allowed Cypress to eliminate a step in its production process. "And that makes it cheaper, reduces the cycle time and makes the process easier to manage," Quist says. That's a good thing, because cost has been a top issue for the company's customers, which have been concerned about the potential expense of moving to compliant components.

Surprisingly, Quist says that he still finds that some of Cypress' customers have been lagging in their planning for RoHS. "I'm surprised when people aren't already past the engineering qualification and study portion of [the transition process]," he says. Quist has been doing his part to educate the industry about the benefits and challenges of "going green," not only meeting with Cypress' customers and suppliers but also speaking before broader industry audiences (for which he has been recognized as a Pro to Know in Supply & Demand Chain Executive's 2005 list of supply chain thought-leaders). In addition, Quist has been promoting the idea of forming an industry consensus on what "green" really means, particularly as different companies — and different countries — come up with varying lists of "banned" substances.

But the issue that really keeps John Quist up at night, he says, is scrap, or lead inventory that might get stranded in the supply chain as the industry moves toward RoHS compliance. "Today lead inventory is not necessarily potential scrap, but as we get closer to the deadline, and as more and more customers convert, non-RoHS compliant inventory, scares me. When you look at the inventories involved in large multinational companies, it's millions of dollars." And for an industry running on notoriously slim margins, those millions could mean the difference between red and black ink on the bottom line.