Counterfeit Components: Are There Any Weak Links in Your Supply Chain?

? n i a h : C s nt ply e p n u o S p r hal u m o o Y Falkent C d n n t o i i m ks rfe n

By Ray e i t L n k u a o e C W y n A re e h T e r A

Content Executive Summary..................................................................1 Overview................................................................................... 2 Impact on the Sourcing Process.............................................. 5 What System Elements Are Listed in The Proposed Rule?..... 6 Risk Mitigation from A Contractor’s Perspective..................... 8 Identifying Issues Early in the Product Development Cycle..... 8 Identifying Counterfeit Risk as Part of NPI............................... 9 Working with Trusted Suppliers.............................................. 10 Screening Counterfeit Components........................................11 Reporting Counterfeit Parts................................................... 13 Production Test and Inspection.............................................. 13 Conclusion............................................................................. 14

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Executive Summary

The reality is that the regulations will likely remain in a state of fine-tuning for the next few years as unintended consequences arise and are corrected.

The infiltration of counterfeit components is a serious and growing risk in the electronics industry. Long lifecycle, mission critical products, such as those found in military and aerospace applications, are particularly at risk because limited redesign options typically translate over time to an increased number of components at or near end-of-life. The costs of counterfeit components can be difficult to fully calculate because issues driven by counterfeiting can include production defects that lower yields increasing rework rates, infant mortality in the field and partial failures which can impact the unit’s functionality.

There is also a growing administrative cost associated with identifying counterfeit components.

In 2010, a study by the U.S. Department of Commerce Bureau of Industry and Security’s Office of Technology Evaluation (OTE) found that, “the procurement process has become a main entry point for counterfeits due to the use of unapproved suppliers, lack of part authentication procedures, lack of communication and cooperation between suppliers and customers, insufficient inventory control procedures, and limited counterfeit avoidance procurement practices.”1 The OTE study led Senate hearings on the danger counterfeit components pose to the military supply chain and modifications in the Defense Federal Acquisition Regulation System (DFARS) as a result of changes to the National Defense Authorization Act (NDAA) in Fiscal Year (FY) 2012 and 2013. The proposed modifications to DFARS set to take effect in early 2014 are a response

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to changes in the NDAA in 2012 which put the burden for preventing counterfeit components from entering the supply chain on military contractors. Under the proposed revision, the burden for counterfeit prevention will now be shared with the Department of Defense, provided the defense contractor has internal safeguards in place and procures parts from original component manufacturers or authorized distributors.

How does this impact contract manufacturing relationships? Is simply flowing down requirements enough? The reality is that the regulations will likely remain in a state of fine-tuning for the next few years as unintended consequences arise and are corrected.

Industry groups have raised questions about requirements which could raise internal costs for incoming inspection and testing without allowing for added compensation.

There are also questions about whether or not longlifecycle products can be effectively supported via a strategy that allows for procurement only from original component manufacturers (OCMs) or franchised/ authorized distributors. From a sourcing standpoint, there is one major question to consider: is your contractor committed enough to the defense segment of its business to make the investments in personnel and process development to provide adequate screening and reporting mechanisms under a changing set of regulations or will the changing requirements and increased costs drive them out of this segment of the business? This paper looks at some of the recommended best practices and potential issues.

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Overview

The January 2010 study by the U.S. Department of Commerce Bureau of Industry and Security’s Office of Technology Evaluation (OTE) did an excellent job of identifying both trends in counterfeiting and the issues contributing to proliferation of counterfeits in the supply chain. The study looked at five supply chain segments: • • • • •

Original component manufacturers (OCMs) Distributors and brokers Circuit board assemblers Prime contractors and subcontractors Department of Defense (DOD) agencies.

The survey’s objectives were to assess levels of counterfeiting, what types of devices were being counterfeited, what practices were used in procurement and management of electronic parts, what types of practices were in place for recordkeeping and recording identified instances of counterfeiting, what techniques were used to detect counterfeits and what best practices were employed to control the infiltration of counterfeits.

The assessment encompassed 387 companies and organizations who participated in the study during the 2005 to 2008 reporting period. During the four year reporting period, the OTE data indicated that 39 percent of those participating in the survey encountered counterfeit components. The data further indicated a trend of increasing incidents ranging from 3,868 in 2005 to 9,356 in 2008. 2

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The OTE study listed the following findings: • All elements of the supply chain have been directly impacted by counterfeit electronics • There is a lack of dialogue between all organizations in the U.S. supply chain • Companies and organizations assume that others in the supply chain are testing parts • Lack of traceability in the supply chain is commonplace • There is an insufficient chain of accountability within organizations • Recordkeeping on counterfeit incidents by organizations is very limited • Most organizations do not know who to contact in the U.S. Government regarding counterfeit parts • Stricter testing protocols and quality control practices for inventories are required • Most DOD organizations do not have policies in place to prevent counterfeit parts from infiltrating their supply chain3

During the four year reporting period, the OTE data indicated that 39 percent of those participating in the survey encountered counterfeit components.

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To Be Continued

DOD regulations are changing to increase supplier liability for the cost of counterfeit PCB components:

"The counterfeit component 'industry' poses a grave risk to national security."

 Does your supply chain managment meet DOD regulations?  What resources are avialable to enhance your risk and detection practices?  What are the common warning signs of counterfeit PCB components?  Is your EMS provider taking a proactive aproach to risk mitigation?  8 pages, 161KB

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