IHS
June 12, 2012

One of every two counterfeit parts is obsolete

Obsolete parts have accounted for slightly more than half of all counterfeit-part reports during the last 10 years, highlighting the critical importance of obsolescence management for the electronic supply chain, according to IHS.

A total of 57 percent of counterfeit-part reports from 2001 through 2012 have involved obsolete or end-of-life (EOL) components. Another 37 percent were active parts. In all, these counterfeit incidents represent many millions of parts in circulation in the supply chain. As reported recently by IHS, considerably more than 12 million parts have been involved in global counterfeit incidents in just the past five years, equating to more than one counterfeit part every 15 seconds during that period.

“Some have said that if you can avoid all obsolete parts, you can eliminate all the risk of counterfeits,” said Rory King, director, supply chain product marketing at IHS. “However, this is untrue for many reasons. Among them, obsolete parts represent only a portion of the counterfeit scourge, with active components accounting for a significant share of all counterfeits reported. Moreover, it’s unrealistic or technically infeasible to economically eliminate the use of all obsolete parts. This underscores the critical need for electronics buyers to arm themselves with the right methods and tools to manage both obsolete and active critical components.”

Management in this regard includes knowing exactly which counterfeit parts being circulated within the supply chain by using insight from firms like ERAI Inc., as well as by monitoring rising price and lead-time trends that signal attractive market conditions for counterfeiters.

“Industry figures suggest that a single incident of an obsolete part can cause as much as 64 weeks of down time and $2.1 million to resolve,” King said. “On parts lists, bills of materials, or assemblies that encompass as many as 30,000 parts, it’s typical that 10 percent or more of these components are obsolete, showing what a significant cost obsolescence carries.

“And, given that more than more than one in two counterfeit parts is an obsolete component, the need to forecast obsolescence and have access to alternate part and supplier options is crucial to avoiding both obsolescence costs and counterfeit risk,” King added.

Built-in obsolescence

Obsolescence is inevitable for a number of reasons, most notably that the product lifecycles of components are much shorter than the products in which they are used. This is especially true for long-lifecycle or complex products such as automotive, industrial, medical, aviation, or telecommunications equipment that use once-current, but now-outdated, components.

Although it afflicts many markets, the issue of obsolete parts in long-lifecycle gear is most dramatically illustrated in the defense/aerospace industry. For instance, the B-52 bomber had its first flight in 1952 and is set to end its service in 2040, nearly 90 years later. Meanwhile the Department of Defense (DoD) recently extended the life of the bomber by 15 years.

“If the demand picture changes or the end customer extends the life of a project by more than a decade, it can have the effect of creating a sudden shortage of critical parts for replacements and maintenance, forcing buyers to find new sources, or to seek alternative parts,” King noted.

“Meanwhile changes in the supply base—like the enactment of a regulation such as the European Restriction of Hazardous Substances Directive (RoHS)—can result in diminishing manufacturing sources and material shortages (DMSMS). When RoHS came into force in 2006, 20 percent of all components were discontinued above and beyond what buyers were expecting. Another 20 percent of components were unexpectedly discontinued in 2007. Manufacturers attributed these events specifically to the shift to lead-free components. If a product is 20 or more years old, you simply can’t avoid obsolete parts, which are prime breeding ground for counterfeits", he continued.

Even new systems can be subject to the obsolete-part problem. In one dramatic example, more than 70 percent of the components used in a surface ship sonar system were obsolete—even before the first system was installed.

The disaster within the disaster

Even those companies that are most conscientious about avoiding counterfeit and obsolete parts may be forced to deal with riskier sources, as illustrated by the Japan earthquake in 2011. Following the quake, 60 percent of companies that purchase electronics reported they increased their buying activities for components whose supplies were affected by the quake, according to an IHS iSuppli survey.

A full 40 percent of those companies said they increased the use of the open market or other independent supply chains to source critical parts. More than half of the companies—at 55 percent—said they recognized that there would be an increased risk of counterfeits from widening their supplier bases.

Following the quake, there was an acceleration in EOL notices, as many suppliers stopped production of some parts more quickly than expected.

“The scenarios created during the Japan crisis exposed multiple companies in many more industries than ever before to the risks of counterfeit and obsolete parts,” King said. “The earthquake showed that any time there is a supply disruption, supply chain behaviors change dramatically and risk can increase very quickly for all companies.”

Managing the risk

“Obsolete parts are unavoidable, and represent a major element of counterfeit part detection and avoidance,” King said. “Because of this, obsolescence planning is critical. Electronics buyers need to know as quickly as possible which parts are obsolete, which parts are being phased out, and when parts have become EOL in order to mitigate costly obsolescence issues. It’s critical that firms are aware of alternative parts they can use as replacements, and which safer suppliers they can utilize to access those components.

“However, as important as it is, obsolescence management solves only part of the counterfeit equation. To explicitly address counterfeit parts head-on, organizations must understand which counterfeit parts are actually in circulation and being reported, regardless of whether they are obsolete or active,” King added. “Furthermore, constant vigilance in supply planning for parts is necessary to stay ahead of component price and supply chain health issues and to ensure continuity of supply from safer, approved and trustworthy part sources.”
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