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© Smith & Associates General | July 05, 2012

Combating the counterfeit threat

The risk of counterfeit parts and products is no stranger to the semiconductor and electronics industry. Recent news spanning industries has underscored the reach of the problem of substandard, non-conforming and counterfeit parts in the wider, global supply chain.
The problem of such parts in the supply chain goes beyond a financial and legal issue; the failure of a part can have devastating, life-threatening and destructive consequences. The reason behind the continued presence of counterfeit, substandard and non-conforming parts, however, is unfortunately simple: opportunistic financial gain.

As much as counterfeiters continue to increase in number and sophistication, leading distributors at the front lines of our industry are implementing cutting-edge detection tools and processes for removing such product from our global supply chains. Understanding both the motivation behind counterfeiting, hence windows of opportunity for counterfeiters, and the techniques employed by counterfeiters to gain market entry for these illicit goods remains essential to detection and permanent removal of these components.

Counterfeiters are indiscriminate

The oft-cited, broad-stroke solution to counterfeit reduction in the supply chain is to simply avoid working with independent distributors (IDs). The logic here is faulty in that counterfeit parts can enter through all supply chain points. From a risk management perspective, having a diversified supplier base is essential when the inevitable disaster strikes and supply chain disruption ensues, as we experienced in 2011 in the wake of the natural disasters in Japan and Thailand. Counterfeiting can be limited by the aggressiveness and thoroughness of the supplier's quality standards, and the ability to put those standards into continuous practice throughout the enterprise.

At the core of the most successful anti-counterfeiting strategies is the seemingly simple mantra of "know thy supplier." Which translates to knowing who you are sourcing parts from, and importantly, what their anti-counterfeiting processes and procedures are for sourcing, inspection, testing, packaging, logistics and tracking, as well as reverse logistics operations. Requiring suppliers to hold certifications, meet meticulous audits, provide visibility into internal processes and procedures for components are part of anti-counterfeiting risk management.

Counterfeiters have a variety of entry points into the supply chain, regardless of the type of supplier. Reverse logistics operations must be carefully documented, taught and updated to ensure that counterfeit product is not being introduced alongside legitimately returned components.


Author: Mark Bollinger (Vice President of Marketing, Smith & Associates) joined Smith & Associates in 2000 to build its business development team and now heads Smith's marketing efforts. He was formerly with the Federal Communications Commission (1993-2000), where he managed the wireless telecommunications spectrum auction program. Mark received his BA from William Jewell College and his JD from the University of Missouri School of Law.
© Smith & Associates
Similarly, the protocols for sourcing of obsolescent components, another top entry point for counterfeit product, must be strictly adhered to throughout the enterprise. In many ways, the seemingly simple step of ensuring awareness of the indiscriminate and opportunistic path of entry for counterfeit, substandard and non-conforming parts in the semiconductor and electronics industry is important to successfully combating the threat.

Anti-counterfeiting hands-on

The rise in reported incidents of counterfeit chips has multiple sources, though the reasons and opportunistic moments are not complex. One reason is the simple fact that there is an increase in the volume or sheer number of chips in the market today.

The rise in volume is due to the increased use of various semiconductor chips in end-products because the continued decline in cost of chips and also the increased demand for more tech-sophisticated end-products by consumers. With this increased use of chips, and the fierce pressures to improve margins in the face of price competition, comes the increased opportunity for counterfeiters to commit criminal acts and make a profit by infiltrating the market with counterfeit, sub-standard and/or non-conforming chips.

Beyond the rise in the number of chips on the market is the increased turn-over rate, that is, the obsolescence, of chips, which means that the supply-demand ratio also becomes appealing to counterfeiters trying to sell product that can garner higher prices. Finally, there is also the supply-demand opportunity when disaster strikes the tech supply chain and shortages for components mean higher prices and higher rates of counterfeit components and products flooding the market. Unfortunately, at the core of these opportunistic market events is the simple fact that criminal behavior exists and leverages opportunity to illegally profit.

We continue to see the alarming numbers of counterfeit and non-conforming parts being reported, particularly by the US Department of Defense, based on a recent open-disclosure protocol (summarized by IEEE Spectrum, "Counterfeit Chips on the Rise").

The move to more open disclosure of counterfeit chips will continue and we are likely to see additional number spikes in counterfeit chips being reported as the most recent US Bills, such as H.R. 6012 and the National Defense Authorization Act for Fiscal Year 2012 [PDF], "aims to fight counterfeiting by requiring government contractors to track and report counterfeits and to be held accountable for replacement costs," as reported by IEEE Spectrum.

It is important to recognize that counterfeiting is a criminal activity immune to borders and is, unfortunately, well-known across industries. The stories of increased awareness leading to the discovery of existing counterfeit products and components in the defense departments of numerous countries has been profiled recently, such as the situation in the US, UK and Japan, by IEEE Spectrum, based on the UK's 2010-11 IP Crime Report.

The increased disclosure and regulations will promote the much needed information sharing and collaboration in the industry to further improve anti-counterfeiting measures. At the heart of such collaboration are industry certification standards for quality management, technical laboratories, and the engineers on the front lines of counterfeit detection.

Certifications

Industry certification standards for quality and control are essential in evaluating a distributor; after all, in the realm of Independent Distributors (IDs), one can run into a gamut of suppliers, from small internet "mom & pop" organizations to leading, global IDs with sophisticated and well-heeled technical engineers and run by industry professionals.

There are various certifications that one ought to require of a distributor when sourcing semiconductor components and electronic parts:
  • Quality Management System Standard for Independent Distributors of Electronics Association Members, the IDEA-QMS-9090-A, the IDEA-ICE-3000, IDEA-STD-1010-A;
  • Components Technology Institute's Counterfeit Components Avoidance Procedures (CCAP-101);
  • International Standards Organization ISO 9001, ISO 14001, ISO 17025; and
  • SAE G-19, "Counterfeit Electronic Parts; Avoidance Protocol, Distributors," which is still in progress but nearing the latest round of completion.

When an ID holds IDEA and CCAP certification, there is a considerable investment of time, effort, and personnel in the initial training and certification award; and in the investment in laboratory equipment and the recertification of quality engineers.

Not that money alone solves the problem of counterfeit chips in the supply chain, but when sourcing from a distributor who has made such investments and who is maintaining a recognized set of industry standards, the chances of purchasing non-conforming or counterfeit product is significantly reduced.

Additionally, as a purchaser, knowing that the supplier has been certified means that these suppliers are equally interested in safe-guarding the global semiconductor supply chain and are dedicated to visibility and collaboration to improve the industry.

Vendor rating and testing laboratories

Beyond the quality and control standards required to be certified, there are also vendor auditing and rating systems that bring with them a history of sourcing relationships and experience with quality management that are essential to successful anti-counterfeiting efforts.

While each supplier will have their own vendor rating and quality control (QC) operations in place, it is essential that employees have continued education for technical and operational procedures and that they understand how to implement these policies and procedures in their enterprise. Performing on-site audits of suppliers is the best way to ensure that these critical business practices are in place and in use.

Finally, in addition to industry recognized certifications, vendor rating systems and implementing and practicing operations, having on-site technical laboratories to test components adds significantly to ensuring quality when sourcing from IDs. The investment of time and resources into these highly sophisticated labs is no small matter. Furthermore, the best assurance to not receiving counterfeit product is working with an ID that has implemented all of the above protocols and that has the technical engineering capabilities to perform an array of recognized and your customized tests on components.

Closing the loop

Diversification and globalization are critical to success in today's electronics market, but these are also challenges that reduce manufacturers' ability to know, first-hand, the path that a component takes along the supply chain. Yet, the production and distribution of electronic products internationally dictates this very situation. Furthermore, as the volume of semiconductor chips and electronic end-products continues to proliferate, these challenges only increase.

An important set of solutions to address these challenges comes in improved visibility into processes and procedures, industry recognized certification standards for distributors, as well as increased knowledge around counterfeiting techniques and stringent audits of component suppliers. Partnering with certified suppliers and performing due diligence on your partners is the first step.

Having an awareness of the realities and challenges facing the industry is the next step in combating counterfeiting in the industry. The best tool is collaboration, knowing your supplier, and vigilance in all incoming product, whether from a supplier or through reverse logistics channels, and your electronics disposal protocols.

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