War on Counterfeit
Most electronics industry professionals agree that the industry is more vigilant and doing a better job of keeping counterfeit electronic components off the plant floor than they were just five or 10 years ago. But they also say that counterfeiters are getting better at their craft and that detection is becoming even harder—key reasons suppliers can’t weaken their resolve in the fight against counterfeit parts. A host of recent events, including newly released standards and a long-awaited update to the federal government’s requirements for companies who supply equipment containing electronic components to the government, is keeping everyone in the channel on their toes.
“Overall, the supply chain is doing a better job of keeping this stuff out as much as they can—out of the end user’s supply chains,” says Mark Snider, president of ERAI, an association representing independent distributors of electronic components. “But it’s only through diligence that they’re making that happen.”
Snider agrees that awareness of the counterfeit problem has risen dramatically in the last several years, and he points to recent government actions to highlight the problem as a key reason. New standards and regulations surrounding selling to defense organizations is at the heart of the issue and is driving continued change on the counterfeit front. Here’s a look at five ways the fight to keep counterfeit components out of the supply channel is evolving.
1. DFARS Update
In May 2014, the federal government issued an update to its rules for companies who sell equipment containing electronic components to the federal government. Known as the Defense Federal Acquisition Regulation Supplement (DFARS), the update addresses new requirements that arose from the National Defense Authorization Act for fiscal years 2012 and 2013 surrounding the detection and avoidance of counterfeit parts. Essentially, the update tells government contractors what they must do to detect and keep counterfeit parts out of the defense supply chain, and it has direct implications for suppliers of those components.
For the most part, the update reflects what the industry expected, so most companies have built their procedures around those expectations, says Kevin Sink, vice president of total quality for authorized distributor TTI Inc. Sink is a member of standard-setting organization SAE International’s G19 Committee, which works to address prevention, detection, and electronics industry response to the counterfeit threat.
“Now we have to figure out exactly what to do if it’s different than we expected,” he says of the DFARS update, noting that much of the work ahead for suppliers surrounds understanding the requirements and ensuring they have the right systems and procedures in place.
2. The Next Big Issue: Software
Sink cautions that the DFARS update matches industry expectations “for the most part.” A key difference, and one he says is a big surprise to the industry, is the federal government’s definition of an electronic part, which is expanded to include “any embedded software or firmware.”
“That caught everyone by surprise,” Sink says, adding that detecting malicious code in software products had not been part of the discussion leading up to the DFARS update. He adds that it represents a big challenge for supply chain companies and one that no one was expecting to have to address.
“It had not been part of the discussion, and there are no reported cases [of malicious or Trojan software] that we are aware of,” Sink adds. “So unless it’s occurring and the government knows about it and hasn’t told us—which is possible—then no one is really prepared to handle that part of it.”
This opens uncharted territory, Sink explains, adding that he expects this to be a big issue down the road.
“I suspect we’ll begin to have healthy debates around this issue in the next few months,” he says. “The issue of software will be an evolving one. It’s challenging because it gets into issues that really are beyond counterfeiting—that’s really going to be something new to look at.”
3. More Places to Turn for Help
On a positive note, there is much more information available today to help companies throughout the supply channel navigate the regulations surrounding counterfeit component detection, mitigation, and reporting.
“We now have several more standards in existence than before, so there is a lot more professional advice for companies to follow,” Sink explains, pointing to the newest industry standard, AS6496, which is a guideline for authorized distributors of electronic components. This adds to other recent standards for original equipment manufacturers (OEMs) and independent distributors. The aerospace standard AS 5553, for OEMs, was released in 2009, and AS6081, for independent distributors, was issued in 2011. Sink also points to a fairly recent proposal to create a standard for original component manufacturers.
AS6496 helps clarify the role of the authorized channel—an issue that wasn’t 100% clear to many buyers of electronic components, Sink and others agree.
“It gives customers a good understanding of the protections they get when they buy from the authorized channel—the authorized distributor in particular,” Sink explains, noting that distributors that comply with the standard must meet requirements regarding how they handle products, from whom they purchase them, and the level of manufacturer support they receive.
“Customers can feel confident that if they purchase through the authorized channel they get support if anything does go wrong, and they also know that the authorized distributor must purchase from [the original component] manufacturer or other authorized distributor. They can’t go out to the open market to fulfill demand,” Sink says.
4. Clearer Business Segmentation
AS6496 not only sheds light on what it means to be an authorized distributor of electronic components, but it puts some teeth into the authorized model by creating a sharper distinction between authorized and independent business. This is a model some distributors are adopting, in which they handle a number of authorized and non-authorized product lines. The standard requires distributors to disclose to customers which lines they are authorized for and which ones they are not.
“It’s putting some teeth in authorized,” Sink says. “You can’t have [an authorized line] from one manufacturer and call yourself authorized for everything.”
Sink says this helps create a clearer segregation of authorized and independent, or broker, business among the many independent distributors that do both types of business. Such companies also must adhere to both standards—the one for authorized and the one for independent distributors, further cementing the difference between the two.
Sink adds that the new standard is also helping to strengthen the authorized brand, helping authorized distributors learn how to better market themselves.
5. A Sharper Focus on Scrap
By and large, companies are also taking a closer look at how they dispose of inventory they can’t sell these days. This is especially true of distributors, Sink explains. Authorized distributors typically dispose of such inventory via third-party recyclers, and if they’re not careful about the partners they deal with, those parts could fall into the wrong hands.
“We all realize that a large source of counterfeit components has been [from products] that anyone in the chain—distributor or customer—has resold, scrapped, or that the scrap company didn’t actually dispose of.”
The reselling of products is how parts end up on the “gray market,” a practice Sink says TTI has never participated in. Nonetheless, the path parts follow to get into the hands of counterfeiters is something everyone is taking a closer look at these days. The industry recommendation is that excess inventory should be destroyed so that it can’t fall into the wrong hands and be misrepresented. To that end, Sink says many distributors are now having excess product ground up and melted down, and getting paid for the raw metals the process yields. The payment is far less than what you’d get for reselling the product, but Sink says it’s a practice everyone should follow.
“All of us are much more aware of this, and authorized distributors are taking a stronger approach to controlling their scrap inventory,” he says. “It’s a bigger economic hit, but it’s the right thing to do.”
In the end, information is key. As the counterfeit issue continues to evolve, it will take center stage at upcoming industry meetings and events. Sink was a keynote speaker at September’s SAE 2014 Aerospace Systems and Technology Conference in Cincinnati, Ohio, addressing the Obsolescence and Counterfeit Parts Management Technical Session. He discussed the ongoing fight against counterfeit parts with particular attention to the DFARS changes and the new AS6496.
ERAI is also working hard to keep education and information at the forefront of its efforts. The group’s annual meeting, scheduled for next April in San Diego, will include detailed discussion of the DFARS update and any new issues that arise from it, Snider explains.
“It’s our intention to heavily integrate as much of this as we can into our conference,” Snider explains. “We’re going to be reaching out as much as we can to government to help—making them available to answer questions and give people an update as to where we are.
“That’s the hope and that’s the goal.”