The National Electronic Distributors Association (NEDA) has announced new guidelines regarding product returns concerning electronic parts which, in our view, lack substance.  These guidelines are a long-overdue response to the rapidly growing problem of counterfeit and bogus parts penetrating high tech and national defense related supply chains. NEDA has rightfully acknowledged that a primary source of illegitimate parts lies with the reverse supply chain, and the guidelines were established to help distributors to better validate the return parts process.

Supply Chain Matters commented in November of 2009 on the increasingly widespread problem of counterfeit parts.  Scrupulous players have found that there are more monetary and other incentives for engaging in this activity, more so than illicit drugs or other forms of organized crime.  Criminal laws covering this activity are generally weak. On the buying side, suppliers offering parts and components below current market prices lure buyers into spot buying or new contract arrangements in order to meet cost-reduction goals. Suppliers and other players continue to discover more sophisticated means to alter the composition or stated quality of parts, more often beyond current means to detect such deficiencies. Many of these parts originate from the recycling of discarded electronics that make their way to the China and other Asian destinations, or through various channels for selling or disposing of inventory surplus.

We view this NEDA announcement as encouraging but rather weak in substance. The four page guideline is rather thin on specific controls and mitigation procedures, along with outlining any consequences for those distributors who do not choose to adopt the guidelines.  The document notes that “the most effective way to minimize risk and to ensure receiving authentic parts is to buy through authorized channels”, yet the outlined guidelines only address visual inspection of superficial packaging and verification of purchase orders, which are hardly substantive in insuring audit and control.  There are no guidelines for insuring pedigree or chain of custody regarding parts. The guideline seems to imply that best means to control counterfeiting is to buy from a NEDA member distributor, only.

Readers may recall our December Supply Chain Matters posting noting that the U.S. Department of Defense and other governmental procurement agencies have begun to step-up criminal investigation and indictments related to those suspected of selling counterfeited electronic parts or altering product trademarks.  The U.S. government is clearly serious about enforcement and so should all players residing in industry.

The final note in the NEDA announcement states that: “We want the component manufacturers to also consider their stock rotation/scrap-allowance policies with respect to their authorized supply chain.” That statement is but another acknowledgement that neither NEDA nor the high tech industry as a whole has the alignment or the determination to crackdown on the sources and operators in counterfeit parts. After all, its always the problem of that other entity in the chain.

Bob Ferrari

A few weeks ago I shared my takeaways from attending the MIT Forum for Supply Chain Innovation Fall conference that focused on the current widespread problem of bogus and counterfeit materials infiltrating multitudes of supply chains.  The conference speakers reinforced how widespread this problem has become, not only in commercially-oriented, but even defense-oriented supply chains.  Scrupulous players have found that there are more monetary and other incentives for engaging in counterfeit part activity suppliers and other players have discovered more sophisticated means to alter the composition or stated quality of parts, more often beyond current means to detect such deficiencies.

The latest evidence of the extent of the problem and how strident government monitoring and enforcement will become was highlighted in a recent Electronic News story.  A California man, one of three family members that were indicted by the United States Attorney’s Office for trafficking counterfeit electronic components, has pleaded guilty to two separate counts involving conspiracy to defraud the United States and trafficking in counterfeit goods. This individual now faces five to ten years of incarceration and fines ranging in excess of $2 million dollars, but has agreed to cooperate with the government to uncover others.

Reading this article will give you a sense of how the counterfeiting process was allegedly conducted, and how these defendants on 22 occasions imported over 13 thousand integrated circuit assemblies bearing counterfeit trademarks, including military-grade markings involving contracts to supply the U.S. Navy and other government agencies.  The counterfeited parts involved altering the trademarks of seven different semiconductor companies.

While the Acting U.S. Attorney issues a very stern warning regarding how serious stepped-up enforcement will become, we have to wonder how many of these counterfeit parts are currently still populating our most sensitive supply chains and supply depots.

 Bob Ferrari

I’ve authored a couple of posts over these past months commenting on the ever increasing presence of counterfeit or bogus parts within all forms of global supply chains.  We’ve all heard about these bogus parts or materials appearing in food-related, pharmaceutical, and even more concerning, defense-related supply chains.  And just in case you really believed that this phenomenon was not widespread, here’s even more evidence.

A recent article in the Houston Chronicle indicates that the acting administrator of National Aeronautics and Space Administration (NASA) testified before a U.S. Congressional sub-committee that some of the cost overruns of that space agency stem in-part from counterfeit parts. It seems that NASA has been trying to weed out counterfeit parts for years, but the problem has grown with more foreign firms and counterfeiters manufacturing equipment that ends up in NASA’s supply chain.  One bogus part supposedly contributed to a nine month delay of the recently launched Kepler spacecraft.  “We find out about it while sitting atop a rocket or, worse, find out about it space” stated Christopher Scolese, acting administrator.

That particular quote should have all of us, including NASA, somewhat concerned.  Do you think?

The need for a supply chain security and risk management strategy has never become as important as it is today.  It seems that no industry or agency has been immune from this problem, even those you would think were highly regulated or controlled.

I touch upon these issues and perspectives in my supply chain risk management workshop.  If you want to learn how your organization can get started with a risk management plan, please call or email and we can discuss scheduling of this two-day workshop for your team at your facility. You can email your interest to supplychain info (at) theferrarigroup (dot) com.

Bob Ferrari