It seems that every week brings more supply chain risk management stories related to either counterfeit or contaminated products.  I don’t seem to run out of material for bringing these issues to light for Supply Chain Matters readers. Here’s yet another one involving counterfeit parts in U.S. defense-related supply networks. 

Business Week has a featured investigative report cover story (Dangerous Fakes- How counterfeit , defective computer components from China are getting into U.S. warplanes and ships) in both its October 13th print and online editions, and I urge you to read this article, especially if you are involved in military, defense, or aerospace-related supply chain management. You can even view a capsule video version on the web site.

The essence of the threat that the article’s authors point out is that counterfeit computer chips that often flow from tear-down bazaars in rural China through a network of dubious brokers in the U.S. and elsewhere are making their way into complex weapons with obvious results.  The article further quotes an official who heads research into counterfeit parts for the Naval Air Systems Command who states that as many as 15% of all spare and replacement microchips bought by the U.S. military are counterfeit.  Pentagon officials are reported as playing down the danger, but government documents and interviews with insiders suggest a stronger connection between phony parts and failures.

While readers can make their own assessment, the common thread that I concluded from the article is that the zeal for achieving lower material cost outweighs the risk of potential dubious sources of supply, or insuring quality of supply.  Sound familiar?  Interviews of the authors with so-called “front” traders and brokers provide outright admission that they (the brokers) “… only do trade.  None of us understand the technology.”  A Hong Kong based supplier of counterfeit chips argues that if the U.S. military wants guaranteed high-quality chips, it should purchase them directly from the original manufacturers or their official franchisees.

And as if by coincidence, an article this week in SupplyChainStandard.com basically reinforces the specific notion of the hidden links involved in Asian based supply chains.  In this article, Jim Ridgwick who leads Deloitte’s Sourcing practice for China points out that in many cases, buyers who deal with trading companies tied to Asia do not understand accepted business practices of interlinked networks of sister operations, business partners, sub-contractors, or even the sub-contractors to their sub-contractors. Mr. Ridgwick indicates that this is particularly commonplace when buyers seek a one-stop source of supply outside of the limits of their chosen supplier’s capacity or competence. The takeaway for this article is that when you rely on the trading entity to conduct due diligence, the risk increases exponentially.

Let’s collectively hope that the Pentagon procurement groups as well as defense contractors will come to understand that low cost or one-stop convenience as the singular driver of a procurement decision needs to be balanced with today’s ever present supply risks.

Bob Ferrari