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Counterfeits Continue Flooding Supply Chain


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The numbers are in, and the news is not good - counterfeit parts are on the rise. Overall, the U.S. Chamber of Commerce now estimates that counterfeiting and piracy cost the U.S. economy between $200 and $250 billion per year, and the world economy approximately $650 billion per year. According to the midyear FY2007 report on intellectual property rights seizures by the U.S. Customs and Border Protection agency, the domestic value of consumer electronics seized in the first half of 2007 was $9.4 million, compared to $2.1 million reported over the same period in 2006.

But, it's not all gloom and doom. Though the magnitude of the counterfeiting issue is severe, there are several ways that individual companies within the electronics supply chain can protect themselves in the short-term and also effect long-term change. While industry groups like National Electronic Distributors Association (NEDA) and the Semiconductor Industry Association (SIA) have been advocating for better intellectual property (IP) rights regulations and enforcement throughout emerging manufacturing economies such as China and India, individual companies must also do their part in terms of due diligence, says Steve Schultz, director of strategic planning and communications for Avnet Logistics, Phoenix.

The first step, says Schultz, is to start communicating aggressively when there is something wrong in the supply chain. "This problem is getting bigger every day, and it is clear that the industry's overall reluctance to openly discuss and address events as they occur is only compounding the problem," he says. While it is human nature to want to sweep mistakes under the rug, the counterfeit problem is not something that can be quietly fixed, he adds.

All members of the supply chain must also take responsibility for ensuring the quality and authenticity of product going into and out of their facilities - regardless of how trusted a trading partner might be. "In today's world we cannot take anything for granted. Even in the most respected relationships, you must 'trust but verify'," says Schultz, who believes that the industry's heavy reliance on process control has led to an erosion of typical quality-assurance functions. "Today the world is built more around process control, which works well if everyone is being honest, but when something breaks down in the supply chain, like counterfeiting or corner-cutting such as the recent occurrences of leaded paint on toys, then that process fails," he says. "If companies are relying on process controls only and not doing internal inspections, it is a train wreck."

In addition to working harder to identify counterfeit or substandard parts within the supply chain, original equipment manufacturers and contract manufacturers can also protect themselves by insisting on specific terms and conditions in their supplier contracts, says Leon Hamiter, a former component engineer with NASA and president of the Components Technology Institute, Huntsville, Ala. Hamiter recommends that contracts include a clause specifying that counterfeit and substandard parts will not be accepted, and if parts are determined to be counterfeit or substandard, they will be permanently disabled and payment will be withheld.

"If the supplier knows in advance that the customer has a formal inspection process in place and will not only refuse to pay for, but basically destroy, counterfeit materials, it really removes the motivation that the supplier may have to try to pass off counterfeit goods. If the supplier cannot make money, why do it?" says Hamiter, who also chairs a "Counterfeit Electronic Components Avoidance" workshop series in conjunction with Custom Analytical Services Inc., a failure-analysis lab based in Salem, N.H.

Empowering customers to validate components before paying for them "will dramatically reduce counterfeit products," according to Jack Stradley, manager of business development and government relations, Rochester Electronics, Newburyport, Mass. Rochester is one of the founding members of the SIA's recently formed anti-counterfeiting task force (ACTF). Among the task force members' goals is the development of a standard that will allow suppliers to place encrypted codes on containers, enabling online authentication of content by distributors and OEM customers.

Rochester is also working with SIA on creation of an authorized reference manual, which will provide a comprehensive directory of component suppliers and their authorized distributors, says George Karalias, director of marketing and communications for Rochester. The manual, which the group expects to release in October, brings together all the information available through company Web sites and catalogs, and puts it all in one place.

Distributors agree that shining a spotlight on the counterfeiting problem is important for mitigating the damages to the supply chain. "It's a sensitive issue," says Avnet's Schultz. "Suppliers are concerned that their brand equity will be diminished if they go public with counterfeit findings, and OEMs are often embarrassed to admit they have been duped."

But the reality is, the more open the industry is about the problem, the more proactive members of the supply chain will be in terms of protecting their brand and their bottom line.
Ten Steps to Ensuring Quality in China's Supply Chain

1. Source from reputable, well-established companies with tight internal controls.
2. Conduct comprehensive background checks, including checking trade references and past business history, of supply chain partners before conducting business with them.
3. Implement site inspections of supply chain partners and find out what systems have been put in place to track quality.
4. Conduct ongoing performance reviews of supply chain partners and engage in ongoing communications with them to benchmark against preset goals and define improvement plans.
5. Only source from companies that are willing to provide a guarantee for products in writing.
6. Be cautious of buying from companies that do not have franchised relationships with distribution partners to avoid a greater potential risk of counterfeit product.
7. Beware of unusually low pricing. While pricing is certainly important, it should not be the only determining factor in business relationships.
8. Look for International Organization for Standardization (ISO) or other equivalent, globally recognized certifications in a supply chain partner's operations.
9. Establish relationships with third-party organizations.
10. Translate quality into measurable and clearly defined targets with supply chain partners and ensure these metrics are communicated regularly with employees.

Source: Arrow Electronics Inc.