Supply Chain Counterfeiters: The Rise of Fake Parts

The issue of counterfeit parts in supply chains tends to focus on high-profile cases (e.g., A&D applications) that put lives directly at risk, rather than more mundane situations involving a range of parts or components that are part of the bill of materials for everyday industrial applications, appliances, consumer electronics and devices, and a host of other areas. But a recent article in Electronic Engineering Times suggests that counterfeit electronic components (in both defense and other industries) are on the rise. According to the story, "Incidents of parts counterfeiting reported by component suppliers, including companies in the semiconductor sector, shot up 'dramatically' to 9,356 in 2008, up about 142 percent, from 3,868 in 2005, according to the Bureau, which said China, Taiwan, the Philippines, Malaysia and India were identified as the primary sources of counterfeit products by suppliers surveyed recently." Why is counterfeiting on the rise?

For one, it's because suppliers know they can get away with focusing their energies elsewhere, paying limited attention to the issue. Still others, further up the food chain, assume that others in the supply chain are testing their parts. In reality, testing and authentication levels are less than what they need to be; moreover, the counterfeiting problem is compounded by a lack of traceability. According to the article, the central challenge is that "procurement organizations at times cannot trace purchased parts back to their points of origin with any degree of certainty. This is further compounded by the fact that many components are provided by offshore suppliers, making verification more difficult."

How can companies address the counterfeit issue? They should put in place rigorous supplier performance-management programs that hold suppliers in breach of contract and financially accountable if counterfeit parts are detected. Just as supplier audits for invoice accuracy have a direct financial incentive (e.g., billing back suppliers for overcharges), so should counterfeit-part audits, giving potential third-party firms upside to carry out these audits on behalf of customers, and sharing in the upside. Especially in developing markets, suppliers are much less likely to respond to carrots than sticks. If suppliers know they're being watched -- and they know there will be significant financial penalties if they're caught without the proper controls -- they're far more likely to take a proactive approach to cutting out counterfeits. In this case, accountability really does need to start with a rod or stick.

Jason Busch

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