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Executive Summary .................................................................1
Overview........................................................................................2
Impact on the Sourcing Process ..............................................5
What System Elements Are Listed in The Proposed Rule?......6
Risk Mitigation from A Contractors Perspective .....................8
Identifying Issues Early in the Product Development Cycle..8
Identifying Counterfeit Risk as Part of NPI...............................9
Working with Trusted Suppliers............................................. 10
Screening Counterfeit Components.......................................11
Reporting Counterfeit Parts .................................................. 13
Production Test and Inspection............................................. 13
Conclusion ............................................................................ 14
The infiltration of counterfeit components is a serious
and growing risk in the electronics industry. Long
lifecycle, mission critical products, such as those found
in military and aerospace applications, are particularly at
risk because limited redesign options typically translate
over time to an increased number of components at or
near end-of-life. The costs of counterfeit components
can be difficult to fully calculate because issues driven by
counterfeiting can include production defects that lower
yields increasing rework rates, infant mortality in the field
and partial failures which can impact the units functionality.
There is also a growing administrative cost associated with
identifying counterfeit components.
In 2010, a study by the U.S. Department of Commerce
Bureau of Industry and Securitys Office of Technology
Evaluation (OTE) found that, the procurement process
has become a main entry point for counterfeits due to the
use of unapproved suppliers, lack of part authentication
procedures, lack of communication and cooperation
between suppliers and customers, insufficient inventory
control procedures, and limited counterfeit avoidance
procurement practices.
1
The OTE study led Senate hearings on the danger
counterfeit components pose to the military supply chain
and modifications in the Defense Federal Acquisition
Regulation System (DFARS) as a result of changes to
the National Defense Authorization Act (NDAA) in Fiscal
Year (FY) 2012 and 2013. The proposed modifications
to DFARS set to take effect in early 2014 are a response
to changes in the NDAA in 2012 which put the burden
for preventing counterfeit components from entering the
supply chain on military contractors. Under the proposed
revision, the burden for counterfeit prevention will now be
shared with the Department of Defense, provided the
defense contractor has internal safeguards in place and
procures parts from original component manufacturers or
authorized distributors.
How does this impact contract manufacturing
relationships? Is simply flowing down requirements
enough? The reality is that the regulations will likely
remain in a state of fine-tuning for the next few years
as unintended consequences arise and are corrected.
Industry groups have raised questions about requirements
which could raise internal costs for incoming inspection
and testing without allowing for added compensation.
There are also questions about whether or not long-
lifecycle products can be effectively supported via a
strategy that allows for procurement only from original
component manufacturers (OCMs) or franchised/
authorized distributors. From a sourcing standpoint, there is
one major question to consider: is your contractor
committed enough to the defense segment of its business
to make the investments in personnel and process
development to provide adequate screening and reporting
mechanisms under a changing set of regulations or will the
changing requirements and increased costs drive them out
of this segment of the business? This paper looks at some
of the recommended best practices and potential issues.
Executive Summary
1
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The reality is that the regulations will likely remain in a state of fine-
tuning for the next few years as unintended consequences arise
and are corrected.
The January 2010 study by the U.S. Department of
Commerce Bureau of Industry and Securitys Office
of Technology Evaluation (OTE) did an excellent job of
identifying both trends in counterfeiting and the issues
contributing to proliferation of counterfeits in the supply
chain. The study looked at five supply chain segments:
2
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Original component manufacturers (OCMs)
Distributors and brokers
Circuit board assemblers
Prime contractors and subcontractors
Department of Defense (DOD) agencies.
The surveys objectives were to assess levels of
counterfeiting, what types of devices were being
counterfeited, what practices were used in procurement
and management of electronic parts, what types of
practices were in place for recordkeeping and recording
identified instances of counterfeiting, what techniques
were used to detect counterfeits and what best practices
were employed to control the infiltration of counterfeits.
The assessment encompassed 387 companies and
organizations who participated in the study during
the 2005 to 2008 reporting period. During the four
year reporting period, the OTE data indicated that 39
percent of those participating in the survey encountered
counterfeit components. The data further indicated a
trend of increasing incidents ranging from 3,868 in 2005
to 9,356 in 2008.
2
The OTE study listed the following findings:
All elements of the supply chain have been directly
impacted by counterfeit electronics
There is a lack of dialogue between all organizations in
the U.S. supply chain
Companies and organizations assume that others in
the supply chain are testing parts
Lack of traceability in the supply chain is
commonplace
There is an insufficient chain of accountability
within organizations
Recordkeeping on counterfeit incidents by
organizations is very limited
Most organizations do not know who to contact in the
U.S. Government regarding counterfeit parts
Stricter testing protocols and quality control
practices for inventories are required
Most DOD organizations do not have policies in place
to prevent counterfeit parts from infiltrating their
supply chain3
During the four year
reporting period, the
OTE data indicated that
39 percent of those
participating in the survey
encountered counterfeit
components.
Overview
3
To Be Continued
DOD regulations are changing to
increase supplier liability for the
cost of counterfeit PCB
components:
Does your supply chain
managment meet DOD
regulations?
What resources are avialable
to enhance your risk and
detection practices?
What are the common warning
signs of counterfeit PCB
components?
Is your EMS provider taking a
proactive aproach to risk
mitigation?
8 pages, 161KB
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"The counterfeit
component 'industry'
poses a grave risk to
national security."
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