Buyers Vary Strategy to Mitigate Counterfeit Risk

04 June 2014

Purchasers at OEMs and electronics manufacturing services (EMS) providers are often admonished by chipmakers and authorized distributors not to purchase parts from independent distributors because counterfeit components often enter the supply chain through non-franchised distributors and parts brokers.

Most buyers know that counterfeit parts are a problem in the electronics supply chain. The last thing they want to do is have a production line shut down or a piece of equipment fail in the field because of a counterfeit part.

“The prevention, detection and mitigation of acquiring counterfeit parts from any source is a major concern within Kimball,” said Jamey Mann, director, global purchasing for EMS provider Kimball Electronics, based in Jasper, Indiana.

He said all materials sourced from an independent distributor by Kimball purchasers must be verified as authentic prior to purchase and receipt. “Components must be fully traceable back to the original manufacturer, the chain of custody must be unbroken, and full compliance testing is required to determine the authenticity. Our processes are very rigid and thorough pertaining to acquiring components from non-franchised sources,” said Mann. He added traceable components must undergo a full battery of validation testing prior to purchase and delivery to Kimball’s facilities.

“We only acquire materials from the independent distribution channel when parts are either end of life, obsolete, or because of a shortage scenario that will stop production,” said Mann.

However, chipmakers and other component manufacturers say that even during shortages, or when a device has gone end-of-life or obsolete, parts are available from authorized sources, but buyers don't know which authorized distributors or aftermarket manufacturers have the components.

Countering the perception that the counterfeiting issue is more prevalent with end-of-life and obsolete parts, Dale Lillard, president of aftermarket semiconductor supplier Lansdale Semiconductor Inc., opines ”the majority of counterfeit parts that are out there are counterfeits of parts that are still available. It is not as big of an issue with [obsolete] product as you may think. The counterfeit problem that exists today is commercial product as much as anything, because that's where a lot of the dollar volumes is.”

To support his view, Lillard cites a reported 15% annual growth rate for instances of component counterfeiting, and a much lower rate of component obsolescence. He adds that 80% of the ICs that are end-of-life are still available from aftermarket suppliers like Lansdale, Rochester Electronics, and E2V. “That is a pretty big number. The 20% that are not available (from manufacturers) are still available in excess inventories, brokers and companies of that nature.”

Most buyers say that that purchasing from independent distributors is not their first choice, but a last resort when parts cannot be purchased from authorized distributors or from component manufacturers.

George Karalias, director of marketing & communications at aftermarket semiconductor supplier Rochester Electronics Inc., takes a slightly different view, stating “In many instances, counterfeit activity can simply be traced to supply and demand dynamics. End-of-life or obsolete parts tend to have more demand than supply, and thus counterfeiters can take advantage of buyers looking for these hard-to-find products. We see this mostly occur with equipment with longer lifecycles including products in military, aerospace, industrial and medical applications.”

He also warns against substandard parts, which are real and genuine, but have been mishandled, stored improperly, or perhaps discarded (e-waste) and brought back into the supply chain. He adds, “thorough testing is the only way identify that a device is substandard – something that needs to be done more in our industry.”

Inventory Search

Many buyers will use parts search and inventory aggregator sites to find sources for hard-to-find parts. There are several such sites, including IHS's Datasheets360. Some show inventory of authorized distributors, while others also display parts from independent distributors as well.

Arrow’s Electronics Verical business unit enables buyers to search for parts in inventory at any of Arrow's business units and from more than 400 suppliers. Suppliers publish their unsold inventories to Verical.com and keep them continually updated as often as every 10 minutes, according to Arrow.

Jim Ricciardelli, Arrow’s vice president of ecommerce strategy, said companies that have a sudden un-forecasted spike in demand often use Verical to find inventory.

“If you're searching for parts at Verical you will see parts from all the different global locations and businesses that Arrow has purchased over the years,” Ricciardelli. “It's all franchised product. It is all product that is traceable back to the factory, but it's from multiple sources,” he said.

Inventory includes any parts owned by Arrow or one of its businesses, Ricciardelli said. It includes stock that is “still sitting at the factory that the suppliers may not want to push out to distribution for whatever reason," he said. “We publish that inventory on the site.”

He said that Verical is a “safe alternative” to independent distributors.

“The promise that we know where the inventories are coming from is very powerful, especially with military accounts,” said Ricciardelli. “We know this is factory product that you can buy when you have spikes in demand,” he said.

Authorized Only

Arrow, including its Verical business unit, is one of the sources on the Electronic Components Industry Association’s (ECIA) ECIAauthorized.com site, which shows inventories of authorized distributors and links to distributors to buy the parts. The site was developed three years ago as a tool to help buyers locate hard-to-find parts from authorized distributors.

“It shows everything that distributors have to offer," said Robin Gray, ECIA chief operating officer and general counsel. “With the big guys (such as Arrow and Avnet) it’s real-time information. We are pulling the data from the distributor's website itself. The smaller distributors give us a flat file that may be updated daily or weekly," he said.

Gray said buyers looking for scarce parts often check out the site if they can’t find parts from the distributors they usually use.

He noted that electronics purchasers often say they purchase from independent distributors when components are not available from authorized distributors.

“To a certain extent that is a myth,” said Gray. “There is authorized inventory out there but they are just not looking in the right place,” he said. ECIAuthorized.com helps buyers find authorized sources.

He said if buyers can’t find the part on the site, they can inform their managers that authorized products cannot be found and the part needs to be purchased somewhere else.

Buyers then have to do their "due diligence and make sure the products they buy from unauthorized sources are not counterfeits,” said Gray. “However, your best assurance is the authorized supply chain. Once you leave it, all bets are off,” he said.

Buyers say not all independent distributors are the same. Some are reliable and screen and test parts thoroughly and sell only genuine products that can be traced to the part manufacturer.

The key is to find such distributors and to closely manage and monitor them. Many OEMs and EMS providers carefully scrutinize and audit the independent distributors they use. Some companies qualify independent distributors the same way they would qualify an authorized distributor, while others hold independents up to up to a higher qualification standard because of the counterfeit risk.

“All the channels have an important place in our industry,” said Troy Hiner, vice president of supply management for EMS provider Sanmina, based in San Jose, Calif. “Demand volatility makes them all important. The independent channel is no exception.”

Deep Concerns

However, there are “deep concerns” with the independent channel and “it is an area that we control tightly,” said Hiner. Sanmina controls the channel by using part inspection and testing programs and with special anti-counterfeit agreements it has with independent distributors.

“The anti-counterfeit agreements are extra material protection precautions Sanmina puts in place with our independent sources,” said Hiner. “These are documents that give written assurances that materials are all original, new, unaltered, not reconditioned or repaired.”

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