Partnering With Small Business in the Fight Against Counterfeit Electronic Parts

The use of original manufacturers or their authorized suppliers is the keystone to counterfeit part avoidance practices recommended by industry and US government subject matter experts. In an earlier essay, I described why one would use other suppliers when parts are currently produced by and available from the original manufacturer or are available through its authorized dealer.

US Government agencies, including DoD, flow down expectations to enhance subcontracting opportunities for small and small disadvantaged business concerns. One method that contractors use to be responsive to these expectations is to outsource part procurement to small and small disadvantaged businesses. Section 818 of the FY2012 NDAA supports this approach. Referring to Section 818(c)(3)(A), DOD is expected to revise regulations to require that, whenever possible, DoD, contractors and subcontractors at all tiers to obtain electronic parts from the original manufacturers of the parts or their authorized dealers, or “from trusted suppliers who obtain such parts exclusively from the original manufacturers of the parts or their authorized dealers”. DoD and its contractors must recognize, however, that counterfeit electronic parts tend to enter the supply chain through Independent Distributors and brokers; many Independent Distributors and brokers are small or small disadvantaged businesses.

When selecting small and small disadvantaged businesses to be suppliers of electronic components, DoD and its contractors should ensure these suppliers have business practices in place to prevent the supply and proliferation of counterfeit parts. One method would be to flow down requirements to small and small disadvantaged businesses directing procurement from an original manufacturer or its authorized dealer. In cases where a contractor considers the use of small and small disadvantaged businesses to acquire electronic parts that are not available from an original manufacturer or its authorized dealer, the buyer must apply significant oversight to ensure the authenticity of parts.

DoD and contractors should consider the following when selecting Independent Distributors and brokers, including those that are small and small disadvantaged businesses, to acquire electronic parts that are not available from an original manufacturer or its authorized dealer:

1. The majority of Independent Distributors and brokers supplying product sourced from the open market do not have the capability to perform or effectively outsource inspections and tests other than those that would detect some forms of obvious fakes.

2. It will be left to the buyer (such as a contractor or DoD procurement organization) to determine what further tests and inspections are necessary to detect various forms of counterfeit parts.

3. The buyer must have the knowledge necessary to select additional tests and inspections to fill in gaps left behind by Independent Distributors and brokers; the buyer must see to the execution of those additional tests and inspections and assess the results.

4. The buyer must flow down expectations of Independent Distributors and brokers in the event counterfeit parts escape tests and inspections performed by the Independent Distributor or broker, but are detected through additional tests and inspections performed by the buyer or at the direction of the buyer by a third party laboratory.

These considerations are key to partnering with small and small disadvantaged business and, at the same time, preventing counterfeit electronic parts from entering the DoD supply chain.

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3 thoughts on “Partnering With Small Business in the Fight Against Counterfeit Electronic Parts

  1. A well respected and knowledgeable colleague offered the following comment …

    “I am surprised your recommendations did not include the need for a site visit to assess the capabilities of the distributor. I think if this had been done in many of the cases we know about the sale might not have occurred.”

    Below, I share my response to this excellent comment….

    You make an excellent point about site visits. You have to look in order to understand what capabilities and vulnerabilities exist.

    There are a number of things that a buyer (be it a contractor or USG organization) should do with respect to supplier assessment, including site visits, formal assessments, audits, etc. You also make an excellent point about how some buyers may not always take certain important steps before procuring parts given the nature of a particular supplier being considered.

    In addition to your excellent example, another would be to understand the extent to which a supplier is able commit to expectations concerning remediation in the event of a counterfeit part quality escape. Yesterday, I saw a comment on a related issue that interested me which came from an individual working for an organization representing national security interests. I abstract from the comment verbatim here …

    “… Critical Tier 3 and Tier 4 suppliers are usually small businesses – they don’t have the resources. One counterfeit part slips by, and they are out of business. …”

    I think the issue offered by this commenter is a very important one. In addition to the potentially catastrophic consequences for such a supplier, it implies the buyer could be taking on considerable risk and, therefore, should apply additional measures for its own protection and (more important in my view) to avoid harm to the customer and end user.

    Activity associated with supplier selection needs to take into account the short comings associated with certain categories of suppliers. From my experience in working the counterfeit parts issue for 1/2-decade now, “small” frequently goes hand in hand with limited technical capability, including those capabilities necessary to avoid supplying counterfeit products to one’s customers. I am not sure such gaps are generally understood as organizations pursue opportunities for small and small disadvantaged business to meet US Government expectations.

    I believe it is premature to say with any certainty the degree to which standards will result in encouraging suppliers to increase their abilities to avoid supplying counterfeit products to their customers. I speculate that significant capability gaps will remain and, therefore, the use of suppliers without these capabilities, including small and small disadvantaged businesses, will continue to call for additional precautions to avoid counterfeit parts quality escapes.  

  2. When the Dod came to the conclusion that the majority of counterfeits entered the supply chain through small business, they were correct. However, since that time it’s been the small business / Independents that have taken the lead in counterfeit mitigation. Through standards and programs such as AS 6081 and the DLA QTSL program, process and procedures have been put in place to keep counterfeits out of the supply chain. These standards are audited by a third party to ensure conformance. When are the Primes and DoD going to recognize that it’s the small business that is looking to stop counterfeits from entering the supply chain?

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