Product Returns to Authorized Distributors

A colleague recently approached me for my thoughts about the integrity of products returned to authorized distributors and the inspections an authorized distributor should apply to returned products before receiving them into inventory. This question was prompted by a recent report of a rare event — the sale of a counterfeit product by an authorized distributor. This escape occurred due to a lapse in the authorized distributor’s product return process. After investigating the particulars of the incident and researching other information about authorized distribution practices related to product returns, I believe the aerospace and defense electronics industry should consider the following —

Should products returned to distributors be considered authorized products?

Here are some thoughts to consider …

Probability of counterfeit parts escapes
Reported cases of counterfeit parts supplied by authorized distributors are very rare. Though authorized distributors supply products acquired directly from the OCM, they occasionally accept product returns from their customers. Cases have been reported where a customer did not return the same authentic products acquired from an authorized distributor, but, instead, returned other products that were counterfeit. If an authorized distributor does not apply sufficient due diligence for product returns from customers, counterfeit parts can be inadvertently introduced into its inventory. Product returns generally comprise a very small proportion of an authorized distributor’s total shipments on an ongoing basis. While it is reasonable to assume the the probability of counterfeit parts escapes through authorized distribution is very low, a review of the authorized distributor’s product return acceptance practices is a prudent precaution.

Distributor’s knowledge of its customer’s business model and business relationships
A distributor’s knowledge of its customer’s business model and business relationships with other suppliers is key to determining how best to handle product returns. A distributor may assume that product returns from some customers are less likely to include counterfeits than returns from others. For example, a distributor might assume that product returns from a Contract Manufacturer are likely free of counterfeits vs products returned by other distributors. A distributor (or OCM for that matter) may not perform sufficient research to understand the nature of it’s customer’s business practices, including the customer’s business relationships with other firms that may engage in the purchase and sale of products acquired from open market sources. While resources, such as D&B reports are useful to gain insight into a customer’s business, these resources may not reveal that a particular customer has an active business relationship with companies providing a number of services related to the procurement of materiel (including purchases from open market sources ) and inventory management. Some contract manufacturers perform “consignment manufacturing” and obtain materiel from its customer without direct knowledge of supply chain participants associated with this materiel. Such complexity in the supply chain increases the probability that product returned to a distributor is not the same product acquired from the distributor in the first place. (See my earlier post on CM/EMS/3PL providers).

Impact on Availability and Pricing
Some suppliers claim that if the aerospace and defense industries were to disallow shipments consisting of product returns, unit prices would rise and lead-times would increase. Since product returns generally comprise a very small proportion of an authorized distributor’s total shipments on an ongoing basis, it seems unlikely that this would have a major impact on pricing and availability. Given the due diligence required to ensure that returned product is authentic authorized product and maintain the original product warrantee from the OCM, it is possible the costs to reestablish this level of assurance would make reselling such products as authorized products impractical. As an alternative, a distributor could elect to supply returned products through their business units that supply open market products.

I return to my original question…

Should products returned to distributors be considered authorized products?

Given these issues, why wouldn’t aerospace and defense customers and industry standards disallow the shipment of products consisting of returns from other customers in order to sustain a high level of confidence in products acquired from authorized distribution?

H Livingston

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