I had the opportunity to attend the latest session of the MIT Forum for Supply Chain Innovation on October 29th.  The theme of this fall session was Strategies for Brand Protection, Material Assurance and Anti-Counterfeiting, and the presenters represented a cross-section of pharmaceutical industry, high-tech industry, and U.S. government and defense agencies. My takeaway from the sum total of all the presentations and discussion was that the problem of counterfeit or bogus materials infiltrating both industry and defense-oriented supply chains has become widespread, much more than even I anticipated.  In fact, many conference participants including myself, after viewing the presentations, commonly expressed ore reaction to the current problem as “sobering.” Robin Gray, Executive Vice President of the National Electronics Distributors Association (NEDA) summarized the problem as “widespread and pervasive and involving all segments of the economy.”

The reasons for increased occurrence of bogus materials within supply chains are numerous, but center upon profit motives.  Scrupulous players have found that there are more monetary and other incentives for engaging in this activity, more so than illicit drugs or other forms of organized crime.  Criminal laws covering this activity are generally weak. On the buying side, suppliers offering parts and components below current market prices lure buyers into spot buying or new contract arrangements in order to meet cost-reduction goals. And finally, suppliers and other players have discovered more sophisticated means to alter the composition or stated quality of parts, more often beyond current means to detect such deficiencies.

Incidents have occurred at all tiers of the supply chain.  In fact, a soon to be released U.S. Department of Commerce research study indicates that over half of counterfeit incidents involving defense-oriented supply chains are never reported, because of negative incentives. There is also speculation that the increased focus on green supply chain initiatives, specifically the recycling of parts or packaging materials, may be fueling a further problem.  Recycled parts make their way to unscrupulous players, mostly in China, who breakdown finished electronics to harvest internal components and later rename them as other or similar parts.  Other highly sophisticated players contract to receive original packaging materials from recycling, allowing them to both re-label and package bogus parts to look the same or even better than an original part shipment.  Amazingly, counterfeit parts are not merely focused on high-value products, or products that are no longer in active production.  The NEDA findings indicate that the most prevalent price range is $1 to $10 in unit costs, and the U.S. government was surprised to learn that current incidents are much more prevalent among parts in active production.

A lot of initiatives are currently underway in attempt to combat this problem.  Industry associations such as the NEDA are stepping-up awareness and recommending that procurement of materials been focused solely from OEM’s or their authorized distributors. Pharmaceutical companies such as Bayer AG and other partners are running European based pilot processes to test product verification and product serialization processes in preparation for more wide scale deployment. The U.S. General Services Administration, Defense Department, and associated military procurement agencies are stepping-up efforts to tighten-up procurement practices and screen both existing inventory and new shipments of electronic components. 

Much more awareness, grunt work and sophisticated technology need to be brought to bear on this problem.  The risks are huge and widespread, ranging from failed products, damage to a corporate brand or reputation, or even human safety.

My sense from this latest snapshot, compliments of MIT, is that industry and government are still not sensitized to the magnitude or growth in this supply chain risk category.  My advice to readers is to make sure your organization has its eye on the problem of counterfeit parts, and has definitive plans and timetables to address forms of mitigation.  The problem is widespread, and it is growing.

 Bob Ferrari