Some time ago, Supply Chain Matters brought attention to the growing problem of counterfeit electronic parts within defense-oriented and other supply chains. Our first introduction to this growing problem was from a prior MIT supply chain forum, and we have since added stepped-up efforts to mitigate counterfeit parts infiltrating multiple industry supply chains to Prediction Eight of our Supply Chain Matters Annual Predictions for Global Supply Chains.

The latest visible evidence of the fact that counterfeit parts are compromising supply chains comes from the U.S. Senate Armed Services Committee.  On May 21, this Committee issued a report indicating that a year-long investigation found evidence of 1800 cases of bogus electronic parts supplied by more than 650 suppliers. This Committee also cites China as the principal source of the majority of these bogus parts and calls for that government to take more concerted steps to stop counterfeiting operations that are carried out openly in the country.

The Senate Committee report outlines eight sobering conclusions as a result of its investigation, and high tech supply chain teams need to be aware of the issues brought forward:

  • Conclusions One and Two indicate overwhelming evidence indicating that China as the dominant source of bogus parts.  A statement from the U.S. Trade Representative (USTR) states: “…China’s global manufacturing capacity “extends to all phases of the production and global distribution of counterfeit parts””. A witness indicated he observed whole 10,000-15,000 employee factories in China setup for the purposes of counterfeiting, and that parts are sold openly in public markets.
  • Conclusions Three, Four and Five casts doubts on the U.S. Department of Defense and its contract buying agencies on their ability to determine the extent of the overall problem, as well as be able to track specific vendors and occurrences. It further identifies some deficiencies in the way contractor’s recover costs incurred as a result of rework or replacement of identified counterfeit parts.
  • Conclusion Six notes that the defense industry’s reliance on unvetted independent parts distributors results in unacceptable risks to national security. In one cited instance of a part used in Electromagnetic Interference Filters (EIF) utilized on U.S. Navy large helicopters, the non-conforming parts changed hands five times before a subcontractor to defense contractor Raytheon had acquired the parts. Raytheon nor the Defense Department were aware of where the part was originally manufactured, prior to the Committee’s investigation. Our readers can also recall that in the ongoing shortage of critical generic injectable life-saving drugs involving the pharmaceutical industry, buyers have had no choice but to turn to secondary buying channels to locate critical supply.  Incidents of increased occurrence of counterfeit drugs stems from these secondary channels, with again, ignorance to the original production source.
  • Conclusion Seven and Eight cite ongoing weaknesses in testing procedures which are exploited by counterfeiters. A lack of uniform testing or sampling procedures opens the door for bogus parts to penetrate the supply chain. What blew our minds was the Committee conclusion that the vast majority of the cited 1800 cases of suspect parts were apparently unreported to the Defense Department or to criminal authorities. “Many cases were not reported to the Government-Industry Data Exchange Program (GIDEP), a DOD program where government and industry participants can file reports about suspect counterfeits”.

This last set of conclusions is a disturbing indicator that this problem may well be much bigger than anyone is willing to admit.  It also should be an alarm to all electronics-related supply chains that a concentrated focus on identifying and mitigating the existence of counterfeit parts should be an obvious priority.

To give readers a further sense of the hidden nature of this problem, Supply Chain Matters came across a related article published by a publication associated with Warner Robbins Air Force Base. In that article, a top base supply official implies that the problem of counterfeit parts is not as pervasive as the Senate’s panel would indicate. That official notes: “We have not seen significantly increasing volume of suspect counterfeit parts in the weapon system items we support.  None of the cases we have seen has caused a known operational incident or impact”. Our reaction to that quote was that it represents a perspective of the problem does not exist until an occurrence, or until it is reported.  One wonders if this perspective ignores the hidden problem of unreported or untracked incidents reported in the Senate investigation.

While this Senate report should be a serious wake-up call to defense procurement teams, one wonders if legislators and DOD procurement teams are also willing to re-visit policies that call for automatic selection of lowest-cost suppliers in defense supply contracts.  It seems that some qualifier for integrity of supply needs to be factored in procurement policy, one that overrides lowest visible cost.

Bob Ferrari