In a move that already is causing no small degree of consternation, President Obama last Saturday signed a new law that places the onus squarely on the Pentagon’s supply chain for ensuring all electronics components in all defense products are legitimate.
The bill, part of the 2012 National Defense Authorization Act, requires that the Department of Defense, the Department of Homeland Security and their contractors “detect and avoid counterfeit parts in the military supply chain.”
Counterfeits have been a known problem for years. (CIRCUITS ASSEMBLY has been warning of the issue at least since I came aboard in 2005.) I was personally told by a QA manager at one prime contractor that no less than a fourth of all the parts in some of its systems were suspected to be faked or otherwise out of compliance. And workshop after workshop told the tale of rivers of parts being shipped as e-waste to China, primarily the Shenzhen area, where they were separated and stripped from circuit boards, cleaned (usually in polluted water), sanded and remarked, and then resold into the supply chain. In a keynote at SMTAI in 2010, Tom Sharpe of independent distributor SMT Corp. noted some 29,000 incidents of counterfeits were reported to the US Department of Commerce between 2005 and 2008.
But the turning point, according to some analysts, was a Nov. 8 Senate Armed Services Committee hearing at which Congress heard compelling testimony on the sheer volume of fakes in the US military supply chain, including the results of a Government Accounting Office sting operation targeting electronics parts counterfeiters.
The evidence spurred Committee Chairman Carl Levin (D-MI) and Sen. John McCain (R-AZ) to lead a bipartisan effort to act. The result: legislation that establishes a program of enhanced inspection of electronic parts imported from any country determined by the Secretary of Defense to be a “significant source of counterfeit parts” in the DoD supply chain. The bill further requires defense contractors to establish policies and procedures to eliminate counterfeit electronic parts from their supply chains, and for the DoD to adopt policies and procedures for detecting and avoiding counterfeit parts in its own direct purchases.
Most important, the new law states those contractors that fail to detect and avoid counterfeits, or fail to exercise adequate due diligence, can be debarred. Furthermore, contractors can no longer charge the DoD for rework or related costs to remove and replace counterfeit parts, and they are held liable for any remedies required, regardless of where the counterfeit entered the supply chain. The law affects all contractors at all tiers and is not limited to direct acquisition of parts. In other words, an EMS firm would be responsible for the counterfeit solder mask (yes, that happens) on a PCB it sourced from a fabricator in Asia (yes, that happens too).
Counterfeiting runs the gamut from the mundane to the highly sophisticated. In some cases, the trickery is performed by crude remarking and easily caught by a diligent inspector with an eye loupe. But at the upper end, it has evolved into a wholly systemic problem; again, we have been reporting on the “fourth shift” at various semiconductor factories, where workers build parts using legitimate materials and lines, but those parts are not subject to rigorous inspection and are sold “out the back” to unscrupulous third parties. In one egregious episode, VisionTech Components administrator Stephanie McCloskey was sentenced to prison and her boss, Shannon Wren, died of a drug overdose after facing similar charges for duping the US government in a long-running scam.
There is no question the supply chain has found counterfeit detection and prevention an expensive and difficult undertaking. XRF, chemical or laser etching and DNA marking are three of the more sophisticated means, although each adds time and cost to traditional inspection methods.
But the problem is too pervasive, and the risks too great, to whine about the costs. Counterfeiting has gotten completely out of hand. For those reasons, we welcome the bill and its well-conceived structure that puts the onus not on the taxpayer (via pass-along costs) but on the supplier, where it belongs. If this means contractors will have to start relying more on known-good suppliers, well, that’s not a bad thing either. I’ve seen far too many instances of high-level buyers at OEMs and EMS companies searching for parts on LinkedIn to be confident that the auditing many claim to have in place is being taken seriously.
What do you mean that “….For those reasons, we welcome the bill and its well-conceived structure that puts the onus not on the taxpayer (via pass-along costs) but on the supplier, where it belongs….. ” The cost of adding the additional infrastructure and analysis will add to the cost of the component and that cost WILL be passed on to the government and eventually to the taxpayer PERIOD…. Who are you kidding. Counterfeit part problem lies completely with China period. We are at economic war with China and the plebian of the US doesn’t have a clue nor does congress. So PLEASE don’t assume that I am stupid and make such a statement that the contractors will pick up the bill. This is the same thought pattern of taxing the rich corporations…. corporations just pass on the higher tax burden to the public. Later Daryl
@Daryl:
You introduce quite a number of thoughts. I’ll try to address them best as I can.
I think we agree that counterfeits are broadly present at all levels of the supply chain. It is also widely understood that the supply chain’s efforts to mitigate the problem are mixed, at best. Some companies have diligent QA operations that are undermined by their own procurement practices and management demands.
I’m not sure why you think the bill will result in additional infrastructure and analysis. There certainly will be short-term costs as suppliers work out better procurement methods. But if doesn’t require much rock turning to find blatant examples of manufacturers ignoring . Did you see the link I provided to a post by a manager at Daimler searching for parts on LinkedIn? I’ve seen a director of purchasing at Elcoteq do the same thing. What are the odds the supplier of those parts is on those companies AVL? Truth is, they don’t care, because they wouldn’t be looking on that site if they did. That’s not a government problem, that’s a supply chain problem.
You write that the problem lies with “China, period.” By that, it’s unclear what you are proposing. China is the world’s workshop. An enormous amount of component fabrication is now there. The West cannot cut off China as a supply source without completely shutting down the supply chain. That’s simply not an option.
Instead, I would argue China is one source of the problem. All that e-waste comes primarily from the West. We dump our trash there. China doesn’t create the demand; it simply is one source for the fix. Put another way, I don’t like coke dealers, but I don’t think much of people who use/abuse the drug, either.
Ever consider why “rich corporations” are so rich? Sometimes, it’s from cutting corners. Supply chain management is supposedly a differentiator for many manufacturing companies. We’re about to see just how much.