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Counterfeiting: Blame the Criminals, Not the Brokers

Do you get frustrated when you see people hashing and rehashing a problem without ever coming up with a way to fix it, when you can see an obvious solution? I know I do. Sometimes when I'm watching the news out of Washington, I even get so annoyed that I find myself wanting to invoke my grandmother's fix for everything: “Give ‘em to me for one day. I'll make sure it never happens again!”

Well, I can't help but think that there's a parallel when it comes to solving the problem of counterfeit parts. This issue has become very high profile — and for good reasons. Now, it seems to me that many companies are reacting out of fear instead of making a wise, thought-out decisions about where and how they acquire components.

From my perspective, it's a lot like the fearful reactions of banks and lenders in 2008 — and the result then was that credit screeched to a halt. It seems to me that something similar could happen with parts acquisition, and that wouldn't be in anybody's best interest.

Let's look at a few examples where this is happening and a few “wise”-practices.

Because of the new anti-counterfeit legislation, many companies have said, “We will not use brokers or independent distributors.” With all of the noise and confusion surrounding the issue of counterfeit parts, I can understand why they are saying this. However, that's a lot like throwing out the baby with the bath water. Reputable brokers and independent distributors play valuable and necessary roles in the supply chain. Refusing to work with them because some unscrupulous vendors are exploiting the situation is causing the whole industry to suffer.

There is a real solution: Follow the steps that many independent distributors have been following for years. These companies did not react out of fear or panic. They took a cautious and methodical approach to mitigate risk.

Organizations like the Independent Distributors of Electronics Association (IDEA) and ERAI Inc., saw this issue coming years before the masses started talking about it. In fact, these organizations and their members helped sound the alarm that created awareness of the risk. Beyond that, they encouraged member companies to self-police and helped to create standards to prevent substandard parts from entering their clients' supply chains.

Take a look at some fear-based responses and suggested wise-practices that could be implemented instead:

  1. We are going to require testing on 100 percent of parts that are not from distribution or acquired direct from suppliers:
  2. Require testing in accordance with the standard sampling profiles already in place in IDEA and military testing standards.

  3. We are going to jump on every new testing method — electron microscopy, for example — even if it is not fully vetted:
  4. While it is important to take advantage of new testing techniques, it is more important not to rush to use something that is not 100 percent founded or not yet part of any external standards body such as ASE or ISO.

  5. We will not source parts from anyone but the factory/franchise:
  6. One to 5 percent of an approved vendors list (AVL) has parts that cannot be procured from factory/franchise distribution. Companies need to be able to source these parts from alternative channels to meet their clients' needs.

  7. Brokers and independents are causing the problem:
  8. Brokers and independents are not causing the problem. Criminals are!

A wise strategy is the way companies that are not reacting out of fear are solving the counterfeit parts problem. Here's what they are doing:

  • Selecting their preferred independent distributors from the role books of IDEA and ERAI.
  • Implementing a program to assure “purchasing discipline” in their organization.
  • Establishing an internal system to make sure proper procedures are followed.
  • Completing regular audits (desktop and on-site) of their preferred independents.
  • Asking their preferred independents to come in and train on what to look for.
  • Asking for increased screening and testing where appropriate and requiring documentation.
  • Becoming part of the solution by minimizing e-waste and using a preferred independent to help recapitalize and dispose of stranded material.
  • Removing vendors from their preferred lists when they cannot or do not adhere to the requirements they have put in place.

Clearly, the counterfeit parts problem cannot be resolved in a day or a week. However, if everyone takes a step back, looks at the whole issue, and implements wise solutions to minimize risk, I believe it can be addressed without bringing the industry to its knees. What do you think?

24 comments on “Counterfeiting: Blame the Criminals, Not the Brokers

  1. Nemos
    May 9, 2012

    Of course, I agree with the basic idea of the article blame the climinals, not the Brokers” and it seems that the problem it is very complicated and difficult to be solved. In my opinion, we have to control the e-waste because most of the counterfeit parts occurred from there.

  2. Adeniji Kayode
    May 9, 2012

    I agree with the points outlined in the article too and also what could be the economic effect of disposing the e-waste

  3. FLYINGSCOT
    May 9, 2012

    I believe the onus is on the consumer of the part to ensure they are using qualified components.  If they take a strong stance (like your fear based examples) it wil eventually force the suppliers to get in line.

  4. Anand
    May 9, 2012

    Because of the new anti-counterfeit legislation, many companies have said, “We will not use brokers or independent distributors.”

    @Mark, thanks for the post. I have a  very basic doubt. Isn't it beneficial for the companies if they avoid brokers/independent distributors and directly deal with the factory/franchise ? Why do you think the role of brokers/independent distributors is crucial here ?

  5. Anand
    May 9, 2012

    If they take a strong stance (like your fear based examples) it wil eventually force the suppliers to get in line.

    @FLYINGSCOT, I agree with your observation, but the bigger question is what is a company loosing by not dealing with suppliers ? Am curious to know what role the intermediate suppliers play.

  6. bolaji ojo
    May 9, 2012

    Nemos, The point many in the industry are making is that sometime the “broker” is also the “criminal.” But as Mark pointed out, manufacturers shouldn't apply the broad brush of “criminal” to every broker in the market simply because they are not franchise distributors. Unfortunately, that's what has been happening so far.

    For many people in the industry, if a company operates as an independent distributor or broker, it must also be a criminal, hence the view often expressed often that buyers should only purchase parts from franchise distributors. It's going to take a major push by industry players to change this mindset. It will also require that more brokers adopt many of the actions suggested by Mark in his article.

  7. Jay_Bond
    May 9, 2012

    I really hope some of these companies take a good hard look at everything and think before they over react. If they stop using brokers, we could have some serious issues in the supply chain. Costs will rise along with lead times and inventory. If these companies would take a second and stop panicking they would be able to figure out there are solutions.

  8. Ariella
    May 9, 2012

    @Mark You make an excellent point about the difference between”fear-based responses” and “wise practices.” One has to consider a rational approach with feasible solutions. 

  9. MarkofWorldMicro
    May 9, 2012

    Great Question…what value does an independent distributor play in the supply chain. How do you quantify their value. Here are some first hand stats:

    1. The marketplace is $3B worth of transactions from OEM/CM's to brokers/independent. This means that thousands of companies see the value year after year of using independents. Their reasons vary but almost always come down to one theme: The independent channel serves my need best for this particular part.

    Now for some specifics:

    1. I know that during the last allocation we helped one publicly traded OEM hit their quarterly numbers that would have been otherwise impossible if they waited full lead time.  The slight premium they paid us to make that happen was more than offset by being able to hit the analysts projections. The missed deliveries could have resulted in tens of million in lost shareholder value.

    2. I know that after the tsunami, our company helped secure product for mid-size consumers of hard drives. They were left without product b/c the larger consumers (PC clients) got first crack at any available inventory. Without that product many of these clients would have no product to ship…Period!

    3. We have successfully extended the lifecycles of fully functional projects ranging from municpal lighting, aviation, and industrial autoamtion products. Many of these products were designed years ago and have plenty of life in them if a supplier can help service and support the business with quality repair parts.

    4. A critical flaw in the flow of product from distribution and manufacturing is that it is a one way trip. Many OEM/CM clients are left with stranded material and no recourse but to try and recapitalize it through an independent distributor.

    Hope that helps answer your question….Thanks for the feedback! Keep it coming!

  10. Anand
    May 9, 2012

    @Mark, thanks a lot for the detailed response. Now I totally understand what value an independent distributor play in the supply chain.  

  11. rohscompliant
    May 9, 2012

    E-Waste is only part of the problem……there is also the fact that when you make die for a component, a certain % of the die is deemed defective or not up to 'snuff' to be packaged into an ic. that % is 'supposed to be disposed of properly and destroyed. if this known bad die has a $$ value if it were to make it's way back into the supply chain as the 'good product' then u can bet dimes to dollars that a counterfeiter has a contact on the inside of that semi mfg to get his hands on the bad die and have it made into the 'good' part. Bad die is not classified as 'e-waste' because it is assumed that it never made it into the market to eventually become a part on a pc board that becomes e-waste. Bad die theft / buying is rampant in Asia. Put a bad die under a microscope and chances are good that u will c markers that lead u 2 believe that u have a valid part……..bad die is good biz for the counterfeiter.

  12. ddeisz
    May 9, 2012

    Mark – there is a place for independent distributors. It is right in line after the fully authorized sources. The electronic component market is as much about people (or more) than about the value an independent brings outside that relationship. Reputable independents have their customers and take care of them. Good for them and as well they should! That doesn't mean those customers are attempting to purchase from authorized sources first. They go to who they know that they trust and try there first. The market value of component sales serviced by independents is not in itself justification for independents as much as it is a testament to the number of relationships they have fostered over the years. I don't think you say “we sold $x of components therefore the market needed $x from us”. When it comes to “component testing” by independents, I have to step in and say that anything visual is a half-hearted or tiny step in validation of product. True dynamic testing with high fault coverage on a genuine product tester while measuring edge rates, timing and power really get the heart of whether a product is genuine or not. Expensive you say? No, that's authorized.

  13. Mr.Funkhouser
    May 9, 2012

    I think there's a great point in here… look at the companies/organizations that have known about, been warning, and have already instituted policies on counterfeits, BEFORE you freak out and make fear based decisions.

    We do that in every other area of our life don't we? We do our own research; look at what other people who have been dealing with it do. If I were married and found out my wife is pregnant, we should all agree it would be silly of me to go to friends who don't have kids and ask for advice or look to them for how to prepare. Especially, when I people who experienced the process and deal with it on a daily basis I can go to.

    While the analogy may be poor, I think it proves a point. We need to look at people who have experience and have been dealing with counterfeits for years, instead of looking to people who are reacting to it for the first time…

    When I first got into this business, I decided the same thing (out of fear), “We should only buy from Authorized Distributors”, then as I learned more about the industry and counterfeits, and the steps being taken by certain independent distributors, I slowly pulled away from that belief. Companies that use the services that ERAI and IHS offer, and adhere to standards IDEA agrees upon are in a completely different class than those who don't and shouldn't be lumped in to the same category by any means.

    Some food for thought… 

  14. bolaji ojo
    May 9, 2012

    A recent discussion with a “buyer” in the electronics industry confirmed to me that many in the market will continue to include independent distributors in their list of potential sources. They do so for various reasons but they are also emphasizing the issues of quality, pricing and availability. These concepts run across the industry — doesn't matter whether or not the partners are franchise or independents.

  15. Mr.Funkhouser
    May 9, 2012

    Very true. I mean, that's what a lot of ID's do, as far as I know. They order from people based on ALL three of those things. Quality, Pricing, and Availibility. If it doesn't pass quality standards, it doesn't matter how low the price is.

    I think the big problem in the thinking of people who promote Authorized Distributors over ID's and Brokers, is that they aren't aware of the focus on quality that many ID's have. 

    Having been homeschooled, I'm often stereotyped as someone who sat around watching PBS and going shopping. In reality, my family had standardized tests, and a strict regement of classes. I had more homework than my public school friends, and was graded tougher (because she only had two students and knew our strengths and weaknesess). 

    In the same way that I had to overcome the stereotypes associated with homeschooling (throughout college and even in my carieer), I think ID's and Brokers will be able to shed the imagine and a new stereotype will arise that will be quite flattering to the new class of Independent Distributors. 

  16. Mr.Funkhouser
    May 10, 2012

    Dan –

    While I appreciate your passion for Authorized, there is a class of Independents that should be beside the authorized sources – not behind them. Why? Because, like you mentioned their customers know “that they can trust” the independents. They haven't come across issues, IF Independents were as sketchy as you make them seem they wouldn't be around after so long – price alone cannot make up for shoddy parts and the like.

    What about independent distributors who get their parts from Authorized distributors? Are willing to meet specific demands of customers that Authorized Distributors aren't (or do it for cheaper)?

    The market decides where the money will be spent. People will buy from companies who will best suit their needs and that of their customers. If a hospital requires product to be obtained from a company certified with the Medical Electronics ISO-13485 that hospital won't be able to go to every authorized distributor, but will be able to go to certain independent distributors.

    Just a thought. 

  17. tioluwa
    May 11, 2012

    We have a big problem with counterfeit components but it seams no one is ready to really take responsibility for it.

    i've not heard about IDEA before now, but i believe the use of registered bodies will help alot in this issue. since IDEA stands as an association for Independent Distributors, then they are in the best position to stand up for Independent distributors and brokers.

    All independent distributors and brokers should be accountable in this issue. I don't see why a distributor or broker cannot take responsibility for counterfeit products.

    If all dealers in components sales are registered, then a system for reporting counterfeit parts gotten from a distributor should be put in place, where customers can report cases, and i believe there are ways to prove where these components came from aren't there?

  18. Brian775137
    May 14, 2012

    I keep hearing all sorts of suggestions for avoiding obtaining/using counterfeit parts, but only a few are proposing truly effective means of avoiding getting only “good” parts for use in thier product.  Some have proposed various means of doing this such as putting the blame on the independent suppliers and not taking responsibility for the problem themselves.  The military uses a program called GIDEP (Government Industry Data Exchange Progam) wherein any poblems with parts which are destined for military usage are reported to a central entity – GIDEP – and the problem, along with actions taken to solve the problem are reported to everyone within the GIDEP community.  Names are named and their corrective actions are reported.

    Now if a similar type of entity could be established by someone such as ERAI, then over a period of time, the counterfeiters could be identified and eliminated in an effective way.  Denying the source materials the counterfeiters have – scrapped electronic materials – would go a long way towards cutting down on the availability of counterfeit parts, but not totally eliminating the problem.  I believe that the suggstions given here would also help to solve this problem, but only a centralized entity such as GIDEP would be the most effective means of severely reducing the problem effectively.

    We all need to pull together and have a centrallized place where people could tell others about their experiences with the counterfeitters and to name names and how they solved their problems with the named counterfeit part suppliers.  This would be a long process, but would be truly effective in severely rducing the number of counterfeiters and those within the supply chain who do not take responsibility for assuring that the parts they supply are “good” parts.

  19. Mr. Roques
    May 15, 2012

    Aren't companies who buy those parts also guilty? If you see it costs 50% less than the original… then something must be wrong, no? 

  20. dalexander
    May 15, 2012

    ddeisz,

    Hooray for you! As a Component Engineer, I appreciate the implication for thoroughness in the testing process before concluding a 100% confidence level. Because an 8 pin SOIC can contain anything from hex inverter logic to mixed-signal analog devices, the functional verification would have to be on my check list before achieving a 50% confidence level. A visual inspection for lead-frame integrity and surface examine for ink permanance and signs of ablation or black-topping, would only take my confidence level up to about 80%. I would want to check for speed gradients, coplanarity, outside packaging integrity, and lot and date code, logo, and part number markings against the manufacturer's artwork and datasheet. Now I am at 95% confidence. But, I want the reel unwound and samples taken from 4 or five different places in the reel to make sure that I don't have a counterfeit reel with genuine parts on the first and last 100 parts, with the balance of 2800 tape and reeled parts being bogus. Now I am at 99% confidence and only time will tell if the long-term reliability indicates that these parts were not “recycled” through the supply chain with half of their lives used up in other products. There is always the possibility that a legit factory ran an illicit third shift without the proper Quality Assurance measures employed during the normal work day. 99% is good. 100% is better. Don't forget. The counterfeiters produce counterfeit reels, rails,waffle packs, antistatic and humidity packages, tapes, bags, and labels.

  21. ddeisz
    May 15, 2012

    Douglas,

    Exactly! Now take that 8-pin device and ramp it on up to a 300+ pin bga package containing a processor or fpga of some kind. Nobody is going to convince me that DC measurements and visual inspection are adequate. It's still a risk. While testing being proposed/executed to thwart counterfeit doesn't include quality metrics common in the design world (AC testing, fault coverage, mtbf, etc…), it has become a “least common testing we can get away with” and/or “let's not pay too much for testing” process. In my opinion, the bare minimum gets done by the reputable independents when it comes to test and not much gets done more than that.

    Testing and validation is hard work and costs money. Arguably, validation takes longer and is more complicated than design. There's very little validation going on with visual and DC testing that gets to the heart of long-term reliability. Whle everyone these days is focused on the silicon (justable for now), the packaging is not far behind. Material analysis of packaging to include die attach, mold compound, bond wires, etc…is coming.

    I stand by what I said earlier, get your parts from authorized first and then independents. Anything else is compromise and a level of risk depending on your broker.

    Dan Deisz

  22. MarkofWorldMicro
    May 18, 2012

    I dont dispute your arguement that is safer to buy from authorized. However, you cannot be a participant in the global electronics industry and think that is a viable solution to only use authorized. How would your proposed solution work in these scenarios:

    -A military client needs Celeron Processors to repair field units.

    -A municipality needs old thru hole parts to repair street light boards.

    -A company who still runs DOS needs floppy drives from time to time.

    How in a world where resources are tight can you honestly fault a client for serving thier company's interests? None of these situations are likely to be in the authorized channel. A little know secret is that most   Please reply with how “authorized” can fix these three scenarios! Oh yeah, these are just the ones that came in this week!

  23. ddeisz
    May 18, 2012

    My statement was to use Authorized First, then Independents and I was talking about semiconductor components. Your scenarios conveniently don't have part numbers so that makes it difficult to figure out if an authorized source has the parts you referred to. If you would like to provide part numbers, I could look into it further.

    “None of these situations are likely to be in the authorized channel.” Did you look as a statement of fact or is this your hypothesis?

    “Can you honestly fault a client for serving thier company's interests?” is an interesting way to view not going with Authorized First. I view going with Authorized First completely in any customer's best interest.

    Authorized First is the lowest risk approach for any component purchase – period. Every other option is higher risk at some level. Independents are going to be able to supply parts that the Authorized channel cannot, but when an Authorized version is available, I am saying that is the one that should be purchased.

    Dan

  24. Barbara Jorgensen
    May 18, 2012

    This is a great discussion and is a snapshot of the kind of thing buyers face every day. I'm not sure anything is risk-free. (Otherwise, there wouldn't be a cottage industry of risk analysis firms cropping up everywhere.) The decision to buy from an authorized or independent distributor ultimately lies with the buyer. I'm not sure eliminating choice –i.e., wiping out the independent market — serves the purchasing community. I do know from experience that past efforts to do so have failed. Raising the awareness of this risk at least gives buyers the best chnace to make informed decisions.

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