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IHS: ‘High Risk’ Suppliers Threaten Defense Supply Chain

The number of electronic component suppliers that pose significant risks to the US government defense supply chain has increased substantially over the last nine years, according to researcher IHS Corp., which says the jump has occurred despite efforts to curb their presence in the system.

In a report emailed today to reporters, IHS said the number of suppliers classified as high-risk in the US government supply chain surged 63 percent between 2002 and 2011, rising to 9,539 from 5,849 10 years ago. These suppliers were “reported either for known involvement in high-risk, fraudulent and suspect counterfeit-part transactions, or for conduct identified by the government as grounds to debar, suspend or otherwise exclude from contract participation.”

The government has been warning about the dangers to the defense supply chain from counterfeiters and has in recent years taken steps to tighten up the system. It recently passed a law that puts the onus of ensuring the safety of the defense supply chain directly on suppliers as well as the equipment manufacturers supplying products to the government. The National Defense Authorization Act for Fiscal Year 2012, for instance, strictly compels suppliers to certify the authenticity of products supplied to the government. The law imposes severe penalties on companies in violation of the Act and has led in recent months to an increase in the reported number of counterfeiting incidents.

“Instances of these parts and poor conduct and unscrupulous activity are being reported at record levels,” said Vicki Knauf, parts logistics expert and Haystack product manager, supply chain solutions, at IHS in the statement:

    It's abundantly clear that supplier risk is real, extensive and growing. It's a federal acquisition requirement to screen for debarred, suspended or otherwise excluded parties. A key component of developing a secure supply chain includes the use of Trusted Suppliers. Pinpointing probabilities of risk, blacklisting and vetting high-risk suppliers is crucial to developing a resilient supply chain that fends off devious behavior.

IHS identified the US National Aeronautics and Space Administration (NASA) as one of the major government branches that has been active in combating counterfeiting in its supply chain. The agency is reported to have “put in place many processes and procedures aimed at counterfeit detection and avoidance,” according to IHS.

NASA will on Nov. 2 at 12:00 noon EST hold a Webinar on the topic of counterfeit detection and avoidance. The presentation will be hosted by the EDN Network, a sister publication to EBN, and will feature as speakers Steven Foster, who works in procurement quality assurance at NASA, and Rory King, director of supply chain global product marketing at IHS. Click here for more information about the Webinar.

11 comments on “IHS: ‘High Risk’ Suppliers Threaten Defense Supply Chain

  1. GraniteIC
    October 30, 2012

    IHS receives most of its reported part information from ERAI. ERAI does a very good job investigating disputes between companies. They do not have the same policy for reported parts. 

    Anyone can report parts as being “suspect” there is no investigation as to where the parts came from. How the parts were inspected or tested. If the people conducting the inspection are properly trained or qualified. In the majority of the reports there is no indication as to how the parts have been disposed of or if the parts have been returned back into the market. 

    In a recent article examples are given on how the same parts with the same date code lot code information are reported multiple times over several years.

    Anonymous posting of “suspect” parts offers little to no value. It only provides information to the counterfeiters and e-waste flippers on how parts are detected and how to improve their craft. It does nothing to stop or prevent counterfeiters and e-waste flippers from continuing their scams.

    Anonymous posting is used as a weapon by companies to cause harm to competitors. There is zero accountability on anonymous posting of reported parts. If you want to take out a competitor or devalue their inventory submit a suspect part report. The accuser is never identified or required to show any proof of training or qualification. There is no requirement to state how the product has been disposed of or where it has been sent.

    There is plenty of evidence that shows the same parts are being resold multiple times. The counterfeits and e-waste flippers do not have to make every deal stick. They only need to be paid on approximately 20% – 40% of their product to be profitable depending on the size of their operation. 

    There is plenty of evidence that shows not all the reported parts are actually “suspect” and are a result of unqualified inspections and competitor sabotage.

    ERAI is between a rock and a hard place. The lack of reporting on GIDEP shows that companies will not report if they are identified. There is a need to report true counterfeit and suspect parts. The only way people are willing to report is under a blanket of anonymity that opens up the door to abuse and does little to nothing stop the criminals.

    There needs to be a change in attitude in the Manufacturing community. All Military and Commercial manufactures need to stop protecting the companies who are supplying substandard parts. They protect their suppliers by not reporting and continuing to use the same suppliers. They justify this bad behavior by requiring the supplier to report the incident. The supplier then uses a method of reporting that allows them to remain anonymous. The cycle continues and the counterfeiting epidemic grows.

  2. hash.era
    October 31, 2012

    I think this is something which we should dig deep into becasue SCM is something which we can use to do loads of work at one stretch. Its such a powerful tool if its being used correctly.

  3. Taimoor Zubar
    October 31, 2012

    It's interesting to see NASA getting involved in finding solution to counterfeiting. Normally NASA has a lot to worry about but getting involved in dealing with counterfeiting tells you a lot about the critical nature of the issue and how badly counterfeit parts may hurt it.

  4. bolaji ojo
    October 31, 2012

    NASA is equally impacted by counterfeiting and must have seen evidence of fake parts in its supply chain before getting involved. In the case of the space agency, this is even more pressing because it needs components that the original maker may not produce anymore, meaning it must rely more on the broker market, the sector that's been the source of a major percentage of counterfeit parts.

  5. Taimoor Zubar
    October 31, 2012

    “In the case of the space agency, this is even more pressing because it needs components that the original maker may not produce anymore, meaning it must rely more on the broker market, the sector that's been the source of a major percentage of counterfeit parts.”

    @Bolaji: Don't companies normally enter into an agreement with the equipment manufacturers to also provide the spare parts for a long period of time (usually 10 to 20 years)? I've seen that happening in the military quite commonly.

  6. bolaji ojo
    October 31, 2012

    Taimoorz, Yes, they do but think of all the components that go into a space vehicle, for instance, and it's quite clear NASA cannot possibly have that type of agreement with the suppliers of all parts. Some will be bought from other sources.

  7. GraniteIC
    October 31, 2012

     It's great to see NASA and Military Contractors get involved. I agree with the previous comments NASA and Military contractors have been receiving Counterfeit parts for years. 

    Why haven't they been reporting the companies who sell the counterfeits? 

    Why are the GIDEP reports nearly non-existent?

    We see hundreds of parts reported anonymously every month and by all accounts the problem is growing.

    Why anyone is surprised that the problem continues to get worst month after month year after year is beyond me. 

    When NASA, Military and Commercial manufactures protect the companies selling counterfeits. These companies have no fear of selling counterfeits. They have no fear of the law. They know they can ship recycled e-waste that has been cleaned up and re-graded as new. They know the parts will go undetected for years. The small percentage that gets detected is polity referred to as an escape and a mistake. The supplier is never reported and continues to retain their “Trusted Supplier” status. 

    The P/N gets anonymously reported so people can pretend that they are doing the right thing. The counterfeiting epidemic is only going to continue to grow year after year because the manufacturing community is protecting the suppliers of counterfeits and substandard material. 

    The number of “High Risk” Suppliers continues to grow because there are no consequences. What is the down side to shipping counterfeits? Occasionally producing a corrective action? The Manufacturing community refuses to report Suppliers of Counterfeit and Substandard material. As long as this remains the status quo expect to see this epidemic continue to grow. For every 1 counterfeit detected 100 go undetected. This is why there are so many counterfeiters and e-waste flippers it's profitable and there are no consequences.  

  8. bolaji ojo
    October 31, 2012

    You raised valid points. I don't think there's a conspiracy to not identify the sellers of fake parts. Often, there's a great deal of embarrassment because companies do not want anyone to know counterfeits were found in their inventory. However, as you rightly said, this is not solving the problem. We need to move beyond passive “seize and destroy” to actually locating the source of the problem and asking them to account for how the fake parts got into the channel.

  9. bolaji ojo
    October 31, 2012

    Granite IC, In this case, IHS was reporting numbers provided by the government rather than what it received from ERAI or other industry organizations. It may be time for the industry and government to become even more proactive. I don't personally like the idea of the government just transferring the onus of proving the parts are genuine to companies alone. There also has to be tough consequences for the companies found to be selling or receiving fake parts that should have been discovered through the simplest of tests.

  10. Daniel
    November 1, 2012

    Bolaji, why such counterfeit companies are involving in supplier source? Before accepting any component for space and defense applications, they used to do ‘n’ number of tests to eliminate counterfeit components. Moreover such applications need high grade (Space/Military) components, which may not be possible with most of the local companies. If such things are happening means obliviously there will be some involvement from the respective authorities too.

  11. GraniteIC
    November 1, 2012

    Bolaji If IHS was reporting numbers provided by the government then that is public information. I would like to know the name of that government report. 

    It doesn't change any of my previous comments. The GIDEP's are nearly non-existent while anonymous P/N reports continue to grow monthly. The current system enables the counterfeiter's and e-waste flippers. It does nothing to discourage this illegal activity. 

    This reminds me of Lance Armstrong who never tested positive. These so called “Trusted Supplier” have no GIDEPs or reports against them. They are the high profile companies on all the approved vendor lists with perfectly pristine records. If that's true and their processes are so perfect then why is anyone upset about Counterfeit and Substandard Material? 

    Companies are upset because they have been flooded with e-waste Counterfeit and Substandard Material for years and they protect their suppliers by not reporting. You say, “There's no conspiracy to not identify the sellers of fake parts.” 

    I agree with you that there is no conspiracy but to continue to use the same suppliers over and over again while protecting these suppliers to avoid embarrassment. Is the reason why Counterfeit and Substandard Material is so profitable. These Suppliers know that very few will get detected by the End User Manufacture because Counterfeit and Substandard Material works initially. Often its months or years after the transaction the issues are discovered if ever. Then there is no reporting. Why should these Suppliers stop? They are making millions, they will never be reported and never suffer any consequences. 

    If they are ever called to account for the incident it usually a significant time after the transaction where proving liability becomes a challenge so the only corrective action is an anonymous report of the P/N. 

    Reporting makes good companies better. It also stops bad companies in their tracks. 

    When a Counterfeit or Substandard part is identified then all tractability and chain of custody documents need to be provided. If the part traces back to the OCM, Authorized Franchise or verifiable OEM excess then forgiveness and process improvement is fair and reasonable. This is a very small percentage less then 1% 

    When the part leads back to a dead end of the e-waste junk piles then the entire chain of custody need to be reported they are engaging in e-waste flipping and that needs to be reported. This is the case in 99% of all the true Counterfeit and Substandard Material. 

    It's time for NASA, Military, Medical and Commercial manufacture to bite the bullet once and for all and report everything. Suffer the 6 months of embarrassment and move on. Protecting the Suppliers is why we have had a decade of counterfeits. In 6 months the problem is solved with 100% reporting.

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