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Pay No Attention to That Man Behind the Curtain…

How safe is the open market these days? US Customs' seizures of counterfeit products are skyrocketing, thanks to enhanced enforcement on our nation’s borders and increased industry awareness. However, the fact that seizures are up is just the tip of the iceberg: It is, at the same time, a reflection on a growing problem within our industry.

Many brokers would like buyers, in the words of the Wizard of Oz, to “pay no attention to that man behind the curtain.” In fact, customers should be paying more attention than ever. Chinese suppliers have set up networks of local sales offices in Canada, California, Florida, the UK, and Poland, just to name a few — and they're offering “new and unused” parts, which, unfortunately, don't always have the same level of quality as US semiconductor professionals expect. Far too many brokers are offering products that are not traceable — products for which they in fact do not know the source, nor do they have the tools to properly inspect.

The greed of many brokers is, unfortunately, contributing to the counterfeiting problem. Time and again we see brokers offering “new and unused” parts, which they claim are from “OEM stock,” only to have them confirm a “5- to 7-day lead-time,” or to read about a “30-day warranty” limitation in the fine print of the order confirmation or invoice. Both of these are warning signs that the seller has no provenance on the parts they are selling, and you may not be getting what you expect. In the spirit of fair play, it is a cheap shot to try and hide such limited warranty details in the fine print of an invoice; brokers know full well that many of these documents go straight to the accounting team for payment and are not seen by the buyers.

In times of allocation, or, worse yet, in the wake of a natural disaster like the one that has affected the Japanese supply chain, many companies do in fact need to access the open market in order to meet production schedules and customer commitments. When a franchised distributor lets a customer down, as will happen from time to time, buyers need to take matters into their own hands in order to keep the production line running.

The open market is a wonderful thing, driven by the classic rules of supply and demand, but it can also be a demon. The question is, of course, how to access this market segment safely and to ensure that the products purchased are going to meet expectations.

Some OEMs have created their own industry groups, such as EXACT in Switzerland, in which purchasing managers exchange information about market conditions and product allocations. Other approaches, such as Virtual Chip Exchange, have brought together thousands of OEM customers from around the world to trade in their own private parts exchange — no brokers allowed. Some buyers try to rely solely on the prior success of their “approved broker” list, while still others prefer a full transparency approach — listing hundreds of China-based brokers on their Websites — caveat emptor (let the buyer beware).

In my opinion, the playing field is no longer level. There are far too many “behind-the-curtain” players who provide shady products into the US supply chain; even the most well-established brokers can become victims. What is needed is a commonsense approach to the problem, and that is something that each and every one of us can contribute to. At the end of the day, a $20 “Rolex” is never the real thing.

15 comments on “Pay No Attention to That Man Behind the Curtain…

  1. Houngbo_Hospice
    July 25, 2011

     “What is needed is a commonsense approach to the problem, and that is something that each and every one of us can contribute to.”

    Changing information  regarding market conditions and product allocations.  could be a best way to fight against counterfeit products supply. But in case of emergency, it is sometimes difficult to verify every information about the supplier as enterprises should “keep the production line running” without delay. And in the case there is a risk factor involved. What do you suggest in such situation?

  2. mario8a
    July 25, 2011

    Hello

    Very interesting article, however I'll like to understand better what do you mean by enhanced enforcement in the borders and what do you mean by industry awareness, do you mean this is a gowing problem for the not open market industry?

    Regards

  3. jbond
    July 26, 2011

    I completely agree with your comment that it is no longer a level playing field. It is a shame that reputable suppliers are getting stuck by some of these counterfeits. There needs to be a better system in place that allows companies to have other choices when their preferred supplier is out of components, and not worry about getting stuck with counterfeit parts. It is great to hear that Customs is catching a lot of counterfeits at the border. I'm sure this is attributed to both the increase in security and the increase in trying to bring more into the country. If Customs has stopped this many shipments from entering, it makes you wonder how many more actually got through.

  4. Eldredge
    July 26, 2011

    It seems as though any broker who valued their reputation would (and probably does) refrain from these practices. Is there any type of rating system in place for brokers, or anyone else who engages in finding sources of electronic devices?

  5. Michael Wood
    July 26, 2011

    Dear Hospice_Houngbo,

     

     

    It was Sir Francis Bacon who penned the lines “knowledge is power”… and how right he was! If we could only know about supply-chain changes in a timely manner, most shortage situations could be avoided – and the resulting price explosions which accompany them.

     

    However with more than 100 Million different electronic components available on the market, the complexity of the issue has overtaken the industry’s ability to communicate changes in a timely fashion – it is just not possible to get the information into the hands of every buyer on time.

     

    This complexity affects the entire supply chain. As another reader pointed out, there will always be risks when trying to “keep the production line running”. It is important to understand that risk is not limited to open market suppliers; rather it is inherent in the supply chain. I know of several franchised distributors who offer customer buy-back and/or kitting programs – perhaps your own distribution partner even offers this service. Although low, both of these customer service programs expose the distributor to the risk of receiving counterfeit parts into their supply chain. In addition, I have personally sold open market parts directly to a major chip manufacturer – as such, I know first-hand that everyone at some point must weigh the risk of purchasing outside the “normal” distribution channels versus the cost of a line-down situation or missed delivery schedule. More often than not, the cost outweighs the risk.

     

    If strict diligence is applied when purchasing, the risk of an open market purchase can be greatly reduced. Applying good common-sense and understanding your supplier’s supply chain can greatly reduce the risk in any electronic component transaction. Don’t be tempted by low-price offers for highly allocated parts… you always get what you pay for!

     

    If the best defence is a good offense, then reducing risk starts with a careful supplier selection process coupled with a policy of full-transparency on every transaction. If your current open market partner is not telling you where the parts are from, then “caveat emptor”… let the buyer beware! 

     

    Best regards,

    Mike

     

  6. Michael Wood
    July 26, 2011

    Immigration and Customs Enforcement is the primary investigative arm of the U.S. Department of Homeland Security (DHS). In addition to the resources applied directly to border control, which includes protecting U.S. industry from counterfeit components, there are several support groups set up to improve public awareness of the issue. These groups can provide detailed information on the problem, and include the Global Intellectual Property Center, and the Coalition Against Counterfeiting and Piracy (CACP) of which Virtual Chip Exchange was an early member and supporter. 

  7. Michael Wood
    July 26, 2011

    You ask if there is there anyone else who engages in finding sources of electronic devices? Well the answer is yes; Virtual Chip Exchange is an OEM-to-OEM Member driven website focused on the buying and selling of 100% traceable stock.

    NO BROKERS ALLOWED on the site, and every OEM e-signs an agreement that all stock is traceable. If you have not tied it out, it is free to us… just go to the site and sign up. TIME Magazine called the site “the planet's largest electronics B2B exchange”.

    To answer your other question, there are indeed industry groups and online sites which rate brokers, but frankly new companies sprout up faster than they can be rated! An easier approach might be to rely on firms which are based in the USA and which have been in business for many years.

     

  8. JADEN
    July 26, 2011

    The approach to counterfeiting problem is traceability to the source but it is not universally available.  Most counterfeit materials get into the supply stream through indirect means, the direct line to the source could have been the best.

  9. Michael Wood
    July 26, 2011

    Right you are Jaden! However as the reader Hospice_Houngbo pointed out, that ideal is not always practical in our day to day fight to keep production lines running.

    The question becomes how to best manage the risk while still having access to the estimated $30 billion worth of product which is available via the open market each year. 

  10. Doug
    July 26, 2011

    When buying from other than your usual trusted sources “Let the buyer beware”.  It's best to just not go there.

    No matter how good the price or delivery if it looks too good to be true, it is.

    The cost of a line down is far less than a production run of product that is useless.

    As the commercial says, “Get the CARFAX”.

  11. Barbara Jorgensen
    July 26, 2011

    Transparency–that is, knowing who you are doing business with–should be part of any compnay's due diligence when choosing a sourcing partner. Buyers should be able to make informed decisions and have choice among suppliers. Unfortunately, so much of the open market exists because of panic buying–'I need this now or my line shuts down.' Mistakes are made on all sides–suppliers, resellers and customers–and substandard product enters the channel. Even when buying in the spot marekt–nonscheduled orders–buyers can find partners they can depend on.

  12. Anna Young
    July 26, 2011

    @ Doug you're absolutely right, no matter how tempting the price or delivery cost may appear, it is a matter of common sense approach, best buy  the product from a reliable source.

  13. Taimoor Zubar
    July 27, 2011

    I do agree that the open market is subject to quality issues, however, there are still plenty of cases when procuring from the open market becomes inevitable. In many cases there are shortages of products through regular suppliers and in order to meet customer demand, companies have to go to open market agents. To counter quality issues, companies can set up their own internal quality control process to check the parts before using them in production. This will cut down on the risk of producing substandard output and will ensure that the demand is met constantly.

  14. electronics862
    July 27, 2011

    It's a win win situation. Buyers should cautious about the marketing strategy that brokers following as they are shielded. When comes to the quality there is always a chance for degradation in open market. If buyers has a chance to market their products directly with out brokers there will be a good channel to get customer feedback in. 

  15. Tim Votapka
    July 29, 2011

    Good point re; inbound quality inspection and verification. The responsbility level for QC doesn't end for the customer simply because the purchase order was approved. Other industries know this all too well and have taken steps to safeguard their section of the supply chain.

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