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Xilinx/Flextronics Suit Shines Light on the Gray Market

Information about how the gray market works has always been murky. Industry people say it's the unauthorized sale of components. But who exactly is doing that selling? And who is doing the buying? Well, that's what makes it gray. It sounds like every link in the supply chain contributes to the gray market at some point, in some way, including OEMs, contract manufacturers, independent distributors, and even authorized distributors.

Now Xilinx is shining a spotlight on the inner workings of the gray market. In December, it sued Flextronics International, accusing the contract manufacturer of “fraudulent and unfair business practices.” The complaint, filed in the Santa Clara Superior Court of California, says Flextronics misrepresents whom it was purchasing Xilinx parts for. Specifically, Flextronics falsely claims to be buying for a preferred Xilinx customer, meaning one that Xilinx sells to at a lower price based on the high volumes of chips the customer buys each year, the complaint said. The suit also claims Flextronics over-orders components for preferred customers. Then Flextronics sells those parts to a different company at a higher price and pockets the difference, making “large, wrongful profits at Xilinx's expense,” the complaint read.

Flextronics wouldn't comment on the suit, but a spokesperson sent a statement saying it is “committed to complying with all the laws and regulations in every jurisdiction where we operate, [and] deeply committed to operating with the highest standards of ethics and integrity.”

The suit also charges Flextronics purchases gray market and counterfeit Xilinx devices from unauthorized distributors and resells them to Xilinx customers. In addition, Xilinx accuses Flextronics of making unauthorized sales of Xilinx chips to “unknown purchasers in Asia” without obtaining export licenses, a violation of US export control laws and possibly creating a threat to US national security. (Xilinx chips are used in advanced aerospace and defense systems.)

The examples Xilinx gives of how it discovered the alleged fraudulent activity reveal how the gray market works. Last June, it noticed large discrepancies between sales forecasts and consumption levels for two customers, Airvana Network Solutions and Checkpoint Systems, and so started analyzing Flextronics' purchasing history. It found that Flextronics had purchased about 60,000 more Xilinx parts than indicated by the sales forecast of Airvana, which was a preferred customer and thus got a price of $7. Meanwhile, Xilinx confirmed that Checkpoint — which was not a preferred customer and thus paid $11.50 for the same part — had about 40,000 more Xilinx parts in stock than its order history indicated. When asked, Checkpoint confirmed it had purchased the additional parts from Flextronics. Tellingly, Flextronics had previously asked Xilinx for a price quote on an order for 40,000 of these parts for Checkpoint, but had never placed the order, the complaint said.

A second example, however, is less convincing. Flextronics notified Xilinx when a part purchased for Ericsson failed Flextronics' quality testing. When the part number on the failed part didn't match with the parts Xilinx sent to the distributor (Arrow Electronics), Xilinx investigated further.

Xilinx then tested the part itself and found it to be a lower-quality Xilinx part that had been relabeled as high performance. The complaint says that Xilinx confirmed that Arrow had shipped the right parts to Flextronics, and so concludes that “it was at Flextronics that the device was switched with a defective and remarked chip in order to permit Flextronics to make a higher profit from selling to Ericsson. Flextronics then sold the original, authorized Xilinx chip to an unauthorized customer for an even more substantial profit.” A lot of that seems conjecture, without much evidence to back it up in the complaint.

Finally, the suit charges something that seems incredible: that Flextronics has designed its cost procurement system to make it impossible to trace the origin of parts. The contract manufacturer has eight to 10 unauthorized distributors that scour the gray market for low-performance Xilinx chips to switch for the higher-priced devices in customer products, the suit claims. Xilinx charges that Flextronics' procurement system masks these purchases and deliveries.

If this lawsuit goes to trial, even more of the machinations of the gray market might be revealed. I hope it does. Someone needs to turn on the lights in this dark area of the supply chain.

60 comments on “Xilinx/Flextronics Suit Shines Light on the Gray Market

  1. Nemos
    January 28, 2014

    I would like to ask, if the recycling or the reuse process of the electronic components inside or outside the supply chain can be characterized as gray as well?

  2. Hailey Lynne McKeefry
    January 28, 2014

    Hi Nemos, this sort of reuse falls solidy in the realm of counterfeiting in my opinion. There is no traceability for these components. You rarely know where they come from or how they've been handled. Even more than being gray market, I would put these in the realm of the lowest tier of unauthorized distribution.

  3. Hailey Lynne McKeefry
    January 28, 2014

    Hi Nemos, this sort of reuse falls solidy in the realm of counterfeiting in my opinion. There is no traceability for these components. You rarely know where they come from or how they've been handled. Even more than being gray market, I would put these in the realm of the lowest tier of unauthorized distribution.

  4. Eldredge
    January 28, 2014

    Xilinx accuses Flextronics of making unauthorized sales of Xilinx chips to “unknown purchasers in Asia” without obtaining export licenses,

     


    Export violations are a serious issue if it can be proven. It will be interesting to see what happens with this suit.

  5. Eldredge
    January 28, 2014

    @Hailey – Clearly, acquiring lower grade parts and remarking & selling them as higher grade constitutes counterfeiting, and is dangerous to those systems in the supply chaine that require the elevated performance levels. Military and industrial hardware are often designed to function in much harsher environments (heat, cold, vibration, shock, as some examples) than other systems may require. These higher grade components command higher prices becasue they are either designed or screened (or both) to meet more stringent requirements. Placing inferior components in these applications can cause the entire system to fail, and in some cases, place lives in jeopardy.

  6. Daniel
    January 28, 2014

    “Information about how the gray market works has always been murky. Industry people say it's the unauthorized sale of components. But who exactly is doing that selling? And who is doing the buying? Well, that's what makes it gray.”

    Tam, in my experience its by vendors. They used to buy large volume of items from OEMs at a better price and in retail they can sell at MRPs (Maximum Retail Prices). So the difference goes to vendors account as profit. That's common in industry and nobody an question; if customers are not satisfied with the vendors they can look for alternate source.

  7. Hailey Lynne McKeefry
    January 29, 2014

    @Eldredge, we'll be keeping an eye on this…I'm hoping to have a chat about it next month so stay tuned!

  8. Hailey Lynne McKeefry
    January 29, 2014

    @Eldredge, all you say is true. What's even harder is that counterfeiters are getting much sophisticated in their blacktopping and remarking methodologies. It's a game of leap frog where the good guys make the protectio better then the bad guys up their game and so on.

  9. Taimoor Zubar
    January 29, 2014

    “They used to buy large volume of items from OEMs at a better price and in retail they can sell at MRPs (Maximum Retail Prices). So the difference goes to vendors account as profit.”

    @Jacob: The situation gets worse when the original component is short in the market. Then these gray marketeers can even sell at a much higher price than the normal retail price and make even more money. That essentially turns the gray market into a black market.

  10. Hailey Lynne McKeefry
    January 29, 2014

    @Jacob, the real issue comes when manufacturers are forced outside the authorized supply chain to get the products they need because the components are at their end of life. If the product is still being made and supported (as often happens in defense contracts which may last a decade or more), then the manufacturer is forced to look for alternate sources of supply. Then it's up to them to carefully screen parts to make sure that they are getting what they pay for.

  11. Taimoor Zubar
    January 29, 2014

    “Placing inferior components in these applications can cause the entire system to fail, and in some cases, place lives in jeopardy.”

    @Eldredge: I agree. Particularly, these components might end up in military equipments such as tanks or airplanes or critical medical equipments. A failure in that case can be immensely devastating. No one, however, would be able to trace down the cause though.

  12. Taimoor Zubar
    January 29, 2014

    “Even more than being gray market, I would put these in the realm of the lowest tier of unauthorized distribution.”

    @Hailey: I think it's unfair to just blame the fake components manufacturers for this. The distributors who distribute these components and the retailers who sell them are equally to blame. Without their assistance, the manufacturers can only do so much.

  13. Hailey Lynne McKeefry
    January 29, 2014

    @TaimoorZ, i agree that the independant distributors do have a responsibility in this. Today, i would say that many aren't living up to that responsability either. I was speaking with the executive director of the Independant Distributors of Electronics Associatoin (IDEA) and she said that of the thousands of indpendants in the channel, there are only about 100 that would say had the types of practices in place that woudl really catch counterfeiting. Further, she said, there were only 40 that if she were an OEM she would choose to do business with. That's an indightment isn't it?

  14. cameron
    January 29, 2014

    “Tam, in my experience its by vendors. They used to buy large volume of items from OEMs at a better price and in retail they can sell at MRPs (Maximum Retail Prices). So the difference goes to vendors account as profit. That's common in industry and nobody an question; if customers are not satisfied with the vendors they can look for alternate source”

    I couldn't agree with you more on this. When we buy excess from OEM's we have everything tested unless there is tracibility back to the MFG. If the customers that are looking to pay what they paid 5 years ago for the same part, they can shop elsewhere.

  15. cameron
    January 29, 2014

    I believe this is just the tip of the iceberg since a lot of the “brokers” know that these large CM's have been playing this game for years. It's just a matter of time when the MFG's like Xilinx start to notice when Flextronics starts to send their parts to other countries.

    Do you think thay other MFG's other than Xilinx with start to investigate Flextronics? I bet they will. I also think they will look at some of the other large CM's companies too.

    Look, there are a lot of bad “brokers” in the world BUT this is one of the worst cases of balatantly doing whatever you can for profit and they are a CM!! I know a lot of people will be very upset if Flextronics just pays a fine or gets a slap on the wrist for what they did.

  16. Shaun
    January 29, 2014

    That's exactly why the DLA mandated the use of Signature DNA on electronic microcircuits purchased for military use. The company doing this is called Applied DNA and they use double strand plant DNA to mark products. It can not be compromised and each supplier will have their own mark allowing for tracibility. No mark no authenticity no purchase. These vendors are reluctant to secure the supply chain for obvious reasons explained in the article. The government had to force there hand here but I think the companies who are buying these items and getting taken advantage of will eventually demand a more secure supply chain. Articles like this help shed light onthe problem. http://www.adnas.com/

  17. Hailey Lynne McKeefry
    January 29, 2014

    @Cameron, Do you have a ballpark for what sort of premium the necessary testing and scrutiny might demand? I've heard a variety of figures from 100 percent of the component cost to exponentially more.

  18. Hailey Lynne McKeefry
    January 29, 2014

    @Cameron, if found guilty, what sort of penalty would be enough to make the industry sit up and take notice? Since this has been going on a long time without much attention, it would seem that it would take a huge shakeup to make it not worth the risk to reputation and finances.

  19. Hailey Lynne McKeefry
    January 29, 2014

    @Shaun, Signature DNA has come under a lot of fire for a variety of reasons from being not robust enough on a technical level (it can withstand something like thirty swabs) to the decision of the DLA to create a de facto monopoly with this move. My take is that DNA marking has some merit. The biggest concern i have is that it's going to take literally decades for something like this to be ubiquitious in the supply chain so that parts are traceable. Until then, what should the supply chain industry do to close the gap? No easy answers, of course, but i'd be interested in your thoughts.

  20. Eldredge
    January 29, 2014

    @cameron – I'm sure the Xilinx case will encourge others to take a closer look at their distriution numbers as well. But they may wait to take action based on hoe the Xilinx case progresses.

  21. Daniel
    January 29, 2014

    “The situation gets worse when the original component is short in the market. Then these gray marketeers can even sell at a much higher price than the normal retail price and make even more money. That essentially turns the gray market into a black market.”

    TaimoorZ, demand drives the market and pricing policy. So if there is some scarcity, obviously the vendor play around with various prices.

  22. Daniel
    January 29, 2014

    “the real issue comes when manufacturers are forced outside the authorized supply chain to get the products they need because the components are at their end of life. If the product is still being made and supported (as often happens in defense contracts which may last a decade or more), then the manufacturer is forced to look for alternate sources of supply”

    Hailey, any procurement other than from preferred vendors/partners can add risk to the ecco system. Some of the major risks are fluxuating prices, chances for counterfeit components etc. so it's always better and safe to procure through preferred vendors. If they found some difficulty in providing the necessary quality, allow them to procure through their own preferred sources. That's the better solution for companies; than directly venturing in to procurement through alternate sources.

  23. Daniel
    January 29, 2014

    “I couldn't agree with you more on this. When we buy excess from OEM's we have everything tested unless there is tracibility back to the MFG. If the customers that are looking to pay what they paid 5 years ago for the same part, they can shop elsewhere”

    Cameron, customers have always options to look for better prices. If he is not satisfied with a vendor in terms of price they can opt for the next vendor. There are no restrictions and at the same time vendors have the right to fix the price within the maximum allowed price. If they want to attract more customers, obliviously they have to be fix the price at reasonable rate.

  24. John McKay
    January 30, 2014

    Interesting change in definition. I was initially puzzled with this article, as I have been with many others referencing the Xilinx lawsuit against Flextronics. I have ardently repudiated these articles because of the recurring reference to “Grey Market”.  How does a contract manufacture buying product from an OCM, reselling to an OEM for profit, have anything to do with Independent distributors or the grey market? 

     

    It's common to hear the Independent channel referred to as “Grey market” I guess this is now a broader definition now that, at least in this article,  it pertains to a CM.

     

    That being said, since we now have multiple Franchised Distributors that own or have a vested interest in Independent distributors, I guess the distribution channel is officially “The Grey Market”

     

    My 2 cents this will never go to court. Xilinx is posturing to caution the rest of the industry not to sell their product. If they keep this up, CM's will be forced to raise the cost of manufacturing to their OEM's. I'm sure Xilinx margins are much higher than Flex so we'll see how this unfolds.

     

  25. Eldredge
    January 30, 2014

    @John – you are probably right about this never going to court. They have already made their point. Expoert violation accusations may be another matter.

  26. Taimoor Zubar
    January 30, 2014

    @Hailey: I'd consider it to be more alarming than just being indightment. I think it has majorly to do with the fact that there are no established practices amongst distributors that can help them detect counterfeiting. Not to mention the ones that are themselves involved in it.

  27. Taimoor Zubar
    January 30, 2014

    “..demand drives the market and pricing policy. So if there is some scarcity, obviously the vendor play around with various prices.”

    @Jacob: It's an offence to raise up the price in case of scarcity for normal products but it's not a serious offence. What makes it more serious is when the scarcity is artificially created for counterfiet products.

  28. Daniel
    January 30, 2014

    “It's an offence to raise up the price in case of scarcity for normal products but it's not a serious offence. What makes it more serious is when the scarcity is artificially created for counterfiet products.”

    TaimoorZ, how can we say it's an offence? They may have 'n' reasons to justify the price hike. If they intentionally limit the supply for price hike and lead to scarcity, then it's an offense.

  29. Hailey Lynne McKeefry
    January 31, 2014

    @John, thanks for weighing in. For my two cents, i'm wondering if there won't be an evolution of a greater stratification in the distributor market. In the past, we had authorized and independant. With the huge problem of counterfeiting, there are standards being developed around testing methodologies in the rest. This would be an opportunity for an independant distributor to distinguish itself from the pack by saying “We follow the following standards in testing and verification on the parts we sell.”  That way you have this new tier: certified distributors or compliant distributors if you will.

    Independant distributors play an important role in the electronics industry. The ideal that is put forth for always buying from an authorized source isn't realistic in some instances–when parts are EoLed and still needed by the OEM. That being the case, we should look for ways for manufacturers to quickly ascertain the best sources of supply.

    What do you think?

  30. owen
    February 2, 2014

    @Halley, seems to me the DLA has already done that for certain “high-risk” parts with their Qualified Testing Suppliers List (QTSL).

    http://www.landandmaritime.dla.mil/offices/sourcing_and_qualification/QTSL.aspx

    I suspect similar efforts, for other components will follow.

  31. MikeRR
    February 4, 2014

    We have the mechanism and process that make the supply chain transparent and risk free. Yet it is intersting how many customers ignore the risk or when faced with testing costs balk.

    As an Independant Distributor to top OEMs and CEMs, it is intersting to see the competing interests. The Customer wants lower cost and the Chip Manufactuter want to hold profits ( outside sales and reps need commissions ). The concept of Preferred Customer is abstract and not always strategic BUT the price difference can be several $100 per chip.

    CEMs are also trying to increase profits and by leveraging off discounted pricing and becoming a “distibutor” is a natural reaction to a profit opportunity.

    We help customers reduce costs and reduce lead times ( and when it's obsolete, we ensure CEMs can build and ship, which keeps the lights on ).

    My final thoughts are Work with good people and ensure quality processes are in place.

     

     

     

     

  32. ddeisz
    February 4, 2014

    Hailey,

    The original test program for complex product is only in the hands of the original component manufacturer or their authorized sources. Any testing (DLA's QSTL for example) is mostly a CYA move negotiated for lowest cost that will only catch the most obvious of counterfeit. Those test programs at those test houses don't use the original test program…..it's a test program made up by the test house. For simple products, this thought process and methodology can work. For complex product, it's a joke. Real testing has to include at-speed vectors across temp at a test house that has experience with a particular product family to have any hope of being a good test. What passes today at DLA for “testing” on complex product is laughable, mostly visual, negotiated to a minimum, and a checkmark in a box.

    Your comment about EOL justifying Independents is commonly used and incorrect for most product purchases. There are authorized post-EOL sources for most products (Lansdale, Rochester, e2V, Arrow, Avnet, etc….).

    Independant Distribution does have it's place…..anytime there is really no Authorized source for a product.

    Reliability cannot be “tested in” when the original component manufacturer or their authorized sources are the only ones who have the original test program for complex product. At best, a complex product procured through Independants and tested at a test house will give some confidence and questionable reliability. However, that product will not be the same Quality and Reliability as one procured through an Authorized source.

  33. ddeisz
    February 4, 2014

    Shaun,

    A vast majority of the semiconductor OCM's are not tagging product and won't tag product for DLA. What happens when e-waste tagged product comes back into the supply chain? Oh, the product is authentic all right. It's authentic, used, and less reliable product. Great. Authenticity for Semiconductors does not equal Reliability. Tagging products that can be damaged through handling does nothing to ensure long-term reliability…..only tells you who tagged the product. This panecea idea of everyone marking product with a sole-source supplier losing money every quarter should be raising more eyebrows than it has.

    Tagging product that aren't commonly damaged in handling has worked. Those companies need to stick to tagging copper wire and money.

    The DLA tagging story is very long and in no way can be construed as a success story. DLA FSC 5962 product purchasing has gone from 90% authorized to 90% independant purchases in a year since the mandate. Nobody can say this is the way to purchase anything if you want to avoid counterfeit.

  34. John McKay
    February 4, 2014

    @Hailey, I think you're correct! Though I also think this has already come to fruition (less OCM's validating their product). All of the large Independents and many of the smaller brokers have already begun implementing every available quality standard available. They have invested in inspection and test equipment, hired component engineers and outsourced third party testing…. etc. 

    What AS standard is next? We are now the industry of “Quality De jour”  I keep wondering who these customers are buying from to have so many fraudulent/substandard parts.

     

  35. Hailey Lynne McKeefry
    February 4, 2014

    Thanks for the link, owen. I appreciate it.

  36. Hailey Lynne McKeefry
    February 4, 2014

    @MikeRR, your points are well taken and well said. thanks for weighing in! It sounds like there isn't much wriggle room for the middle man (the independant distributor). Do you have a ballpark for how much effective testing might cost in terms of total cost of product? What sort of premium are customers generally wiling to put toward the problem?

  37. Hailey Lynne McKeefry
    February 4, 2014

    @ddeisz, thanks for walking me through this. It's disheartening when anti-counterfeiting measures are simply a check box. What do you think would have to happen to make anti-counterfeiting efforts move into mainstream effectiveness? xray? or some other technology?

    I know that, at least for military customers, DNA marking has some promise–but that's going to take time. Laser marking is also interesting–these of course don't get into spotting counterfeits, just making components easier to verify.

  38. ddeisz
    February 5, 2014

    Hailey,

    I think a lot of people are guilty of seeking the one visual-based technology that will validate Authenticity while ignoring Reliability. Authenticity validated by some visual means says nothing about Reliability. Establishing Reliability is hard and requires investment in real component testing across temperature/voltage with the original test program from the OCM. Anything less than that is less.

    Most test houses know this (especially the reputable ones like Integra for example), but they would lose business if they don't compete based on price and hence less thorough testing. Purchasing or Commodity management are not generally driven to establish Reliability, only Authenticity and price. There are plenty of test houses that will do just the ASxxxx visual testing standards and this appears to be enough for most procurement folks. Given the pressure to win the test house business, those test houses can only recommend to customers and then take the minimum checkbox testing business off the street. The reputable test houses will recommend more testing, but procurement rarely orders up more than the ASxxxx visual stuff because the other stuff costs without an easily quantifiable return. For a vast majority of the time, Procurement will take the cheap way out and only order up the minimum needed to check the box. 

    By far, the best way to combat counterfeit is to buy Authorized if available at all. No supply chain is totally clean, but the Authorized channel is by far the cleanest. Tagging technologies are Authenticity checks only if the original manufacturer tags the product. DLA is in the middle of the semiconductor supply chain (they buy through distribution) having Independents tag product for most of what they buy of FSC 5962 product. DNA tagging for DLA is attempting to fix their own broken internal supply chain of semiconductor product because they lose track of who they bought what from down the line at the depots. DNA tagging has not been accepted by a vast majority of the semiconductor OCM's and won't be. DNA tagging does not have promise for the semiconductor industry in general.

  39. Tam Harbert
    February 5, 2014

    Agreed! I think that is one of the most serious charges in the lawsuit.

  40. Tam Harbert
    February 5, 2014

    Would like to hear the collective wisdom on this: I've been told that OEMs often (or at least sometimes) will sell parts backed into the market if they don't use them all in the manufacture of their systems. So, if the OEM over-orders, then those parts go into the gray market. Is that true? Is that common?

  41. Shaun
    February 6, 2014

    Ddeisz,

    An e-waste prodcut is clearly tarnished when it is removed and reused. Not to mention it is not the chip the DLA is ordering! Couterfeiters are falsley labeling and refacing the chip they are mimicing, specifically these high quality chips used in defense systems. This is getting through the supply chain on that alone. This is a red flag for APDN's tagging system. The counterfeiters can't recycle without losing the DNA inergrity.

  42. ddeisz
    February 6, 2014

    Shaun,

    You are incorrect in so many ways. Not all counterfeits are resurfaced and remarked. In fact, they are authentic BUT USED product. Any tagging would still be there through an e-waste channel eventually. Authentic product does not guarantee Reliable product. Given where DLA is in the supply chain (buying through Distribution and not direct from almost all semiconductor companies), the orignal component manufacturer is not marking the product in almost every case of their FSC 5962 purchases. The best case for any tagging system is determining who tagged the product and nothing to do with Quality or Reliability. In the case of DLA, most of their purchases are through Independents who are tagging……after it has left the Authorized Distribution channel…..and not from any of the major semiconductor manufacturers directly.

  43. Shaun
    February 6, 2014

    I don't know how you can say this is not robust enough on a technical level. It is impossible to counterfeit! Most of the uproar you are hearing comes from these shady suppliers or Applied DNA's competition.

    In response to the DLA crating a monopoly I don't agee. The only reason why DNA marking is being used is because it is the only system that can witstand the tests the DLA required. All companies were allowed to bring their product to the forefront but they all failed trials. Is being the best tagging system a reason not to use it? The DLA has already said they are still looking for other ways to spot counterfeits but until something better comes along they are going with the gold standard.

    For the DLA this will not take decades to be realized. They simply won't buy any products unless they are marked. Also taking time is a poor reason to not secure the supply chain.

    Other companies are taking the initiative to secure their supply chain on their own which is how this system will be adopted. Just last month Dawson Wool and Supima Cotton started marking their products. They will have a secure supply chain.

  44. Shaun
    February 6, 2014

    Show me your proof that all of these companies are selling unmarked products to the DLA in 'all most every case'. NO SHOT. What's the point of a mandate? Why would anyone be outraged if they don't need to oblige?

    And for you to suggest that these Chinese counterfeiters and sifting through cheap micro chips trying to find high quality 'used' ones the DLA requries is laughable. 

  45. ddeisz
    February 6, 2014

    Shaun,

    You don't get it. DNA tagging is an elegant technology with the actual DNA mix by Applied DNA mathmatically impossible to crack in any reasonable time or effort. This isn't about the technology at all. I am talking about the application of tagging technology to the semiconductor market. I didn't say DLA was creating a monopoly. I said DLA chose a sole-source penny stock start-up company who was/is losing money every quarter for their partner. Those are facts. You are clearly an advocate for Applied DNA which puts you as a stock holder, an employee, or working for DLA. You are clearly not employeed by a semiconductor company.

    Tagging technologies are more effective at securing supply chains where the product cannot be damaged by casual handling and tagged by the original manufacturer. Coming in to the middle of the supply chain in the semiconductor market makes no sense for the application of this technology. Your examples of wool and cotton….followed by copper and money, are good examples. Stick to pumping DNA tagging for those markets. This is an electronics related blog.

  46. owen
    February 6, 2014

    @ddeisz, Personal attacks aside, and getting back to Tams close “Someone needs to turn on the lights in this dark area of the supply chain.” I believe, while not perfect now, DNA marking might just be a step in the right direction.

    A Updated FAQ on the subject, released 1/27/14, prepared by the DLA, is available here:

    http://www.dla.mil/informationoperations/sirc/Pages/default.aspx

     

  47. ddeisz
    February 6, 2014

    Owen,

    I think Tam's intent was to show a light on supply chain members and how parts are bought/sold, not talk about a tagging methodology or anit-counterfeit measures. The pro-DNA camp came out to play and I felt the need to clarify. Hats off to Applied DNA for having their advocates and being very good at marketing. What I'm not going to do is stand by and let the conversation go that way without further educating the audience. Authenticity is not Quality or Reliability. Purchasing 90% of your semiconductor product through Independents like DLA is doing is wrong. There is no justification for what they are doing when it comes to buying semiconductor product for our warfighter.

  48. Shaun
    February 6, 2014

    Ddeisz,

    You keep talking about improper handling. How do you expect anyone to stop that?!?! That is not the point. The point is you CAN stop these counterfeiters from entering the supply chain which is what the DLA is doing. This will also work for suppliers trying to sell microchips that do not come from where they say they are sourced which is the point of the article.

    “Parts recyclers in southern China are making a business out of the millions of tons of electronic garbage that are offloaded from the West to the East every year. Significant numbers make money by stripping out old microchips using crude methods and reselling them. That seems at face value to be harmless, even good business sense.

    But many factories are repainting and repackaging old components, and then illegally selling them as new or high-quality components that can endure the stresses of a military environment.”

    http://www.ibtimes.com/why-pentagon-finding-counterfeit-chinese-electronics-critical-military-equipment-701214

  49. Shaun
    February 6, 2014

    Actually Tam sheds light on how they are bought/sold AND how the are relabeled as higher quality parts. Maybe you should read it again. For the last time Signature DNA can help with both of these issues. Good day Sir.

  50. ddeisz
    February 6, 2014

    Shaun,

    Did you really ask “How do you expect anyone to stop that?” when it comes to improper handling of semiconductors? Sorry you don't understand semiconductors.

    The reputable Independent distributors understand improper semiconductor handling issues very well.

    Fully Authorized Channel purchasing as a priority is the answer to your question.

    Tagging product from the middle of the supply chain (not the original manufacturer most of the time) on a product that suffers from mishandling is not the solution that guarantees the most Reliable and highest Quality component. Authenticity is not Reliability or Quality when it comes to semiconductors. Buying 90% of your semiconductor product through Independent Distribution is not the best for our warfighter when the same product is available through Authorized Channels without tagging.

    Good day sir? Really?

  51. Hailey Lynne McKeefry
    February 12, 2014

    @MikeRR, I think you've hit the nail on the head, that relationships are a key piece of the equation.  What, though, should customers be doing at the outset (before those relationships are being built up and maintained) to choose the right partners? Do you have any advice about pitfalls or hallmarks of a good disty partner?

  52. Hailey Lynne McKeefry
    February 12, 2014

    @ddeisz, you said: “DNA tagging does not have promise for the semiconductor industry in general.”

    Can you say more about why you believe that is true? Is it that there are too many products already in the supply chain that aren't marked? Is it a distrust of the technology? I'd be interested in where you see the flaws.

  53. Hailey Lynne McKeefry
    February 12, 2014

    @Owen, thanks for the link. I hadn't seen this.

  54. ddeisz
    February 13, 2014

    Hailey,

    The acceptance by the semiconductor OCM's is virtually non-existant for DNA marking. The mandated technology is ink-based when the industry is primarily laser based. The product validation is not currently done in the field and certainly wasn't when the mandate occured. The end-markets for the vast majority of revenue for the semiconductor industry do not have nearly the counterfeit issues that long-life system houses have. The financial incentive on commercial semiconductor product volumes is simply not there for DNA tagging and won't be there in long-term system markets. Remember, DLA is less than $20M/year of FSC 5962 product purchases. For perspective, $20M/year is a failed SINGLE product or going EOL for most semiconductor companies.

    When you couple these reasons with the fact that DLA does not purchase product through Authorized Sources as a priority when product is available (never has even though the NDAA says you should), there is really no reason it will be accepted by a vast majority of the semiconductor market OCM's. They aren't buying from our Authorized Sources as a priority. Their trusted sources are mostly Independents while their FSC 5962 product purchases are more than 65% active product and could be bought through Authorized Sources….and were prior to the mandate.

    DLA mandated their solution with none of their suppliers involved without addressing their purchasing practices to favor Authorized First when available. They took the “we mandate, you must comply” tact of old instead of proposed alternatives by the SIA. The Independent dealers saw a government-funded way to jump into the void and supply product….now supplying 90% of the FSC 5962 transactions by DLA. Good for them, but is that the best we should be doing for the warfighter? 

  55. Hailey Lynne McKeefry
    February 15, 2014

    @ddeiz, thanks for your answer… I agree that there are a lot of stumbling blocks to this technology adoption. It has been slower than probably the DLA would like. According to the DLA, as of December 31, 2013, there were more than 500,000 DNA marked parts in circulation but that's a very small percentage of all parts. And at the end of the year 27 companies had signed with Applied DNA to use the DNA marking technology. 15 of those were distributors. There's a long way to go–i know Applied DNA is targetting a variety of markets and one of the benefits of the technology is that it can be used across a wide variety of products. For the military folks, we are buying all sorts of stuff, i'm sure that's a positive.

     

     

  56. Hailey Lynne McKeefry
    February 15, 2014

    @ddeiz,My understanding is that the DLA made efforts to get input from the industry with little response–which isn't suprising since there's a lot going on and people are incredibly busy. In terms of alternatives, SignaKey has a system that uses laser etching (I'd be interested to know what you think of that system as well). The concerns i've heard on that front is that the laser will cut deep enough to damage the die. I did talk with Richard McDermott the CEO at SignaKey and he told me that thier measurements are very precise and based on the various designs of the chips.

  57. owen
    February 15, 2014

    @Halley, you might find a discussion with an Applied DNA Science rep worthy as well. By the way, they do offer plasma/laser deposition/etching. It's mostly for use by larger OCMs, but if it fits the flow it's available.  

    Here's another link, it's a bit dated (April 2013) but you may find it interesting. Prepared by APDN and made available by DLA:

    http://www.landandmaritime.dla.mil/downloads/psmc/Apr13/DNAMarking.pdf

     

  58. owen
    February 18, 2014

    @Halley, Given the course of these comments I thought you may be interested in an article by Robert Metzger just published by Bloomberg/BNA.

    Mr. Metzger is recognized as among the nation's leading experts in emerging issues related to supply chain risk management  and avoidance of counterfeit electronic parts. He is Vice-Chair of the Supply Chain Subcommittee of TechAmerica.

    “Some in industry object to greater government intercession in supply chain and cyber risk management , citing an absence of standards and concerns about industrial base impact and adverse effects upon traditional notions of ''open competition.'' Even though many such concerns have merit, industry  should focus its attention on preparation for new rules and regulations, rather than objection and resistance. The national interest in achieving greater supply chain and cyber security is so compelling that, in the author's estimation, the federal government will act irrespective of industry's doubts. The pace of implementation of supply chain and cyber actions is likely to accelerate and the breadth of such actions likely will encompass most or all federal procurement  functions. Companies that ignore or resist these trends do so at their business peril.”

    http://www.rjo.com/PDF/FCR_04182014_RSM.pdf

  59. Eldredge
    February 19, 2014

    The national interest in achieving greater supply chain and cyber security is so compelling that, in the author's estimation, the federal government will act irrespective of industry's doubts.


    I think that statement pretty well sums up the realisitc situation. There is too much at stake for the federal government to stay at arms length, no matter how much it distains adding more regulations. 🙂

     

  60. Hailey Lynne McKeefry
    February 19, 2014

    @Owen, very interesting quote… and article. Thanks for the lik.

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