d.c. counterfeit microelectronics working group - the enemy within

D.C. Counterfeit Microelectronics Working Group-The Enemy Within

Kristal SniderVice President, ERAI Inc.

[email protected]: 239-261-6268F: 239-261-9379

© 2012 ERAI Inc.

Why we are here

http://defense-update.com/20120603_counterfeit-electronics-in-dod-are-widespread-and-threaten-national-security.html

Training Outline

Why we are hereSupply Chain BasicsCounterfeit TimelineAllocation, Obsolescence & Opportunistic Procurement = OpportunityE-WastePortals of EntryVerification of Product-Counterfeit Identification MethodsSupplier SelectionMaterial ControlReportingCounterfeit StatisticsIndustry StandardsPending LegislationIndustry InitiativesEducation & NetworkingResources

© 2012 ERAI Inc.

Supply Chain Basics

© 2012 ERAI Inc.

Industry Terms

© 2012 ERAI Inc.

*ORIGINAL COMPONENT MANUFACTURER (OCM)

An organization that designs and/or engineers a part and is pursuing or has obtained the intellectual property rights to that part.

Notes:1. The part and/or its packaging are typically identified with the OCM’s trademark.2. OCMs may contract out manufacturing and/or distribution of their product.3. Different OCMs may supply product for the same application or to a common specification.

*AS5553 - Counterfeit Electronic Parts; Avoidance, Detection, Mitigation, and Disposition

http://www.ti.com/hdr_home

Industry Terms

© 2012 ERAI Inc.

*FRANCHISED DISTRIBUTOR

A distributor with which the OCM has a contractual agreement to buy, stock, re-package, sell and distribute its product lines. Franchised distributors normally offer the product for sale with full manufacturer flow-through warranty. Franchising contracts may include clauses that provide for the OCM's marketing and technical support inclusive of, but not limited to, failure analysis and corrective action, exclusivity of inventory, and competitive limiters.


Industry Terms

© 2012 ERAI Inc.

*ORIGINAL EQUIPMENT MANUFACTURER (OEM)

A company that manufactures products that it has designed from purchased components and sells those products under the company’s brand name.


Industry Terms

© 2012 ERAI Inc.

Contract manufacturer ("CM")

A manufacturer that contracts with a firm for components or products. It is a form of outsourcing.

Benefits•Cost Savings •Advanced Skills •Quality•Focus•Economies of Scale

Risks•Lack of Control •Relationships •Quality concerns •Intellectual Property Loss•Outsourcing Risks •Capacity Constraints

Industry Terms

© 2012 ERAI Inc.

*INDEPENDENT DISTRIBUTORA distributor that purchases new parts with the intention to sell and redistribute themback into the market. Purchased parts may be obtained from original equipment manufacturers (OEMs) or contract manufacturers (typically from excess inventories), or from other independent distributors. Re-sale of the purchased parts(re-distribution) may be to OEMs, contract manufacturers, or other independent distributors. Independent distributors do not have contractual agreements or obligations with OCMs.

*STOCKING DISTRIBUTORA type of independent distributor that stocks large inventories typically purchased fromoriginal equipment manufacturers (OEMs) and contract manufacturers. The handling, chain of custody, and environmental conditions for parts procured from stocking distributors are generally better known than for product bought and suppliedby broker distributors.

*BROKER DISTRIBUTORA type of independent distributor that works in a “Just in Time” (JIT) environment. Customers contact the broker distributor with requirements identifying the part number, quantity, target price, and date required. The broker distributor searches the industry and locates parts that meet the target price and other customer requirements.


Discuss

© 2012 ERAI Inc.

OCMOriginal Component Manufacturer

Franchise Distributora/k/a Authorized Distributor

OEMOriginal Equipment Manufacturer

CMContract Manufacturer

After Market Manufacturer

Independent Distributora/k/a Broker

Counterfeit Timeline

• 1986 – China’s quest began for admission to WTO

• 1993-1994 - Pilgrim Components

1.) Broker/Stocking Independent Distributor

2.) Buying, Selling

3.) Relationship driven business environment

• 1995 - The Internet was commercialized

March 1, 1995 – Yahoo was incorporated

© 2012 ERAI Inc.


• 1995 - Electronic Resellers Association Inc. (ERA)– How’s that for perfect timing?

1st Trade Association specifically for the Independent Distributor Community

Primary Objectives:– Information Sharing– Education

Most Common Complaint types:– Cancelled Purchase Orders– Past Due Invoices– NSF Checks

© 2012 ERAI Inc.


• 1998 – Google was incorporated as a privately held company The company's mission statement: “To organize the world's information and make it universally accessible and useful.”

• 1998 - Electronic Resellers Association International Inc. (ERAI)Name changed to reflect ERA had become an internationally recognized organization.

Google made the world a much smaller place

International trade became readily available for everyone; not just large corporations

© 2012 ERAI Inc.

Mission Accomplished!


November 9, 2000 – ERAI launches eraiESCROW

Two primary challenges for distributors

• Wire Fraud• New customers

© 2012 ERAI Inc.


November 2001 – China Admitted to the WTO

“A monumental change to the world trading system”

“An event of historic proportions for the world trading system” - Kofi Annan, UN Secretary General

"I believe that as this century unfolds and people look back on this day, they will conclude that in admitting China to the WTO we took a decisive step in strengthening the global economic trading system."

- Robert Zoellick, US Trade Representative

"Just like every member of the WTO, China will have to deliver on its commitments, and we will be watching this very carefully,"

-Pascal Lamy, EU trade commissioner

© 2012 ERAI Inc.


November 29, 2001 – ERAI receives1st nonconforming part complaint against a China based distributor

3A Century aka Gold Advanced aka JXJPart number: TCM3105DWDescription of the product nonconformance:

Parts arrived in Samsung tubes (ordered TI parts). Numerous mixed date codes arrived in a single tube. Solder splash present on part leads. There were 'wash marks' and smears on the upper surface of the chip.

Within a few months China distributors began refurbishing and remarking parts to have consistent date and lot codes in order to pass used parts off as new.

© 2012 ERAI Inc.


January 2002 – ERAI Launches High Risk / Suspect Counterfeit Part Database

April 19, 2002 -ERAI Industry Advisory Committee formed

We saw it coming….

• Ethical standards in the industry• Counterfeit/Substandard parts• ISO• ESD• ERAI Role now and in the future• Negative advertising campaigns launched by AGMA & NEDA

© 2012 ERAI Inc.


March 1, 2003 – IDEA – Public LaunchERAI Executive Conference, Las Vegas NV

Objectives:

1) Promote the independent distribution industry through a media advocacy campaign

2) Improve the quality of products and services through a quality certification program, educational seminars and conferences.

3) Promote the study, development, and implementation of techniques and methods designed to improve the business of independent distributors

© 2012 ERAI Inc.


January 2004 – ERAI travels to China to investigate

2004 - U.S. Chamber of Commerce's Global Intellectual Property Center, organized itself through a broad-based business coalition, the Coalition Against Counterfeiting and Piracy (CACP).

January 27, 2004 – Secretary of Defense releases Memo for Service Acquisition Executives

Subject: Encouraging Industry Participation in the Trusted Foundry Pilot Program

Back door threats realized….counterfeits not the only problem!

© 2012 ERAI Inc.


© 2012 ERAI Inc.

June 2006 SIA launches the Anti-Counterfeiting Task Force (SIA ACTF)


© 2012 ERAI Inc.

October 2006- IDEA releases IDEA-STD-1010-A-Acceptability of Electronic Components Distributed in the Open Market

Standard specifically written to identify nonconforming/suspect counterfeit parts

Counterfeits have a name and a face!

Significance of the IDEA-STD-1010-A

• Counterfeit is defined• Wide spread awareness• In-depth training for detection and avoidance• Minimum inspection criteria• Inspection check list• Documented examples of suspect counterfeit parts

Ignorance is not an excuse!

© 2012 ERAI Inc.


November 29, 2006 – Counterfeit Components Detection & Prevention Symposium hosted by Component Technology Institute a/k/a CTI(attended by Phil Zuluetta who later becomes SAE Aerospace G-19 Chairman.)

December 2006 – ERAI – 2nd trip- Investigation specific to the handling of OEM excess by Chinese based OEMs and CMs.

April 16, 2007 – ERAI Special Report Released– A Time For Change

© 2012 ERAI Inc.

A Time For Change Revealed

• The vast majority of product being sold in the China Open Market originates from e-waste.

• Unknown quantities of e-waste are exported from China to component buyers around the world.

• Nearly 75 million dollars in revenue is generated for the local Chinese Government in the city of Shantou alone.

• What incentive does the government have to control the import or export of this product?

• Much of the e-waste is remarked and counterfeited.

• Most of the distributors operating in and around Shenzhen have no experience in handling, storing or selling electronic components.

© 2012 ERAI Inc.

Estimated units of E-Waste in the US

© 2012 ERAI Inc.

The significance of theescalating volumes of e-waste:

• We need to control e-waste but doing so does not resolve the problem!

• Even if the US prevented the export of all of its e-waste China produces enough of its own to fuel this epidemic.

Counterfeits are here to stay!

Significance of A Time For Change

Where’s the excess?

© 2012 ERAI Inc.

Argument:

I have to do business with Chinese Brokers…manufacturing has shifted to this region…along with it OEM excess.

Reality:

OEMs/CMs in China reportedly do not do business with a company/distributor that does not have a current Chinese VAT License.

ERAI’s investigation revealed the majority of the product being offered in Shenzhen is more likely to have originated from e-wasteThan from legitimate OEM surplus.

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Significance of A Time For Change

Where’s the excess?

© 2012 ERAI Inc.

Portals of Entry

• Low barrier of entry; “Quick & Easy to Apply”

• Anyone can participate in the open market

• Rapid access to millions of parts• Minimal membership

requirements• Quick & easy access to a large

audience of buyers• Burn customer and re-register

using a new name• If you choose to participate you

assume high risks

© 2012 ERAI Inc.

The open market is inherently risky “caveat emptor”


May 2007 – Electronic Resellers Association International Inc. to ERAI Inc. (the term “resellers” removed as ERAI moves to share services with the entire supply chain. Membership no longer restricted to distributors only. Database opened to OEMs, CMs, US Government Agencies, Enforcement, etc.

June 2007 - the U.S. Department of the Navy, Naval Air Systems Command (NAVAIR) asked the Bureau of Industry and Security’s (BIS) Office of Technology Evaluation (OTE) to conduct a defense industrial base assessment of counterfeit electronics. NAVAIR suspected that an increasing number of counterfeit/defective electronics were infiltrating the DoD supply chain and affecting weapon system reliability.

September 2007 - SAE G-19 Committee Charter Counterfeit Electronic Components Committee

The committee was tasked with developing a document that would standardize requirements, practices and methods related to

counterfeit parts risk mitigation.

© 2012 ERAI Inc.


September 2007 - The L-3 Counterfeit Parts Team was established to define and provide guidelines for managing and controlling the risks associated with Counterfeit Parts

OEMS ramping up awareness and avoidance efforts

Late 2007 - U.S. and European customs launched “Operation Infrastructure” resulting in the seizure of over 360,000 counterfeit ICs that were destined for U.S. and European markets.

Enforcement is engaged

© 2012 ERAI Inc.

April 2008- AIA forms the Counterfeit Parts Integrated

Project Team

AIA Counterfeit Parts IPT Plan of ActionTo address the challenges of the today’s supply chain environment, AIA has established

a Counterfeit Parts Integrated Project Team (IPT). The AIA Counterfeit Parts IPT is working in concert with government agencies, original manufacturers, industry associations and independent distributors.

Objectives of the IPT are to:1. Engage the U.S. government in discussions concerning acquisition and procurement

policies to avoid introducing counterfeit parts and materials into aerospace, space and defense products

2. Create a set of standards for government and industry to ensure that the risk of introducing counterfeit parts and materials is minimized, is consistent with risks accepted by the customer and implementable without sacrificing the benefits of buying commercially available products

3. Engage the U.S. government in discussions concerning enforcement of policies to avoid the introduction of counterfeit products into the U.S

© 2012 ERAI Inc.


October 2, 2008 - Dangerous Fakes: How counterfeit, defective computer components from China are getting into U.S. warplanes and ships

Significance = National | International Media Coverage

© 2012 ERAI Inc.


April 2009 –

AS5553 released

© 2012 ERAI Inc.

August 2009 – AS5553 adopted by the DoD


October 9, 2009 – Mustafa Aljaff – MVP Micro /Indictment

November 2009 – Counterfeit Electronics Survey initiated by the U.S. Dept. of Commerce, the Bureau of Industry and Security (BIS), and the Office of Technology Evaluation (OTE).

© 2012 ERAI Inc.


January 2010 - Defense Industrial Base Assessment

Counterfeit Electronics report was released bythe U.S. Dept. of Commerce, the Bureau ofIndustry and Security (BIS), and the Office ofTechnology Evaluation (OTE).

Purpose: The purpose of this study is to provide statistics on the extent of the infiltration of counterfeits into U.S. defense and industrial supply chains, to provide an understanding of industry and government practices that contribute to the problem, and to identify best practices and recommendations for handling and preventing counterfeit electronics.

The veil was fully lifted

© 2012 ERAI Inc.


© 2012 ERAI Inc.

March 2010- GAO Study: DOD Should Leverage Ongoing Initiatives in Developing Its Program to Mitigate Risk of Counterfeit Parts

April 2010- GAO Study: Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods

September 14, 2010 - Shannon Wren and Stephanie McCloskey (VisionTech) Press Release / Indictment

December 2010 – Supply & Demand Chain Executive Special Edition- Supply Chain RISK

March 20, 2011: AIA releases white paper titled: Counterfeit Parts: Increasing Awareness and Developing Countermeasures


March 2011 - Senators Levin & McCain announced a Senate Armed Service Committee (SASC) investigation into counterfeit electronic parts and the risks they pose to the Department of Defense (DoD) supply chain.

April 2011- IDEA-1010-B Released

June 2011- Senator Whitehouse, proposed his own counterfeit bill, the Combating Military Counterfeits Act of 2011, to crack down on criminals who traffic in counterfeit military goods/services.

June 16th 2011- CNN broadcasthttp://www.cnn.com/video/#/video/bestoftv/2011/06/16/exp.nr.seg.fake.military.parts.cnn?iref=allsearch

• Counterfeit parts impact 40% of Pentagon’s Supply Chain according to U.S. Commerce Dept study

• Senator Brown (OH) recommends DOD cancel supplier contracts when counterfeits are found in their supply chain © 2012 ERAI Inc.


July 2011- Supply & Demand Chain Executive Special Edition- The Counterfeit Crisis

November 8, 2011- the SASC held a hearing with DoD contractors, industry associations and others in Washington, DC after which Senator Levin promised a swift government response. It was revealed that 1,800 incidents and over 1M parts have been reported.

November 29, 2011- The Whitehouse measure was amended to the McCain / Levin bill and then unanimously approved by the Senate. It moved to the House for discussion.

December 1, 2011- Senate passage of the Defense Authorization Act for Fiscal Year 2012

December 20, 2011 - ARP6178 - Fraudulent/Counterfeit Electronic Parts; Tool for Risk Assessment of Distributors has been published.

© 2012 ERAI Inc.

December 31, 2011 – Measure signed by President Obama2012 National Defense Authorization Act (Sec. 818)Detection and Avoidance of Counterfeit Electronic Parts

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© 2012 ERAI Inc.

Amendment Timeline

46

Department of Defense

Contractor

Day 0 Day 180 Day 270

Secretary of Defense shall revise the Department of Defense Supplement to the Federal Acquisition Regulation to address the detection and avoidance of counterfeit electronic parts

Secretary of Defense shall implement a program for the improvement of contractor systems for the detection and avoidance of counterfeit electronic parts and suspect counterfeit electronic parts

The Secretary of Defense shall take steps to address shortcomings in Department of Defense systems for the detection and avoidance of counterfeit electronic parts and suspect counterfeit electronic parts

Promulgate the guidelines, policy statements, or amendments provided for in this Act

All contractors, subcontractors and Department of Defense employees must provide a written report on suspect or detected counterfeit parts to the Inspector General of the Department of Defense within 30 DAYS

270 Days

270 Days

180 Days

© 2012 ERAI Inc.


February 2012 – Suspect

Counterfeit electronic Parts Can

Be Found on Internet Purchasing

Platforms

Who heard about this investigation?

May 21, 2012- Senate Armed

Services Report released: Inquiry

Into Counterfeit Electronic Parts

In The Department of Defense

Supply Chain

© 2012 ERAI Inc.


Q: What is the significance of the timeline?

© 2012 ERAI Inc.

A: Awareness

© 2012 ERAI Inc.

Counterfeit Statistics

© 2012 ERAI Inc.

“Just One” Incident Can Cost MillionsDesign interruptions can cost $0 to over $1M+

THAAD Photo courtesy of Raytheon CompanySource: http://www.raytheon.com/newsroom/rtnwcm/groups/public/documents/image/rtn_missile_defense_gal_06.jpg

“According to the Missile Defense Agency, if the devices had failed, the THAAD missile itself would likely have failed. The cost of that fix was nearly $2.7 million”

Senate Armed Services Committee Hearing Opening RemarksSenator Carl Levin (D-MI) , Committee Chairman

Defense A Small Slice of the PieMilitary / Aerospace Application = Approximately 1.9% of market

Source: IHS iSuppli 2011© 2012 ERAI Inc.

The Past Decade Has Seen A Steady Rise in Counterfeit Incidents Reported

Reports of counterfeit parts have quadrupled since 2009Source: IHS Parts Management 2012

© 2012 ERAI Inc.

2011 Record Number of Incidents Reported

Over 1,000 verified counterfeit part incidents were reported.

Source: IHS Parts Management 2012

© 2012 ERAI Inc.

Short Term Outlook – 2012 Counterfeit Incident Levels to Keep Pace with 2011


Global Reports of Counterfeit PartsQ1 2011 and Q1 2012

Trending At 2011 Levels with Signs of Growth in 2012© 2012 ERAI Inc.

Long Term Outlook- A Steady Rise in Counterfeit Activity from 2012 to 2016

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Reported (and Unreported) Counterfeit Incidents Trend Along with Semiconductor Market Cycles

© 2012 ERAI Inc.

In a typical recent two weeks of ERAI provided data (Reported Companies)

Five suspect counterfeit shipments (3 integrated circuits, 1 transistor, 1 capacitor), $55,169.00

• 6,233 ICs at $44,154 = $7.08 per• 500 transistors at $1,015 = $2.03 per• 200,000 capacitors at $10,000 = $0.05 per• These are just the companies that were reported by ERAI

members, usually due to disputes • These instances are seldom reported to GIDEP

Slide compliments of Fred Schipp-MDA

What is Being Counterfeited

What is Being Counterfeited

June-July 2011 ERAI reported 186 suspect counterfeit parts

– Integrated Circuits – 81%• Processors/Controllers – 14%• Memory – 12% (mostly FLASH)• Transmitter/Receivers – 7%• Operational Amplifiers – 6%• Programmable Logic Devices – 5%• Digital Switches – 5%• Converters – 4%• Field Programmable Gate Arrays

(FPGA) – 4%

– Discrete Transistors – 8%

– Discrete Diodes – 4%

– Capacitors – 4% (mostly aluminum electrolytic)

– Inductors – 1%

Slide compliments of Fred Schipp-MDA

The Top 5 Most-Counterfeited Components in 2011 Were…

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#5 Transistors (7.6%)

#4 Programmable Logic Integrated Circuits (8.3%)

#3 Memory Integrated Circuits (13.1%)

#2 Microprocessor Integrated Circuits (13.4%)

#1 Analog Integrated Circuits (25.2%)


© 2012 ERAI Inc.

Companies Accused of 2011 Incidents Were in Largely Within Two Countries

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Make No Mistake, The “Enemy” Also Comes from Within

According to ERAI, of recorded 2011 losses, companies located in two countries alone accounted for nearly two thirds of all worldwide incidents reported. The rest of the world accounted for 35%. The two countries were…

#2 China (32%)

#1 United States (33%)

Faulty ProductRemarked ProductSubstandard ProductProgrammed ProductSuspect Counterfeit LabelSuspect Counterfeit Product…

© 2012 ERAI Inc.

Why Purchase from the Open Market?Allocation, Obsolescence & Opportunistic Procurement = Opportunity

© 2012 ERAI Inc.

How Counterfeits Enter The Supply Chain

© 2012 ERAI Inc.

• Why Do People Go To Open Market?

–Two reasons only

(1) Price

(2) Shortage

How is Channel Integrity Compromised?

Returns Procedures

Inventory Buys from CM/EMS/OEM

Supply Chain / Forecast Breakdown

Materials Obtained Through Acquisition

Why Purchase from the Open Market?

© 2012 ERAI Inc.

Why is the U.S. Government at Risk?Obsolescence (Shortage)

• Air

– B-52 Extended from 2025 to 2040 in 2002 - Boeing

– F-15 A-D USAF could extend by 15 years – Aviation Week

– UH-60A/L Blackhawk extends life to 2025 – Sikorsky

– C-17 likely be extended from 2025 to 2050

• Land

– Equipment used at higher operational rates than peacetime requiring more repairs & overhauls – Sep 2007 CBO study

• Sea

– DDG-51s & Trident subs extended from 30 years to over 40

– DDG-51 class ships extended from 35 to 40 years – CBO

– Trident D-5 missile system extended from 30 to 40 years

– Enterprise carrier built to last 30 years is 50+ years old

© 2012 ERAI Inc.

http://www.naval-technology.com/projects/ohio/

“It is not uncommon, however, for authorized distributors to

purchase parts outside of the OCM supply chain in order to

fulfill customer requirements – 58 percent purchase parts from

other sources.

Specifically, 47 percent of authorized distributors procure

parts from independent distributors, 29 percent

procure from brokers, and 27 percent procure from Internet-

exclusive sources.”

Source: U.S. Department of Commerce, Office of Technology Evaluation,Counterfeit Electronics Survey,

November 2009.

No Supplier is Immune to Counterfeit RiskOpen market suppliers are not the only victims of riskWhy are counterfeit parts also sold by authorized sources?

© 2012 ERAI Inc.

Counterfeit Defined

© 2012 ERAI Inc.

Definition of Counterfeit-The controversy

Source: AS5553

Counterfeit PartA suspect part that is a copy or substitute without legal right or authority to do so or one whose material, performance, or characteristics are knowingly misrepresented by a supplier in the supply chain.

Examples of counterfeit parts include, but are not limited to:

a. Parts which do not contain the proper internal construction (die, manufacturer, wire bonding, etc.) consistent with the ordered part.b. Parts which have been used, refurbished or reclaimed, but represented as new product.c. Parts which have different package style or surface plating/finish than the ordered parts.d. Parts which have not successfully completed the Original Component Manufacturer’s (OCM)’s full production and test flow, but are represented as completed product.e. Parts sold as upscreened parts, which have not successfully completed upscreening.f. Parts sold with modified labeling or markings intended to misrepresent the part’s form, fit, function, or grade.

Parts which have been refinished, upscreened, or uprated and have been identified as such, are not considered counterfeit.© 2012 ERAI Inc.

DefinitionSuspect, Fraudulent & Counterfeit

3.1 Suspect Part

A part in which there is an indication that it may have been misrepresented by the supplier or manufacturer and may meet the definition of fraudulent part or counterfeit part provided below.

3.2 Fraudulent Part

Any suspect part misrepresented to the Customer as meeting the Customer’s requirements.

NOTE: “Previously used parts, not altered, but represented as new” is a subset of all potential “Fraudulent Parts”. In addition to counterfeit parts, this document addresses only this particular category of Fraudulent Part.

3.3 Counterfeit Part

A fraudulent part that has been confirmed to be a copy, imitation, or substitute that has been represented, identified, or marked as genuine, and/or altered by a source without legal right with intent to mislead, deceive, or defraud.

Source: AS6081© 2012 ERAI Inc.

H.R. 1540: National Defense Authorization Act For Fiscal Year 2012 - Sec. 818 Detection and Avoidance of Counterfeit Electronic Parts)

…”establish Department-wide definitions of the terms ‘‘counterfeit electronic part’’ and ‘‘suspect counterfeit electronic part’’, which definitions shall include previously used parts represented as new”

Questions:

-Why?

-When might this be a problem?

© 2012 ERAI Inc.

Verification of Product-Counterfeit Identification Methods

© 2012 ERAI Inc.

4.1.4 Verification of Purchased Product

Question:

At what stage are

most counterfeit parts

Identified?

Source: AS5553

© 2012 ERAI Inc.

Most suspect counterfeit parts are identified during basic inspection

© 2012 ERAI Inc.

Discuss

Question:

Based on today’s level of awareness is an organization that chooses not to screen incoming shipments a victim?

Discuss

Question:

What is a “Trusted Supplier”

TRUSTED SUPPLIERS.—The revised regulations issued pursuant to paragraph (1) shall—(A) require that, whenever possible, the Department and Department contractors and subcontractors at all tiers—

(i) obtain electronic parts that are in production or currently available in stock from the original manufacturers of the parts or their authorized dealers, or from trusted suppliers who obtain

such parts exclusively from the original manufacturers of the parts or their authorized dealers; and

(ii) obtain electronic parts that are not in production or currently available in stock from trusted suppliers;

(B) establish requirements for notification of the Department, and inspection, testing, and authentication of electronic parts that the Department or a Departmentcontractor or subcontractor obtains from any source other than a source described in subparagraph (A);

(C) establish qualification requirements, consistent with the requirements of section 2319 of title 10, United States Code, pursuant to which the Department may identify trusted suppliers that have appropriate policies and procedures in place to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts; and

(D) authorize Department contractors and subcontractors to identify and use additional trusted suppliers, provided that—

(i) the standards and processes for identifying such trusted suppliers comply with established industry standards;(ii) the contractor or subcontractor assumes responsibility for the authenticity of parts provided by such suppliers as provided in paragraph 2); and(iii) the selection of such trusted suppliers is subject to review and audit by appropriate

Department officials.

Discuss

Question:

How does an Independent Distributor identify a trusted source?

ERAI’s Potential Trusted SuppliersMechanism to avoid blind open market purchases

Shown: SMT Corporation

Shown: World Micro, Inc.

© 2012 ERAI Inc.

Discuss

Question:

What are the most effective ways to screen a potential source of supply?

Discuss

Question:

Should a distributor disclose “risk” to a customer?

Discuss

Question:

Why might a distributor NOT disclose risk?


NDAA requires a process for debarring sources of supply:

(3) issue or revise guidance applicable to the Department on remedial actions to be taken in the case of a supplier who has repeatedly failed to detect and avoid counterfeit electronic parts or otherwise failed to exercise due diligence in the detection and avoidance of such parts, including consideration of whether to suspend or debar a supplier until such time as the supplier has effectively addressed the issues that led to such failures;

Discuss

Question(s):

(1) When should a source of supply be removed from an AVL | ASL?

(2) If a supplier continues to procure from a supplier that provides nonconforming material is that supplier a victim?

Discuss

Question(s):

Is it time to return to a relationship driven business model?

TRUST & Trusted Supplier


NDAA requires a process for ensuring suspect counterfeit parts NOT re-enter the supply chain:

(e) IMPROVEMENT OF CONTRACTOR SYSTEMS FOR DETECTION AND AVOIDANCE OF COUNTERFEIT ELECTRONIC PARTS.—

(2) ELEMENTS—The program implemented pursuant to paragraph (1) shall—

(A) require covered contractors that supply electronic parts or systems that contain electronic parts to establish policies and procedures to eliminate counterfeit electronic parts from the defense supply chain, which policies and procedures shall address—

(i) the training of personnel;(ii) the inspection and testing of electronic parts;(iii) processes to abolish counterfeit parts proliferation;(iv) mechanisms to enable traceability of parts;(v) use of trusted suppliers;(vi) the reporting and quarantining of counterfeit electronic parts and

suspect counterfeit electronic parts;

4.1.6 Material Control

The documented processes shallspecify methods to:

a. Control excess and nonconforming parts to prevent them from entering the supply chain under fraudulent circumstances.

b. Control suspect or confirmed counterfeit parts to preclude their use or reentry into the supply chain.

Guidelines for control of parts are provided in Appendix F, Material Control.

Appendix FF.1.4 Control of Suspect or Confirmed

Counterfeit Parts

In the event that product assurance actions, in-process inspections/tests, or product failureexperiences indicate that parts may be counterfeit, the following steps should beimplemented:

a. Physically identify the parts as suspect/counterfeit product (e.g., tag, label, mark).

b. Physically segregate the parts from acceptable non-suspect parts and place in quarantine. Quarantine should consist of physical barriers and controlled access.

c. Do not return the parts to the supplier for refund, replacement, etc., except under controlled conditions which would preclude resale of the suspect counterfeit parts into the supply chain, and to allow the supplier to conduct internal investigation.

d. Confirm the authenticity of the parts. This may include further part-level testing, communications with the part’s supposed OCM, third-party analysis, etc.

e. Upon confirmation that a part is counterfeit, identify and place on “Hold” all potential additional counterfeit parts in storage and installed in product pending disposition by appropriate authorities.

f. Report counterfeit parts in accordance with guidelines provided in Appendix G, Reporting.

Source: AS5553

4.1.6 Material Control

Discuss

Why is suspect counterfeit materialreturned despite the risk of this materialre-entering the chain of supply?

Examples:

(1) Escrow providers require the return of material if parts are notconfiscated by enforcement. (6051S)

(2) Wire Transfer in advance payment terms

(3) Threat of legal action

© 2012 ERAI Inc.

1,800 Counterfeit Cases at SASC HearingTotal Over 1 Million Individual Parts

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“Failing to report suspect counterfeits and suspect suppliers puts everybody at risk. We need to make sure our regulations require contractors who discover suspected counterfeit parts in a military system to report that discovery to the military right away.”

Senate Armed Services Committee Hearing Opening RemarksSenator Carl Levin (D-MI) , Committee Chairman

© 2012 ERAI Inc.


REPORTING REQUIREMENT.—The revised regulations issued pursuant to paragraph (1) shall require that any Department contractor or subcontractor who becomes aware, or has reason to suspect, that any end item, component, part, ormaterial contained in supplies purchased by the Department, or purchased by a contractor or subcontractor for delivery to, or on behalf of, the Department, contains counterfeit electronic parts or suspect counterfeit electronic parts report in writing within 60 days to appropriate Government authorities and the Government-Industry Data Exchange Program (or a similar program designated by the Secretary).

(5) CONSTRUCTION OF COMPLIANCE WITH REPORTING

REQUIREMENT.—A Department contractor or subcontractor that provides a written report required under this subsection shall not be subject to civil liability on the basis of such reporting, provided the contractor or subcontractor made a reasonable effort to determine that the end item, component, part, or material concerned contained counterfeit electronic parts or suspect counterfeit electronic parts.

NDAA requires incidents be reported:

© 2012 ERAI Inc.

AS5553-Requirements: 4.1.7 Reporting

The documented processes shall assure that all occurrences of counterfeit parts are reported, as appropriate, to internal organizations, customers, government reporting organizations (e.g., GIDEP), industry supported reporting programs (e.g., ERAI), and criminal investigative authorities.

ERAI maintains a database of counterfeit and high-risk items. Data can be submitted by anyone on the public domain of their website (www.erai.com). Companies do not need to be members to report counterfeit and high-risk items. Submitting companies remain anonymous in the reporting of counterfeit/high-risk items. Companies must be ERAI members to view this database. However, virtually all electronics-related companies/organizations, not just resellers, are candidates for membership.

Source: AS5553 © 2012 ERAI Inc.

ERAI provides proven tools to mitigate risks on substandard parts, counterfeit parts, vendors and even customers.

How Has ERAI Aligned Itself to Industry’s Needs and This New Legislation?

Trusted Suppliers High Risk Suppliers Suspect Counterfeit & High Risk Parts

© 2012 ERAI Inc.

ERAI Member Benefits

ERAI = Risk Mitigation Tools for Parts, Customers & Vendors

• Searchable Database of Counterfeit, Faulty & High-Risk Parts.• Searchable Database of High-Risk Suppliers & Customers.• Bill of Material /Assembly Cross Checking against Hi-Risk Parts Database.• Vendor Analysis Tools and Information• Customer Analysis Tools and Information• Real Time Complaint Alerts• Real Time Dispute Alerts• Real Time Hi-Risk Parts Alerts• High Risk and Counterfeit Part Reporting• Reduce Financial Losses Through our Escrow and Mediation Services.• Proactively Prevent Losses and Reoccurring Problems.• Complaint Processing• Dispute Resolution Services• Import / Export Compliance Tools• Review Member Profiles for Membership Status and Accolades.• Fair & Impartial Investigation Services• Stay Informed on Current Issues Affecting the Supply Chain.

© 2012 ERAI Inc.

What can reporting tell us?In Seconds A Parts List Can Be Analyzed Industry Average: 0.5% – 5% Match to Reported ERAI Incidents

© 2012 ERAI Inc.

Discuss

Why do organization’s fear or are they

reluctant to report?

Examples:

(1) Brand damage

(2) Don’t want procurement habits to be realized

(3) Liability

(4) Lost revenue

© 2012 ERAI Inc.

Discuss

Make no mistake….the enemy IS within….

Examples

(1) Supplier does not qualify sources or buy from the safest source of supply (2) Procure from high risk regions (3) Supplier risk not disclosed to customer(4) Misrepresents the origin of material or supply chain traceability (5) Quote product available 3-5 days(6) Supplier does not perform obligatory inspection prior to resale(7) Misrepresents office type and/or location (google earth, mail boxes etc)(8) Misrepresents Memberships to ERAI / IDEA, etc. (9) Demands material be returned and refuses to allow third party

confirmation of nonconformance(10) Numerous Customs Seizures

© 2012 ERAI Inc.

BrokersIndependent

Franchise

CommercialDefense

Space

InspectionTest

Resources-Industry Standards

DistributionAS6081

DistributionAS5553

DistributionAS6171

© 2012 ERAI Inc.

ResourcesEducational Opportunities

• SAE International

• SMTA

• Aerospace Industries Association (AIA)

• TechAmerica - G12 Counterfeit Parts Subcommittee

• Independent Distributors of Electronics Association (IDEA)

• IPC: IPC Surface Mount Equipment Manufacturers Association (SMEMA)

• Best Manufacturing Practices Center of Excellence (BMPCOE)

• Government Electronics & Information Technology Association (GEIA)

© 2012 ERAI Inc.

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© 2012 ERAI Inc.

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