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The Rising Threat of Counterfeit Components

As the volume of counterfeit components increases in the marketplace, new solutions are needed to improve electronics supply chain integrity and stability.

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counterfeiting1 As a serious challenge to today’s global electronics supply chain, counterfeiting and gray market diversion of electronics components threaten the integrity of products for manufacturers. Counterfeits and obsolete electronic components contribute to dangerous business exposure for manufacturers’ customers and compromise health and safety of consumers. Clearly, new solutions are needed to improve the electronics supply chain’s integrity and stability.

Enterprise Labeling as a First Line of Defense

Serialization technology provides a means by which products can be uniquely identified with a serial number at the unit item level as opposed to lot or batch levels. The individual item, such as a circuit board, battery, etc., is assigned a unique serial number that is embedded in a 1D or 2D barcode or other type of tag, including RFID tags, human readable numbers, holograms, and other covert identification methodologies. Although unit item serialization is one of the most powerful anti-counterfeiting and anti-diversion measures available today, many manufacturers lack standardized, automated, enterprise-wide labeling solutions as a foundation upon which serialization can be implemented efficiently and cost-effectively.

This is because many large electronics organizations and their suppliers and distributors still rely on a mish-mash of third-party and homegrown barcode labeling systems. Serialization technology cannot be applied consistently or affordably throughout a non-standardized labeling environment.

However, enterprise-wide labeling strategies can provide the first line of defense in today’s complex high-technology electronics distribution environment. Enterprise labeling offers a dynamic and data-driven approach for the creation of complex 1D and 2D barcode labels. It provides a platform for standardization, automation, scalability, and efficient maintenance while allowing businesses to react quickly to evolving customer, regional, and regulatory requirements and ensuring consistency across a global supply chain.

Enterprise-wide (or organizationally aligned) labeling  solutions that increase visibility and collaboration across the entire supply chain can better enable electronics manufacturers, suppliers, and vendors to meet performance and scalability requirements with power and flexibility. Then, when a company is ready to add unit item serialization technology as an additional powerful deterrent to counterfeiting and diversion, unique product identifier serial numbers can be integrated with minimal disruption and effort. Now is the time for all responsible electronics supply chain stakeholders to look to enterprise labeling solutions as the best rapid-response strategy to one of the most critical supply chain challenges today.

Counterfeits Jeopardize Lives and Cost Billions

Examining the electronics global supply chain landscape, the critical nature of the problem of counterfeits and obsolete products is sobering.

The public has heard rumors about the serious problem of counterfeit electronics for many years, but the magnitude and complexity of the challenges have only come into sharp focus over the last 10 years and in the last five years in particular. For aerospace, military, and other high-tech industries, the discovery of counterfeits has ignited intense debate over how to lessen the alarming risks involved. Without a doubt, counterfeits or obsolete components can, sooner or later, fail to perform under critical circumstances. There are a number of factors which have contributed to the difficulty in understanding what to do about obsolete and counterfeit electronics, not the least of which has been the lack of visibility of components as they travel through the supply chain.

Many experts insist that the high prevalence of electronic counterfeits has arisen as a bi-product of the gray market, which is the unauthorized sale of new, branded products diverted from mainstream distribution channels. Some estimates state that up to 8% of total market revenue for electronics components is diverted through the gray market. For the semiconductor industry alone, which earned almost $336 billion in 2014, the gray market could account for up to $26.8 billion.

The gray market has spawned a fraudulent and unreliable distribution system based on a marketplace clamoring for price discounts and high availability for more and more technology products. Counterfeits have crept into the gray distribution networks through rogue component design houses fronting as manufacturers, which then sell those products to independent distributors, who in turn ask the design firms to buy their products of choice from an authorized manufacturer. After distributors obtain these products illegally, components enter the gray market, are sold at sharp discounts over the Internet, and are often offered alongside counterfeit components, making it difficult to know which products are authentic and which are not.

The “underground” supply chain also handles obsolete parts found in e-waste and used in remanufacturing. These obsolete parts have made their way into the hands of buyers who believe they are getting brand new products.

In this way, counterfeit and obsolete electronics have been discovered in missile guidance systems and hundred-million-dollar aircraft, causing serious security problems for the US Department of Defense and its contractors. Who made these counterfeits, and are they programmed with malicious software from terrorist organizations designed to divert flights, radars, or missile controls? What about tampering with commercial aircraft electronic components?

What happens when an obsolete component fails? Certainly lives can be at risk.

There is, understandably, very little information about the sources of counterfeits. When investigative organizations divulge details of their findings, they are often obliged to protect their sources. Counterfeiters shut down and reopen regularly, mushrooming in multiple locations because they hear about sting operations through the media.

So it is easy for manufacturers and suppliers to become discouraged with the risky gray market and counterfeiting environment today. What can be done about it? The US Department of Defense finalized a new ruling in May 2014 to detect and avoid counterfeit electronics as an amendment to the 2012 National Defense Authorization Act, but many manufacturers are still not clear about who is responsible for which part of the ruling. The DOD has placed more of the responsibility on contractors to identify counterfeits, putting them in charge of the legitimacy of the supply chain to include their subcontractors and suppliers. The question is, how to meet that mandate?

What About the Commercial Supply Chain?

And while the military detects a good percentage of counterfeit parts coming into their sphere of purchases, the commercial side is still wide open. Counterfeiters view the commercial supply chain as much more attractive. The commercial market is much larger and more diversified, the level of testing is lower, and product life cycles are much shorter. This gives counterfeit parts more time to hide and counterfeiters more time to sell their wares.

The notion of a commercial supply chain laden with counterfeit parts is truly sobering. Counterfeit parts have been found in servers, routers, storage hardware, and other electronics systems. These systems enable communications, transportation, power, and critical infrastructure to run our daily lives.

For example, here is a list of some of the electronic products under FDA jurisdiction:

  • Television receivers
  • Computer monitors
  • X-ray machines (including medical, research, industrial, and educational)
  • Electron microscopes
  • Black light sources
  • Welding equipment
  • Alarm systems
  • Microwave ovens (devices that generate microwave power)
  • All lasers (including low-power lasers such as DVD and CD readers/writers/players) and other light-emitting devices (infrared and ultraviolet)
  • Ultrasonic instrument cleaners
  • Ultrasound machines
  • Ranging and detection equipment such as laser levels

Unfortunately, most solutions today only detect counterfeit components after they enter the supply chain, not before they enter the supply chain. Unethical suppliers need to be identified and shut down because they manage to stay in business today, and even proliferate, because there are no consequences for their actions. Better technologies are needed 
to track parts as they move through the supply chain, so that data can be shared with the industry at large to discredit unethical suppliers.

In addition to the important question of authenticity, today’s electronics product labeling requires a variety of complex information with data integrated from a large number of data sources. The real estate on a single label is populated with data from a variety of repositories, including varied governmental labeling regulations and standards for new and existing markets, requirements for multiple languages, complex barcode data, and more. But many large companies are not managing this level of complexity with a reliable labeling strategy sophisticated enough to cover all these needs. It is understandable, then, that an attempt to serialize at the unit item level is putting the cart before the horse for many organizations.

Also, for affordable and effectively manageable security measures to be implemented in the supply chain, the ability to allow approved electronics supply chain suppliers and distributors to participate through a streamlined labeling solution 
is required. This secure access by authorized supply chain participants is the first line of defense against counterfeiting and diversion. Standardization of barcode labeling solutions with approved suppliers and distributors can greatly 
diminish the likelihood of obsolete or counterfeit components making their way into the supply chain. Enterprise labeling solutions allow for secure access by approved suppliers and partners, as well as offer many other benefits to manufacturers. Enterprise labeling prevents mislabeling through automation while offering support for regulatory data, multiple languages, and customer-specific labeling requirements. In the end, labeling consistency and reliability are exponentially improved.

With serialization technology added to enterprise labeling solutions, an unprecedented degree of security in tracking electronics components can save billions of dollars and prevent other human and environmental disasters.

The complexity of today’s labeling requirements points to the fact that without the solid foundation of a good labeling strategy, customer dissatisfaction, returned shipments, counterfeits, and loss of business can accumulate, leading to significant erosion of revenue and profitability. Most importantly, the dangers of counterfeiting and diversion can include
a negative impact on human health or even contribute to loss of life.

The electronics industry is in an exciting phase of rapid expansion and change, and outdated labeling solutions are unable to keep pace with these dynamics. Fortunately, enterprise labeling is one immediate way the electronics industry can take charge in response to this changing environment, be more responsive to the critical nature of the current labeling challenges, and improve the stability of global supply chains while concurrently stemming the dangerous rising tide of counterfeits.

­Author 
Joe Longo is an electronics industry specialist with Loftware.

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