This document provides an outline for a training on counterfeit microelectronics. It begins with an introduction explaining the purpose of the training is to discuss the threat of counterfeit electronics. The outline then lists and describes various topics that will be covered, including supply chain basics, identifying counterfeits, supplier selection, industry standards, and resources. It provides definitions for key industry terms and a timeline of events related to the rise of counterfeit electronics.
51. “Just One” Incident Can Cost Millions
Design interruptions can cost $0 to over $1M+
“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 Remarks
Senator Carl Levin (D-MI) , Committee Chairman
THAAD Photo courtesy of Raytheon Company
Source: http://www.raytheon.com/newsroom/rtnwcm/groups/public/documents/image/rtn_missile_defense_gal_06.jpg
57. What is Being Counterfeited
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
77. 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 Department
contractor 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.
84. H.R. 1540: National Defense Authorization Act For
Fiscal Year 2012 - Sec. 818 Detection and Avoidance of Counterfeit Electronic
Parts)
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;
85. 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?
88. H.R. 1540: National Defense Authorization Act For
Fiscal Year 2012 - Sec. 818 Detection and Avoidance of Counterfeit Electronic
Parts)
NDAA requires a process for ensuring suspect counterfeit parts NOT reenter 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;
89. 4.1.6 Material Control
4.1.6 Material Control
The documented processes shall
specify 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.
Source: AS5553
Appendix F
F.1.4 Control of Suspect or Confirmed
Counterfeit Parts
In the event that product assurance actions,
in-process inspections/tests, or product failure
experiences indicate that parts may be
counterfeit, the following steps should be
implemented:
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.
Cost Savings – Companies save on their cost of capital because they do not have to pay for a facility and the equipment needed for production. They can also save on labor costs such as wages, training and benefits. Some companies may look to contract manufacture in low-cost countries, such as China, to benefit from the low cost of labor.
Advanced Skills – Companies can take advantage of skills that they may not possess, but the contract manufacturer does. The contract manufacturer is likely to have relationships formed with raw material suppliers or methods of efficiency within their production.
Quality – Contract Manufacturers are likely to have their own methods of qualitycontrol in place that helps them to detect counterfeit or damaged materials early on.
Focus– Companies can focus on their core competencies better if they can hand off base production to an outside company.
Economies of Scale – Contract Manufacturers have multiple customers that they produce for. Because they are servicing multiple customers, they can offer reduced costs in acquiring raw materials by benefiting from economies of scale. The more units there are in one shipment, the less expensive the price per unit will be.
Cost Savings – Companies save on their cost of capital because they do not have to pay for a facility and the equipment needed for production. They can also save on labor costs such as wages, training and benefits. Some companies may look to contract manufacture in low-cost countries, such as China, to benefit from the low cost of labor.
Advanced Skills – Companies can take advantage of skills that they may not possess, but the contract manufacturer does. The contract manufacturer is likely to have relationships formed with raw material suppliers or methods of efficiency within their production.
Quality – Contract Manufacturers are likely to have their own methods of qualitycontrol in place that helps them to detect counterfeit or damaged materials early on.
Focus– Companies can focus on their core competencies better if they can hand off base production to an outside company.
Economies of Scale – Contract Manufacturers have multiple customers that they produce for. Because they are servicing multiple customers, they can offer reduced costs in acquiring raw materials by benefiting from economies of scale. The more units there are in one shipment, the less expensive the price per unit will be.
After 15 years of diplomatic struggle, China became a fully-fledged member of the international trading system in 2001.
The amount of counterfeit electronic components has arisen alongside the rise of international trade.
Organized and petty criminals alike have taken advantage of open trade agreements to move money and goods freely across borders in a minimum amount of time by moving illegal goods through the same channel as legal goods.
Both developed and developing countries have been unable to sufficiently monitor their borders to combat counterfeit trade.
Counterfeiting is not viewed as a serious problem on its own; it is only when public health and safety are endangered that the threats of counterfeiting are taken seriously.
Public awareness of the dangers of counterfeiting needs to be combined with improved efforts to enforce trade policies.
This graph demonstrates the rapid rise of Chinese Exports between 2000 - 2006
Established in
Seg Market Place
Material Sorting – Prepping for resurfacing / refurbishing / resale
Online trading platforms like these open the doors for anyone to sell anything with few rules or regulations. China has taken full advantage of these open trading portals and as a result the counterfeit component trade has flourished.
Congress has clearly articulated the growing threat that counterfeit electronic parts pose to the safety of armed services personnel, national security, and the economy, but what about the short- and long-term costs to defense systems? Here’s one example from the Senate Armed Services Committee Hearings whereby “just one example” was provided by Senator Carl Levin. The cost to fix a THAAD missile incident was nearly $2.7 million dollars, illustrating the significant cost to address these difficult issues. Generally, major redesigns of our systems can cost in excess of a million dollars and specifically it’s well documented that avoidance of obsolescence disruptions, in addition to counterfeit mitigation, can save between $0 and $1m per incident. Companies can use these figures to create the business case for improved obsolescence and counterfeit tools.
Background Information from Transcript of SASC Hearing opening remarks: CARL LEVIN: “And in terms of the cost, just one example, to the government now: In September of 2010, the Missile Defense Agency learned that mission computers for THAAD missiles contained suspect counterfeit memory devices. 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. Who paid for it? The American taxpayer. We must change our acquisition rules to ensure that the cost of replacing suspect counterfeit parts is paid by the contractor, not the taxpayer -- no ifs, no ands, no buts, and regardless of the type of contract involved.”
In 2008 China was the primary source of counterfeit product.
In the year 2011
We have had total 185 submitted incidents of the following types:
· Suspect Counterfeit Product
· Suspect Counterfeit Label
· Substandard Product
· Faulty Product
· Remarked Product
· Programmed Product
Out of those 185 we have total of 152 that have Loss Data entered.
The loss data is a total of the following items (where applicable)
· COST OF GOODS
· SHIPPING
· ESCROW FEES
· REWORK CHARGES
· TESTING FEES
· BANK CHARGES
· LEGAL FEES
These 152 incidents where the Loss Data was recorded include incidents that were reported as Alerts, Dismissed for whatever reason, or reported as Disputes.
TOTAL LOSS from these 152 incidents is $ 1,312,909.74
Total number of REPORTED incidents was 95
Total loss from these 95 REPORTED (Alerts or Disputes) incidents was $898,820.06
If we were to estimate total Loss for all 185 incidents recorded for these "types" the number would have been $1,597,947 for the year of 2011
Incidents for companies from China were responsible for $423,430.94 of the loss
Incidents for companies from USA were responsible for $432,848.02 of the loss
Incidents for companies from the rest of the world were responsible for $456,630.78 of the loss
China (32.3%)
United States (33.0%)
Rest of World (34.8%)