Penalties for non-compliance of government standards usually take the form of fees or fines, so it’s not surprising that scofflaws of the Defense Federal Acquisition Regulation Supplement (DFARS Case 2012-D055) rule will get hit directly in the pocketbook.
The ECIA this week has taken a close look at the legislation – which strives to eliminate counterfeit components from the Defense Department’s supply chain -- and clarifies its implications for its distributor and original component manufacturer (OCM) members. ECIA said members should pay particular attention to the required counterfeit detection and avoidance requirements placed on contractors because the Department of Defense (DoD) clearly states in its comments section: “The final rule flows down the requirements to all subcontractors of prime Cost Accounting Standards (CAS)-covered contractors, at all tiers, without regard to whether the subcontractor itself is subject to CAS or is a commercial item.” (Emphasis added by ECIA). In other words, just about everyone is impacted.
CAS is a set of government rules for use in determining costs on negotiated procurement. The National Defense Authorization Act and DFARS both address costs that are associated with counterfeit goods. According to the NDAA and other published reports, costs incurred by contractors and subcontractors can take a number of forms. The NDAA states that if DoD equipment has to be rebuilt or redesigned because of a counterfeit component, contractors and subcontractors must pay these and other subsequent costs. Companies that fail to comply with the DFARS rule could be banned from the government bidding process or not receive payment for products and services already rendered.
Government and defense contracts are no longer the bonanza they used to be in the 1980s and early 1990s, but they are still very valuable. Components that are designed into military and aerospace equipment guarantee OCMs a revenue stream during -- and beyond -- the lifespan of the device. The lifecycle of military and aerospace equipment spans decades, but many components become obsolete within years. Companies such as Rochester Electronics, Lansdale Semiconductor and e2v are authorized to manufacture mil-spec components even after the OCMs have stopped.
Other times, finished goods are sold off as end-of-life (EOL) buys and are held as repair and replacement parts. The EOL buys are in part the reason the government has updated its anti-counterfeiting activities. Distributors of EOL parts are not necessarily part of the authorized supply chain -- many of these parts are sourced in the open market. Non-authorized distributors have been known to remark substandard components (see: Anatomy of an Electronics Counterfeit Operation) and sell them as mil-spec. This has made the traceability aspect of the NDAA/DFARS rules extremely important.
The DFARS rule seems to acknowledge some sources of components are riskier than others. The electronics industry has argued that components sourced from an OCM or authorized distributor don’t need to be tested to the same extent as a part that has passed through the unauthorized market. But there are minimum standards for counterfeit avoidance and risk-assessment. ECIA says these are:
- The training of personnel.
- The inspection and testing of electronic parts, including criteria for acceptance and rejection.
- Processes to abolish counterfeit parts proliferation.
- Processes for maintaining electronic part traceability.
- Use of suppliers that are the original manufacturer, sources with the express written authority of the original manufacturer or current design activity, including an authorized aftermarket manufacturer or suppliers that obtain parts exclusively from one or more of these sources.
- The reporting and quarantining of counterfeit electronic parts and suspect counterfeit electronic parts.
- Methodologies to identify suspect counterfeit electronic parts and to rapidly determine if a suspect counterfeit electronic part is, in fact, counterfeit.
- Design, operation, and maintenance of systems to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts.
- Flow down of counterfeit detection and avoidance requirements.
- Process for keeping continually informed of current counterfeiting information and trends.
- Process for screening the Government-Industry Data Exchange Program (GIDEP) reports and other credible sources of counterfeiting information.
- Control of obsolete electronic parts.
ECIA advises its members to take particular note of the “flow-down of counterfeit detection and avoidance requirements.” Due to this requirement, ECIA members can expect contractors to look for these elements in the policies of component manufacturer and authorized distributors. In particular, members should note the provisions for traceability; acceptable suppliers; quarantining; testing methodologies; staying informed; and obsolete parts.
The electronics supply chain may have more to worry about than costs incurred by penalties and fines. Component testing has become a lucrative service for third-party test houses. Since high-risk components will no doubt require more intensive testing, costs are bound to increase somewhere along the line. So maybe it's not just scofflaws that will be hit in the pocketbook.