Component returns aren’t a seasonal problem for the electronics supply chain. Every day, customers that have ordered too much product cancel orders or try to return un-used parts. Most distributors have processes and practices in place to accommodate product returns, and authorized distributors have the right to return a portion of their parts to their suppliers. Among the advantages of using distribution is the channel's ability to find homes for returned products. With the wide customer base available to many distributors, one OEM’s excess is another OEM’s “must-find” item. Authorized distributors have the added advantage of passing suppliers’ warrantees on to end customers.
But not all parts are returnable. Excess inventory is at the heart of conflict in the supply chain regarding counterfeit components. Some OEMs or EMS that can’t (or won’t) return products sell them into the open market. The open market is a clearinghouse for parts and serves a function for an industry plagued by poor forecasting. But authentic parts can be re-marked and become counterfeit parts, or outright counterfeits can be mixed with authentic parts and infiltrate the channel. Therefore the official position of the industry is the authorized channel is the least risky option for procuring genuine components.
Counterfeits have been known to enter the authorized channel through product returns. A new SAE standard provides guidelines for the treatment of returns in the authorized channel:
The standard requires the distributor to issue an RMA [returned materials authorization] if it elects to accept a return. The RMA must require that the parts returned by the customer were the same parts sold to the customer. If the distributor agrees to accept parts that it did not sell, then those parts must not be co-mingled in inventory nor sold to anyone else as authorized product. In addition, parts returned by independent distributors/brokers must be treated as suspect counterfeit parts.
The customer return verification provisions specify the elements necessary to prove that the parts returned by the customer to the distributor were purchased directly from the distributor and not some other source. These elements include:
- Matching the returned parts against the distributor’s traceability records, which should include date/lot codes if available. If date/lot codes are not available or don’t match, then the returned parts should be treated as suspect counterfeit parts.
- Customer returned parts are to be inspected for any evidence of alteration, mishandling, improper packaging or repackaging.
- If a distributor elects not to verify, then customer returned parts shall not be restocked or returned to the supply chain.
Suspect, fraudulent or counterfeit parts shall be quarantined pending proper disposition. The parts may be returned to the manufacturer for analysis and disposition. Confirmed counterfeit parts should not be returned to the customer and should be held in quarantine for five years, or longer if required by law.
The re-stocking provisions reiterate that suspect, fraudulent and counterfeit parts must not be reintroduced into the supply chain, restocked or returned to the manufacturer in a stock rotation. In addition, returned parts shall not be restocked into authorized inventory if purchased from non-authorized sources.
One of the issues the standard does not address is what I would call “disclosure.” In the consumer electronics world, sometimes if a package is opened, products are re-sold as “refurbished.” As I found out by shopping the local Sony Outlet, refurbished could mean the product has been repaired or that its box was opened and the product returned. There’s no way of knowing.
As far as I can tell, electronics distributors or suppliers are not required to tell customers if the parts they are shipping have been returned. This question came up during a discussion of Xilinx parts that were allegedly sold as counterfeit by EMS Flextronics. FPGAs can be wiped and reprogrammed, so it’s not necessarily easy to tell if a device has been used. So I’m posing a question to the industry: Should companies disclose to customers that they are buying retuned parts? What are the pros and cons of such a practice?