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 electronics components contribute to dangerous business exposure for manufacturer’s customers, and compromise health and safety for consumers. Clearly, new solutions are needed to improve electronics supply chain integrity and stability.
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 with 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 identifying 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, their suppliers, and their distributors still rely on a mish mash of 3rd 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 1 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 ensures consistency across a global supply chain. Enterprise-wide labeling, 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 electronics counterfeits for many years, but the magnitude and complexity of the challenges have only come into sharp focus over the last ten 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 under- standing 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 are 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 U.S. 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 U.S. Department of Defense finalized a new ruling in May of 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. How to meet that mandate, is the question.
Continue reading here for Part 2.
Joe Longo is an electronics industry specialist with Loftware and has been working with Loftware enterprise customers in the electronics industry for over seven years.