Supply Chain More Optimistic About Q2 Component Demand
by 
Matt Hartzell, chief administrative officer, Smith & Associates
Proposed amendments to the 2012 Defense Federal Acquisition Regulation Supplement (DFARS) could have far-reaching implications for the electronics supply chain. On the face of it, the DFARS amendments seem to favor sourcing from component vendors and authorized/franchised distributors to the detriment of the open market and/or small business contractors. The amendments appear to tighten definitions, clarify hierarchies and extend traceability and flow down requirements across the board.
If this reading holds, are the new amendments reflecting the zeitgeist of the industry of continuous quality improvements demanded of all parties? Or is this the first tolling of a bell that marks significant reshaping of procurement practices not just for commercial product but also for AVLs?
DFARS, of course, does not stand alone as legislation, but is part of the National Defense Authorization Act (NDAA), which is revised annually. DFARS relates directly to NDAA Section 818, outlining and specifying processes and procedures for the detection and avoidance of counterfeit electronic parts sourced for the Department of Defense (DoD).
The revisions appear to tighten the sourcing requirements for not only mil/spec electronics but also for COTS parts for DoD, and narrowly defines, for the first time, a hierarchy of sourcing partners by virtue of the now explicit definition of “trusted supplier” (See Quality & Traceability: Critical to Procurement for a breakdown of the hierarchy by DFARS). Certainly, the move from the 2012 DFARS, which provided more industry guidance in determining “trusted supplier” definitions, to the present 2015 DFARS underscores a specific hierarchy of sourcing preferences for contracting with DoD for electronic parts.
It’s clear the DoD considers these clarifications valid, necessary, and important, but DFARS casts a wider net. The commercial semiconductor and electronics industry looks to these regulations as a gold standard for quality management, sourcing best practices and vendor evaluation for electronics part sourcing.
To get some perspective on these developments EPS spoke with Matt Hartzell, chief administrative officer, and former general counsel, for Smith & Associates, one of the oldest, leading independent global distributors. Hartzell has been part of the SAE G-19 committee since 2010; the committee, comprised of independent and franchised distributors and other industry leaders, has worked to revise the Aerospace Standard (AS6081) on avoidance, detection, mitigation and disposition of suspect and counterfeit parts.
“My overall thought is that the zeitgeist of the industry has been one of requiring ongoing, continuous, quality improvement,” Hartzell said of the DFARS amendments. “One effect of this trend that is continued in the DFARS proposed rule, is that those who have built their businesses on that principal have thrived and grown. It is clear that you have to be focused on the quality aspect – Smith has spent the last 31 years doing just that.”
Hartzell was equally clear that when quality is the core business focus, there is no threat to independent distributors from DFARS’ tightening. “In some ways we’re not affected at all – when we look at counterfeit mitigation, we [at Smith] are not looking at it from within a narrow box for a particular customer. Smith looks at it from a worldview; it’s what we do. So, if this DoD standard now says they’re going to require of us to be as much as possible like OEMs, OCMs, or franchised in that respect, that’s always been our goal anyway; only they don’t test because they have the magic full traceability that we don’t.”
Testing has been a cornerstone of the original NDAA Section 818 and the 2012 DFARS ruling. Testing is explicitly required in lieu of full traceability, a requirement that is essential when end of life (EOL) parts are sourced. EOL parts, which can be from a significantly earlier production generation, may no longer be fully traceable; are unlikely to be available from authorized distributors; and even so, the question of how the parts have been stored and their present quality must be verified through testing. The DFARS 2015 amendments underscore these requirements for EOL part testing, but specify them as additional requirements for those sourcing events when the parts required are not available through, iteratively, OEM, OCM, or authorized distributor (see Proposal Would Tighten DFARS Sourcing Rule).
While the DFARS 2015 amendments pertaining to a sourcing hierarchy do present challenges for some in the industry, it is small businesses that are at greatest risk of loss. “The impact [of the new definition] will lead to more consolidation and the fall away of small companies,” said Hartzell. “Forced hierarchization means that smaller businesses will find it much harder to survive. I don’t know, I believe in [small businesses] as a free market business person, but I understand the need for [hierarchies in sourcing], especially in DoD acquisitions. I am completely deferential to their purchasing requirements, as we all ought to be.
“Where this becomes troublesome,” he continued, “is out in the commercial market. I don’t think this is the way of the future – there will always be a need for market equalization in the supply chain so long as you have sellers who don’t take return parts when the buyer doesn’t need them anymore. And as long as there is good competition in the industry for quality product, you’ll have demand and for demand that is not met, you will have a supplier who can put their hands on the market [and guarantee quality] when the customer needs it.”
It is evident that regardless of specified, hierarchical sourcing requirements in the new DFARS there is still the nod to the fact that electronic part sourcing is not a closed loop between customer and OEM, OCM, or authorized distributor. The real marketplace is more complex and there are important roles that best in class independents can and need to fill, particularly, for example, around EOL part sourcing. The requirement of quality then befalls those independents to have the ability to provide the most sophisticated and rigorous testing for those products to ensure quality when provenance is not fully available due to age or other supply chain events.
For the small businesses there is certainly a bell tolling in the current DFARS proposal. The requirements to meet “trusted supplier” and provide the traceability, flow down, and fully certified testing required will likely be beyond what is possible. That constriction of the supply chain for DoD sourcing may be for the best in terms of safety and security, given the issue of counterfeiting in the industry. The largest and best independents with their own testing facilities may even benefit from the current regulation changes.
Watch for follow-on pieces to this discussion that will consider more closely the impact of DFARS 2015 amendments and the more prominent role that testing will play.
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