Counterfeit Electronic Parts Avoidance - Profitability or Catastrophe


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Introduction

The number of transistors in a dense integrated circuit doubles about every 18 months. Consequently, the critical technology that the Department of Defense (DoD) uses becomes obsolete around every two years, while many of their weapons systems will remain in use for more than two decades. As a result, there is a critical need to source obsolete or rare parts which are no longer sold via the authorized channel or produced by the original contract manufacturer.

The potential for counterfeit parts infiltration into the defense supply chain is a real and present danger. Cost Accounting Standards (CAS)-bound contractors and subcontractors are required to have an avoidance and detection system in place to quarantine and report suspected counterfeit and obsolete electronic parts. In some cases, those without counterfeit avoidance strategies can be fined, jailed, and even put out of business.

But that’s just the tip of the iceberg. Sweeping changes in the way your business must handle the counterfeit parts threat are here and will soon affect every sector of the world-wide electronics market: Government, commercial, and consumer. Whether you survive and profit or fail and perish will largely depend on the decisions your business makes today to adapt to these new developments.>

A Cautionary Tale

John Doe, owner of XYZ Company, a New Jersey-based independent contract manufacturer, zipped his new Porsche 911 Turbo along I-95 over the George Washington Bridge and into New York City. He was on his way to an important celebration: His firm had just won a $35 million bid to supply electronic components to a prime DoD contractor, with the guarantee of larger deals in the future.

A lavish dinner had been planned honoring XYZ’s seventh year of business--and 28 quarters of consecutive growth! John’s sales team was in for a big surprise: Large bonus checks for everyone, and a special recognition award (the keys to the Porsche) for Mr. C., the China broker. Mr. C. had used his elite connections with a mainland supplier to sole-source deep-discount, out-of-production electronic parts, ensuring consistent markup prices for resale and a steady flow of quarterly profits for XYZ.   

As John entered the hallway to the party he was handcuffed, read his rights and escorted out by federal agents. A military transport aircraft had recently crashed during a special operations mission in Iraq, killing all 20 servicemen aboard. A counterfeit part in the navigation system had been identified as the cause. XYZ Company was the source. John Doe was held responsible.

Read the full column here.


Editor's Note: This column originally appeared in the October 2014 issue of SMT Magazine.

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