Combating counterfeit risks across the complex electronics supply chain

2When it comes to thwarting counterfeit activity, choosing trusted partners to provide embedded systems equipment can actually be half the battle in guaranteeing a clean supply chain.

Accelerating innovation has been a priority for the Department of Defense (DoD) in recent years and momentum is expected to build as geopolitical tensions rise. With the current presidential administration pledging a “great rebuilding of the armed services,”1 the aerospace and defense industry is planning for increased spending on U.S. military weapons and modern warfighter capabilities.

As other NATO nations boost their own defense spending, demand for American-made weapons continues to grow worldwide. Pentagon officials who attended the 2017 International Paris Air Show, one of the world’s largest military and aerospace events, reported “seeing global demand from our partners in air, space, and cyberspace. We’re busier than ever and people want the U.S. to be the partner of choice.” 2

The U.S. is indeed a partner of choice for as the need to maximize system performance while reducing size, weight, and power (SWaP) escalates daily. A recent report projected global growth in the military embedded systems market from $71.3 billion in 2016 to $134.9 billion by 2021, with North America leading the way.3

Fast-moving innovation at odds with military requirements

With demand signals intensifying worldwide, the defense and aerospace industries increasingly look to the commercial sector for solutions. To achieve lower costs and rapid availability, original equipment manufacturers (OEMs) rely on commercial off-the-shelf (COTS) components, along with more ruggedized COTS+ versions for their systems.

While COTS software and hardware enable the defense industry to leverage the rapid pace of technology innovation, it also brings challenges. The two- to three-year product life cycles of many commercial components, for example, is a mismatch with the 10- to 20-year shelf life requirements of the defense sector; this disparity fuels demand for obsolete components.

The increased rate of mergers and acquisition activity in the semiconductor industry is also accelerating as product lines consolidate. What do these trends mean for defense contractors? Most likely, more headaches in managing the proliferation of product change (PCN) and end-of-life (EOL) notifications, which are not always timely or broadly communicated.

Supply chains at risk: counterfeit parts and malicious insertions

Navigating this challenging environment is a constant balancing act, especially when parts near EOL or become obsolete. OEMs striving to avoid the expense, time commitment, and impracticality of product redesign typically place last-time buys (LTB) or negotiate components deals with brokers/non-franchised resellers. While both approaches procure parts, the costs may be too high, especially with the “gray market” opening a door to components – reclaimed, remarked, reengineered, or otherwise fraudulently represented parts. Now the real problems begin.

Beyond the reportedly billions of dollars in annual economic losses tied to counterfeit parts, they also pose significant performance, reliability, and safety risks. Delayed missions, destroyed systems integrity, compromised critical infrastructure capabilities. All of these scenarios can ultimately endanger the lives of our service men and women.

The most insidious threat to our security is malicious components entering the supply chain via terrorists, rogue states, and other non-state actors. As reported in the political newspaper, The Hill:

“A federal advisory committee recently concluded that the U.S. military’s weapons systems are at risk from what is called “malicious insertion” – when something is deliberately inserted into a system for a malicious purpose – and exploitation of undiscovered vulnerabilities. Of particular concern are weapons currently in the field, which were not covered by the Pentagon’s current procedures for mitigating supply chain risks, the Defense Science Board’s cyber supply chain task force said.” 4

While supply-chain vulnerabilities mount daily, so too does the number of opportunities for modern defense weapons platforms and next-generation technologies. Let’s consider best practices for combating counterfeits and mitigating supply-chain risks while accelerating business goals.

Flow down standards across the supply chain

The first rule for combating fraudulent and counterfeit parts is to choose partners wisely by purchasing from original-component manufacturers or their authorized suppliers. It is incumbent on the OEM to establish disciplined processes and risk-mitigations system, and also to ensure that end-to-end supply chain partners do the same, by adhering to vetted procedures in compliance with SAE [the engineering-standards organization] fraudulent and counterfeit electronic parts standards (AS5553B and AS6496). These standards should be applied and flowed down through the supply chain to all organizations that procure EEE [electrical, electronic, and electromechanical] parts and/or assemblies. (Figure1.)

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Figure 1: SAE Aerospace Standard AS5553A “Risk Stack Chart” illustrates the authenticity of parts correlated with risk and application. Chart courtesy Counterfeit Parts/SAE International.

When an original or authorized source is not available, gray-market dealings should be contained to trusted, vetted, and managed brokers that comply with AS6081 – which handles avoidance of counterfeit parts – to reduce violation risks. The latest Department of Defense (DoD) requirements state that OEMs must essentially vouch for the quality and authenticity of the part, assuming all risks if the supplier delivers a counterfeit.

Keeping up with the latest compliance requirements and notifications is an arduous process. OEMs often fret that they want to be in the design and manufacturing business, not the parts-management and quality-control business. Here is where trusted, franchised distributors can help: By leveraging the global supply and design chain services of their trusted distributors from the component level all the way up to embedded subsystems, OEMs can focus on their core mission while minimizing counterfeit risks and managing obsolescence.

Services offered by trusted distributors can include:

  • Proactively keeping pace with the PCN and EOL notifications that matter most. Wading through the tens of thousands of notifications issued monthly can be like finding a needle in a haystack. A franchised distributor should follow a product life cycle and obsolescence process that demonstrates intimate knowledge of its partner’s systems or Bills of Material (BOM). For instance, if a company’s system requires that a component be flagged as an LTB, the franchised distributor can ensure fast action on the requirement. Counterfeit risk and premium costs of the gray market can be avoided by partnering with an authorized distributor that can identify, analyze, and act on the notifications that affect systems.
  • Promoting optimal part selection for standing programs or new designs by evaluating BOMs with procurement data and industry tools. OEMs struggle with so many options and unknowns when creating, managing, customizing, and purchasing BOMs, especially when considering parts obsolescence. Franchised distributors can share their unique insight on the part’s viability, based on global sales data plus manufacturer- and application-specific factors, for a superior predictor of the parts’ long-term availability.
  • Shortened design cycles, reduced cost, and mitigated risk by fully evaluating a product’s life cycle and roadmap. Whether creating a partial or full OEM product, company partners should understand a product’s unique requirements and can recommend new technologies and flexible options to propel it from design and testing to production and deployment.
  • Compliance with the latest DoD requirements and SAE standards with an electronic part detection and avoidance system, maintaining 100 percent control and traceability. The key to thwarting counterfeit parts entering the supply chain is working with authorized suppliers able to guarantee a supply chain through end-to-end visibility and traceability. When an authorized distributor is complying with the DFARS [Defense Acquisition Regulations System] flow down in a purchase order, they should never ship any parts that have been out of their control, unless given explicit consent. (See DFARS 252.246-7008 and DFARS 252.246-7007 for details.)
  • Seeks full transparency with parts returned to stock. Franchised distributors have long been granting OEMs the convenience and value of returning unused parts to stock. While this practice enables another OEM to purchase a needed part, it contradicts the best practice of maintaining 100 percent parts control. Your authorized distributor should have a process to fully vet the returned part – validating that they have matched its traceability and date code – while completing a quality review. Even with high confidence in the veracity of the parts returned to stock, authorized distributers should only ship returned parts to a defense contractor after making clear that the parts may carry risks.

Let’s be honest. These best practices will not stop the escalating counterfeit activity happening worldwide. Just as technology advancements are enabling breakthrough performance, they also empower counterfeiters with new tools of destruction. As we stand on the brink of what many believe to be a major turnaround for our defense programs, we all need to remain vigilant.

Bryan Brady is vice president/director of the Americas defense and aerospace business unit at Avnet. He is responsible for the military semiconductor and military IP&E pricing, supplier relationships, contract negotiations, and market strategy for the components business in the Americas. With nearly 30 years in the electronics distribution industry’s defense and aerospace segment, Brady spearheaded the development of quality and FAR/DFARS compliance programs to meet the industry’s stringent requirements. He has served on various electronics industry boards and working groups. Brady holds a Bachelor of Arts degree in economics from UCLA.

Scott MacDonald is vice president, global integrated solutions at Avnet. He is responsible for the strategic direction and daily oversight of the global integrated solutions organization, which has 1,800 employees and eight Manufacturing Centers of Excellence around the world. MacDonald is a veteran of the U.S. Air Force and holds a degree in civil engineering.

Avnet www.avnet.com

References:

1. Herb, Jeremy, “Trump order sets military budget in motion.” Politico, January 27, 2017. Retrieved from: http://www.politico.com/story/2017/01/trump-rebuild-military-executive-action-234288

2. Weisgerger, Marcus, “Global demand for US weapons ‘busier than ever’ in Trump Era, so far.” Defense One, June 21, 2017. Retrieved from: www.defenseone.com/business/2017/06/new-president-hasnt-dented-worlds-appetite-us-weapons/138869/

3. MarketsandMarkets, (October 2016), “Military Embedded Systems Market worth 134.88 Billion USD by 2021.” Retrieved from: http://www.marketsandmarkets.com/PressReleases/military-embedded-system.asp

4. Chalfant, Morgan, “Lawmakers fear infiltration of defense supply chain.” The Hill, March 19, 2017. Retrieved from: http://thehill.com/policy/cybersecurity/324575-lawmakers-fear-infiltration-of-defense-supply-chain