Faking It: Why Counterfeiting is the
Symptom, Not the Disease
Frank Cavallaro, Chief Executive Officer, Converge
Distributors can't stop chip counterfeiting from occurring, but
they can take better steps at achieving excellence and protecting
the integrity of the electronics supply chain. Working together,
the industry can raise the baseline of quality processes and reduce,
if not eliminate, the majority of sub-standard parts, making it a lot
harder for counterfeiters in the process.
Counterfeiting gets a lot of attention—and rightfully so; it's a topic
that fuels media headlines and puts everyone on edge. Researchers
estimate that between 5–20 percent of components in distributors'
supply chains are sub-standard devices, costing the electronics
industry up to $100 billion per year—so a little sensationalism is in
order. One police raid in China's Guangdong province found $1.2
million in counterfeit computer parts and documents which were
labeled with the logo of a big-name U.S. computer company. And
now there are threats that go beyond monetary loss. Recently, the
U.S. government reported that fraudulent chips are being found in
national defense networks.
However, while counterfeiting is a serious issue, the real problem
is a lack of quality in the distribution system. As an industry, when it
comes to ensuring quality in the modern global supply chain, it is a
victim of its own economics. There are inherent monetary pressures
to skimp on people, processes and technologies that can make the
system more air tight.
Underlying market forces create overly ripe conditions for
counterfeiting to flourish.
- Insatiable Demand for New Products: Even in a down economy,
the right products marketed the right way will fly off the shelves,
as seen with Apple's record sales of its iPhone.1 Strong demand
puts pressure on supply, which unto itself is good, but it further
exposes weak links in the supply chain.
- Speed: Time-to-market pressure, just-in-time inventories and
product upgrade cycles all contribute to "quality evaporation,"
as the amount of time allotted to check and monitor the
integrity of many parts moving through a large system at a
rapid pace is cut.
- Globalization: The more dispersed a marketplace becomes the
more difficult it is to control throughput. With outsourcing
and "midnight fabs," the nodes of production and distribution
multiply and almost disappear into the fog of the global
economy.
The result: a planet-sized marketplace fed by a supply chain in
a state of perpetual motion, governed by an almost infinite set of
variables and whose primary mantra is "faster and cheaper"—not
exactly a formula for a patient, thoughtful approach to quality.
The Monkey is in the Middle
Electronics distributors cannot eliminate the motive for
counterfeiting, but they can cauterize entry points for imitation
products through vigorous quality control. Like any complex
ecosystem, the weakest links are the links themselves—the hand-offs.
The very nature of a distributor's business model is that no parts are
made by the distributor, only the manufacturer. Some might argue
that this creates a “get out of jail free card,” a kind of genetic excuse for allowing the occasional rogue part into the system. "It's not our fault,
we don't have the capability or experience in hardware quality the way the manufacturer does.”
One should have zero sympathy
for that argument. The service sector has learned as much, if not
more, about total quality than the manufacturing sector over the past
decade or two. It is suggested that some in the distribution arena have
a different problem: They don't know they're in the service business!
Distributors have a responsibility for quality that is at least as great, if
not greater, than original equipment manufacturers (OEMs).
Global law enforcement agencies are vigilant and do find
counterfeiters and shut them down. But such scrutiny does nothing
to pinpoint where the corrupt part(s) became viable in the supply
chain.
Credentials and Certifications
A lack of quality discipline turns suppliers into involuntary peddlers
of sub-standard products—that's the harsh truth. This is why
distributor organizations, such as the Independent Distributors of
Electronics Association (IDEA), have recently issued more stringent
standards for membership; it's an effort to systemically raise the
quality bar. These organizations are evolving from networking clubs
into standard bearers for best practices. As they move to a model of
earning membership, they help put the entire industry on a more
quality-conscious track. A number of these groups offer more than
membership. For example, IDEA puts forth specific standards that
every distributor should adopt and even exceed. Here's an overview of
those initiatives/organizations/resources that are absolutely essential
for a global semiconductor distributor to get involved in or use to
remain quality-conscious:
- Customs-Trade Partnership Against Terrorism (C-TPAT): a
voluntary government-business initiative to build cooperative
relationships that strengthen and improve the overall
international supply chain and U.S. border security.
- IDEA: IDEA-STD-1010-A is the first inspection standard
addressing the need for the inspection of electronic components
traded in the open market.
- ERAI: a resource for risk assessment information and insight,
enabling companies to analyze risk mitigation on vendors,
customers and parts.
The following are “must-have” certifications to international
standards that apply to a distributor's facilities and personnel:
- International Organization for Standardization (ISO) 9001: a
quality management system standard.
- ISO 14001: an environmental management system standard.
- Occupational Health and Safety Assessment Series (OHSAS)
18001: an occupational health and safety management system
specification.
- American National Standards Institute/Electrostatic Discharge
(ANSI/ESD) S20.20: an ESD control program standard.
These certifications do require an investment of money, time and,
perhaps more challenging, endurance. ISO, for example, requires
that an organization be able to document its business practices and
demonstrate continual improvement. ISO is an example of how true
quality requires a behavior change and commitment, not only lip
service.
Quality Starts at Home
A company should not only meet all these external criteria, but
also have its own inspection process that exceeds any program in
the market. Quality should be taken very seriously, even fanatically.
A company should approach quality with a philosophy of "zero
tolerance" which pervades the various types of evaluations performed
across the procurement business, including:
- Vendor-Managed Programs: Research, pre-qualify and
continuously maintain vendor sources around the globe
to ensure that products received are procured from safe and
reputable sources.
- Systems Controls: Monitor and grade suppliers on an ongoing
basis. This helps identify any potential problems or concerns
early in the product procurement process.
- Rigorous Inspection Process: Products received must pass an
extensive inspection process before being received and prepared
for shipment. This includes visual inspection, engineering
review and sampling, and product testing.
- Continual Training: Having a strict regimen is one thing, but
having the people who can execute it flawlessly is another
challenge altogether. With the constant changes in technology
and product manufacturing, provide continual training to
inspectors to keep them up-to-date with the latest manufacturing
trends, industry best practices and counterfeiting techniques.
IDEA offers a certification program for inspectors.
- Spot Quality Control Testing: Continually improve quality
control processes by conducting self audits, systemic testing
of product samples and sending materials to an independent
third-party testing vendor to verify findings.
Sourcing, supplying and guaranteeing quality for millions of
semiconductors and electronic sub-systems to meet the demands
of a tech-powered global economy is serious business. Tentative
organizations do not manage risk very well. Sustainable quality requires
commitment and bold action. It's what should be demanded from
any organization because it's what customers demand. Distributors
can do better and should always strive to do so. A distributor's
mindset of a devotion to total quality is this industry's best defense
against counterfeiting. Quality as an antidote to counterfeiting has a
very rewarding side effect—better products. If the industry is using
excellence to eliminate phony chips, then it is also using excellence to
increase the quality of products reaching its customers. That is a true
win-win situation.
About the Author
Mr. Cavallaro has more than 20 years experience in electronic component
distribution and supply chain services. His market insight and financial
discipline have helped Converge become the largest independent distributor
of electronics. Recently, he has led the company's diversification into strategic
services for IT asset disposition and reverse logistics. Prior to his appointment
as chief executive officer, Frank held several key management roles at Converge,
including chief operating officer, vice president and general manager, and vice
president of global sales. Frank holds a bachelor's degree in economics and legal
studies from the University of Massachusetts Amherst. He is a member of the
Young Presidents Organization and currently sits on the board of IDEA.
References
1http://online.wsj.com/article/BT-CO-20090622-710455.html
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