October 1, 2009



Counterfeits and the U.S. Industrial Base



                    Brad Botwin
                    Direct...
Office of Technology
Evaluation (OTE)

                MISSION:
                OTE is the focal point within
            ...
Beyond Gucci and Hollywood

   Groundbreaking focus on national security
       Grounding of aircraft in-theater
      ...
Counterfeit Electronics Study
       -Survey Scope and Objectives

   Scale and scope
   Past problems and impact
   In...
Organizations Encountering Counterfeit Electronics
           Type of                    Encountered         No Counterfei...
Total Counterfeit Incidents: OCMs,
         Distributors, Board Assemblers, Prime/Sub
                   Contractors 2005 ...
Types of Counterfeit Incidents (2005-2008)
       Type of Product          2005   2006   2007   2008 (est.)
Industrial/Com...
Percent of Counterfeit Incidents Involving
In/Out of Production Products 2005 - 2008
100%

90%
       34%
80%             ...
In
                                                                  dep
                                                 ...
Inventory Control and Return Policies

                                                   Circuit
                        ...
Percent of Companies Performing
           Inventory Audits for Counterfeits
75%



60%

               47%
45%



30%
   ...
Percent of Distributors Purchasing Parts
from Different Suppliers
                                 Authorized     Unauthor...
How Companies Are Uncovering Counterfeits
   (2008 est.)
                          Returned as Defective                  ...
Top Authorities Notified After Counterfeit
Incidents

None at All                                                       51...
Internal Actions Taken to Prevent Infiltration
   of Counterfeits

                                                       ...
External Actions Taken to Prevent Infiltration
   of Counterfeits
                                                        ...
Counterfeit Electronics Study
         -Findings

   Lack of dialogue between all organizations in the
    U.S. defense s...
Counterfeit Electronics Study
       -Findings

   Few are aware of legal requirements and liabilities
   Stricter testi...
Counterfeit Electronics Study
       -Best Practices

   Establish clear written policies and procedures

   Increase in...
Counterfeit Electronics Study
        -Best Practices

   Buy parts from OCMs and authorized distributors
    when possib...
Counterfeit Electronics Study
         -Best Practices

   Verify parts meet purchase order requirements and
    document...
Counterfeit Electronics Study
        -Recommendations for USG

   Establish a Federal reporting mechanism and database
...
Keys to Success
                                                                  - Communication
                        ...
Counterfeit Electronics Study
        -What’s Being Done Since Surveys
   Defense Supply Center Columbus procedural chang...
BIS/OTE Contacts
   Brad Botwin
       Director, Industrial Studies
       Office of Technology
        Evaluation
    ...
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Counterfeits and the U.S. Industrial Base - Botwin

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Counterfeits and the U.S. Industrial Base - Botwin

  1. 1. October 1, 2009 Counterfeits and the U.S. Industrial Base Brad Botwin Director, Industrial Studies Office of Technology Evaluation JPL Counterfeits Workshop
  2. 2. Office of Technology Evaluation (OTE) MISSION: OTE is the focal point within BIS for assessing:  The effectiveness of export controls  The capabilities of the U.S. industrial base to support the national defense
  3. 3. Beyond Gucci and Hollywood  Groundbreaking focus on national security  Grounding of aircraft in-theater  Defense, critical infrastructure, and other government programs impacted  Sponsored by Naval Air Systems Command  Comprehensive study  Discrete electronic components + microcircuits  5 surveys (manufacturers, assemblers, distributors, contractors, DOD)  Interviews, site visits
  4. 4. Counterfeit Electronics Study -Survey Scope and Objectives  Scale and scope  Past problems and impact  Internal procurement policies and protocols  Testing, inspection, and inventory management  Post-identification procedures  Industry and government best practices
  5. 5. Organizations Encountering Counterfeit Electronics Type of Encountered No Counterfeit Total Company/Organization Counterfeits Incidents Discrete Original Electronic 18 21 39 Component Components Manufacturers Microcircuits 24 20 44 Authorized 10 35 45 Distributors Distributors Unauthorized 44 9 53 Distributors Board Assemblers 11 21 32 Prime/Sub Contractors 31 90 121 DLA 3 16 19 Department Organizations of Defense Non-DLA 11 23 34 Organizations Total 152 235 387 Source: U.S. Department of Commerce, Office of Technology Evaluation, Counterfeit Electronics Survey, August 2009.
  6. 6. Total Counterfeit Incidents: OCMs, Distributors, Board Assemblers, Prime/Sub Contractors 2005 - 2008 10,000 9,356 9,000 8,600 8,139 8,000 7,000 6,000 142% 5,000 3,868 4,000 3,000 2,000 1,000 0 2005 2006 2007 2008 (est.)
  7. 7. Types of Counterfeit Incidents (2005-2008) Type of Product 2005 2006 2007 2008 (est.) Industrial/Commercial 1739 4860 3841 2839 Consumer 154 345 398 531 High Reliability – Industrial 49 81 164 488 Qualified Manufacturers List 49 77 161 261 (QML) Critical Safety 42 63 93 277 Qualified Products List 16 39 111 144 (QPL) High Reliability – Medical 1 24 58 105 ITAR Controlled 15 10 67 19 Commercial Aviation 9 15 17 27 High Reliability – Automotive 2 6 8 25 Generalized Emulation 0 0 0 2 Microcircuits (GEM)
  8. 8. Percent of Counterfeit Incidents Involving In/Out of Production Products 2005 - 2008 100% 90% 34% 80% 42% 43% 43% 70% 60% 50% 40% 66% 30% 58% 57% 57% 20% 10% 0% 2005 2006 2007 2008 (est.) In Production Out of Production
  9. 9. In dep In en te de rn 0% 20% 40% 60% 80% 100% et nt Bro ke Ex Dis A cl tr rs ut us ib 64% iv ut ho riz e or s So ed ur 46% Di ce st s C rib on ut tr or ac Ind s tM iv an idu uf a ac l s Pr tu im re e/ rs Su b O 14% 13% 12% 12% C on EM tr ac 8% to rs O 7% O D th O th D er er De 3% U S po ts Fe de 1% U S ra OC St lA M * Only includes companies that encountered counterfeits at ge 1% e/ nc Lo ie ca s Who is Selling Counterfeits?* lG 1% ov D er LA nm 1% en ts 1%
  10. 10. Inventory Control and Return Policies Circuit Prime/Sub OCMs Distributors Board Contractors Assemblers Accept Returns From 96% 100% 84% 81% Customers Buy Back Excess Inventory From 25% 46% 16% 7% Customers Restock/Re-circulate Returns or Excess 61% 54% 13% 21% Inventory From Customers Have Cases of Individual Customers Returning 17% 31% 3% 2% Counterfeits
  11. 11. Percent of Companies Performing Inventory Audits for Counterfeits 75% 60% 47% 45% 30% 19% 19% 17% 17% 16% 15% 0% ns rs ns s rs s er M to io to io bl C ac at at bu em O iz iz tr tri an on an ss is rg rg C A D O O b rd Su LA LA oa e/ -D B D im on Pr N
  12. 12. Percent of Distributors Purchasing Parts from Different Suppliers Authorized Unauthorized Type of Supplier Distributors Distributors OCMs 98% 79% Authorized Distributors 78% 91% Independent Distributors 47% 94% Brokers 29% 92% OEMs 11% 85% Internet-Exclusive Sources 27% 58% Contract Manufacturers 7% 66% DOD Depots 2% 11% DOD Manufacturing Centers 2% 9% DOD Surplus 4% 4% DLA 2% 2%
  13. 13. How Companies Are Uncovering Counterfeits (2008 est.) Returned as Defective 1261 Discovered Defective Parts/Poor Performance 1116 Markings, Appearance, Condition of Parts 929 Notification by OCM 835 Testing 776 Customer Suspected Part Was Counterfeit 693 Notification by US Customs 604 Self-Initiated Investigations 341 Notification by OEM 180 Returned as Wrong Merchandise 50 Absence of Original Documentation 15 Returned as Excess Inventory 8 Notification by GIDEP 6 Notification by DLA 6 Notification by Other US Government Agencies 3 Notification by Non-US Government Agency 3 Other 2 Unauthorized Overrun by Contract Manufacturers 0 200 400 600 800 1000 1200 1400
  14. 14. Top Authorities Notified After Counterfeit Incidents None at All 51% Government-Industry Data Exchange Program (GIDEP) 14% Defense Logistics Agency (DLA) 11% State/Local Authorities 8% Customs & Border Protection 7% Federal Bureau of Investigation (FBI) 6% Defense-Related Investigative Services (e.g., DCIS, NCIS, etc.) 5% Federal Aviation Administration (FAA) 5%
  15. 15. Internal Actions Taken to Prevent Infiltration of Counterfeits Circuit Distributor Prime/Sub Action OCMs Board DOD s Contractors Assemblers Performing screening and testing on inventory 27% 8% 41% 37% 21% Training staff on the negative economic and safety 31% 65% 28% 36% 15% impacts of counterfeit products No internal actions taken 35% 19% 34% 32% 72% Revising procurement procedures to more carefully screen/audit/evaluate authorized returns from 35% 76% 25% 23% 11% customers Revising company procedures for disposal of 34% 44% 22% 17% 11% “seconds,” defective parts, and production overruns Other 8% 12% 9% 17% 0% Revising procurement procedures to reduce purchases - - 13% 4% 11% from independent distributors and brokers Embedding new security measures in existing product 12% 4% 3% 2% 2% lines Adding security markings to existing inventory 12% 0% 0% 2% 8%
  16. 16. External Actions Taken to Prevent Infiltration of Counterfeits Circuit Board Prime/Sub Action OCMs Distributors Assemblers Contractors No external actions taken 35% 29% 59% 69% Tightening contractual obligations of contract manufacturers with regard to disposal of “seconds,” 29% 11% 3% 12% defective parts, and overruns Educating customers/suppliers on the negative 31% 52% 16% 9% economic and safety impacts of counterfeit products Educating customers about risks associated with grey 40% 57% 28% 8% market products Other 8% 5% 3% 9% Referring customers to companies that could identify suitable substitute products or re-engineer system 19% 30% 25% 6% components Referring customers to authorized after-market 27% 21% 9% 5% manufacturers Prohibiting authorized distributors from buying back 31% 10% 6% 5% excess inventory on the grey market Prohibiting authorized distributors from buying back 6% 5% 0% 3% excess inventory from their customers
  17. 17. Counterfeit Electronics Study -Findings  Lack of dialogue between all organizations in the U.S. defense supply chain  Assumption that others are testing parts  Lack of traceability in the supply chain  Insufficient chain of accountability within organizations  Record keeping of counterfeit incidents is limited  Few know what USG authorities to contact
  18. 18. Counterfeit Electronics Study -Findings  Few are aware of legal requirements and liabilities  Stricter testing protocols and quality control practices are needed  Most DOD organizations do not have policies to prevent supply chain infiltration  No type of company or organization has been untouched by counterfeit electronic parts  Ultimately, everyone must work together to solve the problem of counterfeit parts
  19. 19. Counterfeit Electronics Study -Best Practices  Establish clear written policies and procedures  Increase internal/external communication  Institute counterfeit part training programs  Ensure physical destruction of defective parts  Inspect all returns and buy-backs to verify authenticity
  20. 20. Counterfeit Electronics Study -Best Practices  Buy parts from OCMs and authorized distributors when possible  Establish lists of trusted and unapproved suppliers  Implement contract requirements for counterfeit avoidance policies and practices  Scrutinize suppliers with cheap prices/short lead times  Require traceability of parts back to OCMs
  21. 21. Counterfeit Electronics Study -Best Practices  Verify parts meet purchase order requirements and documentation (inspections/testing)  Establish strict inventory controls  Remove counterfeits from regular inventory; quarantine  Maintain internal database to track counterfeits  Report counterfeits to law enforcement and industry associations/databases
  22. 22. Counterfeit Electronics Study -Recommendations for USG  Establish a Federal reporting mechanism and database  Clarify FAR and DFAR procurement requirements  USG should issue clear legal guidance  Increase inspections, coordination, and prosecutions  Address deficiencies related to electronic parts information, standards, and training  Develop international agreements  Address procurement obsolescence issues
  23. 23. Keys to Success - Communication -Documentation U.S. Defense Electronic -Notification Parts Supply Chain Original Component Manufacturers (OCM) parts Authorized Distributors Independent Distributors and Brokers parts Circuit Board Assemblers Defense Prime Contractors and Subcontractors Parts, subsystems, and systems Department of Defense Depots and Installations
  24. 24. Counterfeit Electronics Study -What’s Being Done Since Surveys  Defense Supply Center Columbus procedural changes  DOD Action Plan  SAE Standard AS5553  NASA quality assurance/counterfeit avoidance training  Federal Acquisition Regulation (FAR) changes  Anti-Counterfeit Trade Agreement negotiations  Other…
  25. 25. BIS/OTE Contacts  Brad Botwin  Director, Industrial Studies  Office of Technology Evaluation  202-482-4060  bbotwin@bis.doc.gov  www.bis.doc.gov
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