This data compiled by the US Department of Commerce Bureau of Industry and Security shines a bright light on the seriousness of the counterfeiting issue. “The number of incidents rose dramatically, more than doubling from 3,369 incidents in 2005 to 8,644 incidents in 2008. BIS stated this large increase can be attributed to a number of factors, such as a growth in the number of counterfeit parts, better detection methods, and/or improved tracking of counterfeit incidents.
China became a fully-fledged member of the international trading system in 2001. The amount of counterfeit electronic components has arisen alongside the rise of international trade. Organized and petty criminals alike have taken advantage of open trade agreements to move money and goods freely across borders in a minimum amount of time by moving illegal goods through the same channel as legal goods. Both developed and developing countries have been unable to sufficiently monitor their borders to combat counterfeit trade. Counterfeiting is not viewed as a serious problem on its own; it is only when public health and safety are endangered that the threats of counterfeiting are taken seriously. Public awareness of the dangers of counterfeiting needs to be combined with improved efforts to enforce trade policies. This graph demonstrates the rapid rise of Chinese Exports between 2000 – 2006 China’s status in the WTO is not going to change.
Here you can see the rapid rise of Counterfeit instances reported to GIDEP ( Government-Industry Data Exchange Program) between 2000 – 2008 The rise of counterfeits directly correlates with China’s admission to the WTO.
The vast majority of counterfeit parts can be traced back to China. Unfortunately, the supply chain has become so polluted a part’s lineage (including counterfeit parts) is often-times unverifiable. This is only one of the many hurdles law enforcement must contend with.
Online trading platforms like these open the doors for anyone to sell anything with few rules or regulations. China has taken full advantage of these open trading portals and as a result the counterfeit component trade has flourished.
Buyer’s and Seller’s can not make assumptions. We are all aware of the seriousness of this issue. We all must be proactive and responsible for our actions.
According to the survey conducted by the US Department of Commerce: all elements of the supply chain have been directly impacted by counterfeit electronics; • there is a lack of dialogue between all organizations in the U.S. supply chain; • companies and organizations assume that others in the supply chain are testing parts; • lack of traceability in the supply chain is commonplace; • there is an insufficient chain of accountability within organizations; • recordkeeping on counterfeit incidents by organizations is very limited; • most organizations do not know who to contact in the U.S. Government regarding counterfeit parts; • stricter testing protocols and quality control practices for inventories are required; and • most DOD organizations do not have policies in place to prevent counterfeit parts from infiltrating their supply chain
Our objective today is to bridge the gap that exists between the Buyer and Seller during the key phases of a purchase/sales agreement. We will be drilling down to the type of dialogue that should take place between buyer and seller relative to product inspection and testing, which is the final barrier of defense in your risk mitigation strategy.
A proactive dialogue should address the following:
The wrong way and right way of retaining a testing laboratory
Counterfeit Overview -Portals of Entry <ul><li>Rapid access to millions of parts </li></ul><ul><li>Minimal membership requirements </li></ul><ul><li>Quick & easy access to a large audience of buyers </li></ul><ul><li>Burn customer and re-register using a new name </li></ul>
Counterfeit Overview -Impact <ul><li>Impact of using counterfeit parts or materials </li></ul><ul><li>Potential loss of life </li></ul><ul><li>Espionage </li></ul><ul><li>Monetary loss </li></ul><ul><li>Liability </li></ul><ul><li>Lack of availability of products for customer use </li></ul><ul><li>Loss of customer/public trust </li></ul><ul><li>Brand damage </li></ul>
What We Know • There is a lack of dialogue between all organizations in the U.S. supply chain. • Companies and organizations assume that others in the supply chain are testing parts. • Lack of traceability in the supply chain is commonplace. • There is an insufficient chain of accountability within organizations. • Recordkeeping on counterfeit incidents by organizations is very limited. • Stricter testing protocols and quality control practices for inventories are required.
Communication is Key <ul><li>Parts Availability </li></ul><ul><li>Purchasing Process </li></ul><ul><li>Supply Chain Traceability </li></ul><ul><li>Procurement Contract Requirements </li></ul><ul><li>Product Assurance </li></ul><ul><li>Material Control </li></ul><ul><li>Reporting </li></ul>
Product Assurance <ul><li>It should be established prior to procurement which party is responsible for product authenticity verification – Burn-In! </li></ul>
What NOT to Do The Wrong Way: Distributors and their customers should ensure that none of the following five methods are followed by them when choosing a testing facility: The Distributor alone selects the testing facility; The tests that are conducted are not sufficient to ensure whether the parts are valid; The testing facility limits its liability; The testing facility that is used is the only one that is used by the Distributor or its customer; and The Distributor agrees to the testing facility’s terms and conditions without first reviewing them and then not trying to negotiate changes to them.
What TO Do The Right Way : In order to ensure that Distributors and their customers are protected from a testing facility’s negligence and to further reduce the possibility of consummating a transaction involving counterfeit or mismarked components, Distributors and their customers should adhere to the following five rules: Distributor and Customer work together to select the testing facility and the type of testing; The Customer is advised upfront that the costs of the components are at least somewhat dependent upon the cost of the testing; Multiple testing laboratories are considered; Terms of agreement with testing laboratory are negotiated and no limitations of liability are agreed upon; and Discover the type of insurance maintained by testing laboratory and its level of certification.
REVIEW <ul><li>Procurement contract language should include requirements which will help ensure that conforming, authentic material be provided! </li></ul><ul><li>Traceability </li></ul><ul><li>Inspection and Test </li></ul><ul><li>Liability </li></ul><ul><li>Insurance requirements </li></ul><ul><li>Warranty </li></ul><ul><li>Specific product specifications </li></ul><ul><li>Penalties </li></ul><ul><li>Confiscation/destruction </li></ul>
Thank You! QUESTIONS? Keith Gregory Greenberg & Bass [email_address] Kristal Snider ERAI Inc. [email_address]