When Tom Sharpe founded independent electronics distributor SMT Corp., he didn’t set out to become a testing lab. But that’s exactly what has happened, primarily as a result of being burned by bad sources that resulted in counterfeit components finding their way past SMT’s inspection and subsequently into the hands of a valued defense industry prime contractor customer.
That was six years ago. SMT then pulled out of the defense and aerospace industry for an entire year to reassess and revamp its counterfeit mitigation processes and capabilities. During that time, Sharpe and his colleagues embarked on a series of training programs and quality certifications while investing heavily in testing equipment to keep counterfeit parts out of the distributor’s 72,000 square-foot facility in Sandy Hook, Conn.
Today, SMT is widely known as a trusted source when you can’t get what you need from the original component manufacturer or authorized distributor, and Sharpe has become an expert on counterfeit electronic components and the latest test methods for detecting them. Now that the government has taken an even stronger stance on counterfeit components entering the defense supply chain, Sharpe sees positive signals on the horizon for his business and others serving military and aerospace markets.
“This is a good thing, not a bad thing, for the industry,” Sharpe said in an interview late last year, just as government officials were finalizing their recommendations for the National Defense Authorization Act (NDAA). Signed into law in late December, the NDAA includes new requirements for the sourcing of electronic components, with new pressure on defense contractors and their suppliers to know more about the products they’re using and where they came from.
“All of these policies and pressures for taking responsibility for who you buy from are going to thin the herd in the independent sector,” Sharpe adds. “Independent distributors are keenly aware of the counterfeit issue, the dangers of sourcing from the open market, and the difficulty of spotting the newer counterfeit processes, and they can no longer act like victims.”
Independent or not, distributors say stringent requirements and contractual obligations represent the greatest challenges in serving military and aerospace customers, and the counterfeit issue is a large part of that. Contractors and suppliers must meet quality requirements and other, similar terms and conditions when it comes to building military equipment and systems.
These requirements are now raising the bar on the knowledge and processes suppliers must have in place to effectively serve those customers. This is a business that has never been for the faint of heart, experts say, but it’s becoming even tougher under heightened scrutiny.
“This is absolutely not a business where you pick up the phone and ship them a hammer,” says David Moore, director of defense and aerospace for authorized distributor Avnet Electronics Marketing. “You have to understand how to read what the military wants and all the requirements associated with meeting that need.”
Despite anticipated defense budget cuts, many electronics distributors expect continued strength in military and aerospace markets into 2013, so they will remain focused on the quality control and process issues that are becoming so much more important in light of the heightened fight against counterfeits. As independents work to improve their systems, authorized distributors are searching for new ways to address product obsolescence issues so customers will rely less on the open market. In both cases, the objective is keeping bogus parts out of the defense supply chain to ensure better quality, improve safety, and save lives.
“It’s clear that the Defense Department and Congress have seen enough examples [of the danger of counterfeit components] to cause great concern,” Moore adds, pointing tothe thousands of reported incidents of fake parts in the military supply chain in the last year alone. “Companies have been [prosecuted]; people have gone to jail—because they have risked life for personal gain.”
Making Strides Against Counterfeits
The NDAA includes enhanced inspection and reporting requirements for companies supplying electronic parts or systems that contain electronic parts. It also calls for closer scrutiny by the Department of Homeland Security over countries considered to be significant sources of counterfeit parts in the Department of Defense supply chain. Industry watchers characterize the regulations as a good first step and say they expect the rules to get harsher as government agencies work to further define the parameters for supplying electronics and the penalties associated with passing on counterfeits.
There is good reason for the regulations. There were nearly 1400 reported incidents of counterfeit electronics in 2011, up from just 324 reported in 2009, and the bulk of them were reported by U.S. military and aerospace firms, according to industry analyst IHS, which released a report on the subject earlier this year. The figures amount to millions of counterfeit electronic components entering the military supply chain yearly—parts that could potentially fail or not work properly, causing harm and even death to soldiers and civilians.
“Last year there was a record number of counterfeit incidents reported,” Rory King, director of supply chain product marketing for IHS, told attendees at an industry conference this spring. “Altogether, the last five years have seen an all-time high in counterfeit reports.”
SMT’s Sharpe sees the issue up close every day. Entering the company’s warehouse and lab inspection areas is like going through a high-security checkpoint. Video surveillance monitors all work areas and movements of parts. Bio-scan identifications verify authorized personnel. Electrostatic discharge protection must be donned. And the climate is controlled to protect the components from the dangers of both high and low humidity.
With two complete labs and well over $1 million worth of high-end test equipment on the premises, SMT says it maintains the largest in-house lab and test capabilities within independent distribution. Test equipment includes real-time X-ray inspection systems, X-ray fluorescence systems, scanning electron microscopes (SEMs), scanning acoustic microscopy (SAM), automated solderability testers, decapsulation and die inspection systems, electronic testing equipment, and various solvent testing methods. Roughly 30 on-staff technicians inspect each and every product that crosses SMT’s loading dock, equating to about four quality-control employees for every sales rep on staff.
In addition, SMT’s lab inspectors are IDEA ICE 3000 certified, a professional designation awarded by the Independent Distributors of Electronics Association (IDEA). The company holds other key industry quality certifications as well, including AS9120, ANSI/ESD-20.20, ISO14001, and OHSAS 18001.
Sharpe says such steps are a must for independent distributors today because counterfeiters are becoming increasingly more sophisticated, developing new processes for creating counterfeits and anticipating detection methods even faster than they have in the past.
“This is all about massive quality assurance up front and, ultimately, high reliability for our war fighters,” Sharpe says, adding that independent distributors must have more “skin in the game” today—bigger insurance policies and better product warranty programs, for instance, and greater responsibility for a downstream occurrence if products they sell turn out to be counterfeit.
“Responsibility at this point is huge,” adds Sharpe. “[Independent distributors] know the dangers of the open market. Either you have the capability to identify counterfeit parts or you don’t. And if you don’t, you have no business selling components into the defense and aerospace industry.”
The counterfeit problem is a big concern to authorized sources as well, particularly when it comes to product obsolescence. This is the main reason customers turn to the open market, making product lifecycle management issues an even more important part of the conversation these days.
“Slightly more than one out of every two counterfeit parts shipped during the decade from 2001 to 2011 are obsolete,” IHS’s King points out. “Obsolete parts are where a lot of counterfeit activity is occurring. This underscores the importance of obsolescence management and lifecycle planning.”
Avnet’s Moore agrees and says the NDAA is placing intense industry focus on end-of-life product solutions that include a trail of original component manufacturer authenticity. The law includes financial and criminal penalties for contractors and subcontractors if counterfeit parts are found within their products, causing many to place greater emphasis on authenticy of supply.
In response, Avnet is stepping up efforts to elongate the authorized distribution product lifecycle. For example, the distributor is investing more in “end-of-life bridge buys” and providing a variety of financial and logistical solutions to store forecasted product for longer periods of time.
That last point is a key issue on both sides of the supply chain. Military programs are often built with the expectation that they will last decades, not years, and redesign costs are high. At the same time, original component manufacturers can’t be expected to produce a handful of components for decades based on unknown demand. Avnet is working with suppliers to develop product continuity programs in which the distributor will coordinate the manufacture and supply of the components.
“We have to continue to walk in that direction, because it is very difficult for customers to get their arms around future production needs of mature military programs,” Moore explains.