The electronics supply chain faces several significant challenges. One of the most pressing of these is the prominence of counterfeit electronic components.
Electronics is a massive and profitable industry, so it is a natural target for fraudsters trying to capitalize on that potential. As demands have grown and global supply chains have become increasingly difficult to manage, selling counterfeit parts to unsuspecting manufacturers has become easier.
So far, there’s no single “silver bullet” that can eliminate the risk of procuring a counterfeit. Risk mitigation strategies range from vendor selection and visual inspection to high-tech solutions such as blockchain.
The cost of counterfeit electronic components
Counterfeit components are a more common issue than they may seem initially. The Electronic Resellers Association International (ERAI) reported 768 counterfeit and nonconforming parts in 2022. That represents a 35 percent increase over 2021 despite overall semiconductor sales remaining the same. And those are only the instances reported to ERAI. The Government-Industry Data Exchange Program (GIDEP) also collects information about suspicious or non-conforming electronics.
Fraudulent parts carry high costs, too. They often impact overall device performance, leading to recalls, lost sales and declining consumer confidence. Manufacturers may also face hefty legal fines for selling products containing counterfeit components.
The U.S. Chamber of Commerce estimates these costs add up to $500 billion a year across all countries and industries. As the electronics industry grows, so will the losses from counterfeits. In light of these risks, manufacturers in the sector should do all they can to keep counterfeits out of their supply chains. Here are five ways how.
Maximize supply chain visibility
The first step to addressing counterfeit electronic components is to make supply chains more transparent. One of the reasons counterfeits are so prevalent is that many manufacturers lack visibility into their upstream supply chain partners. A shocking 45 percent of organizations today can only see as far as their first-tier suppliers or need more upstream visibility entirely.
Manufacturers can implement more effective controls when they know exactly where every part comes from. That begins with increasing data-sharing practices between supply chain partners. Internet of Things tracking solutions and cloud dashboards can enable the level of visibility and data consolidation organizations need to gain a complete view of their supply chains.
Reconsider your supplier options
Once electronics manufacturers have more visibility into their suppliers, they may need to reconsider them. There are four general sourcing options for electronic components:
- Original manufacturers
- Distributors
- Brokers
- Catalog suppliers
Many manufacturers work with distributors, as they offer multiple selling channels and often have large available quantities for affordable prices. Amid chip shortages, many have also turned to brokers, who buy excess stock from other organizations to resell. However, these options can introduce counterfeit risks from their lack of visibility.
When possible, it is best to source from an original part manufacturer, as it simplifies the supply chain and offers confidence in a component’s origin. Authorized distributors are also considered safe as they procure directly from component makers’ factories and are audited by their suppliers.
Inspect component shipments
Next, manufacturers should monitor for counterfeit electronic components in their shipments. Even if businesses trust their suppliers, counterfeits are a widespread and severe issue, so they should not take any risks.
Photo credit: Mika Baumeister
Start by visually inspecting components to ensure there are not any obvious physical differences between what they should look like. Checking the label is also essential, as any spelling errors, incorrect company names or unusual date codes are red flags.
Some counterfeits are too convincing to see with the naked eye, so testing may be necessary for highly sensitive components. Thickness checks, x-rays, metallurgy analysis and similar steps can all reveal counterfeits, though manufacturers may need to turn to third-party professionals for these services.
Use blockchain tracking solutions
Blockchain technology has recently emerged as another promising way to fight counterfeit electronic components. A blockchain uses a decentralized, distributed network of devices to host a ledger of encrypted records. Importantly for electronics manufacturers, these records are transparent to all users but virtually impossible to alter.
Manufacturers can use a blockchain tracking solution that creates a new block in the chain at each scan from the original production to its final destination. That way, they can verify precisely where parts came from and when they arrived at each point in the supply chain. Large retailers and pharmaceutical companies have already begun using blockchain supply chain tracking, and electronics manufacturers should follow suit.
Transfer risks where possible
Electronics producers can also minimize the costs of counterfeits by transferring risk. Preventive steps like holding suppliers to higher standards and using blockchain tracking are more important, but some things may still slip through the cracks. Legal documentation that shifts responsibility away from the manufacturer can help lessen the impact of those occurrences.
Comprehensive insurance policies can offset some risk. Contracts with suppliers and downstream supply chain partners should also include language that holds the manufacturer harmless should a counterfeit component emerge. As with any legal matter, companies must meet with legal counsel to know their rights and options within this strategy.
Counterfeits require diligence
As digitization ramps up across industries, counterfeit electronic components will become an increasingly serious issue. Supply chain complications may make tackling them difficult, but manufacturers can keep them out of their supply chains by following these steps. There are also numerous guidelines from standards organizations and electronics associations that provide templates for counterfeit prevention.
Counterfeit components have far-reaching effects across the supply chain. The industry must adapt to keep them out and mitigate the impact of what slips through to keep businesses and their customers safe.
