The 2020 Mid-Year Economic Update_long

Distributors Take the Lead in Tackling the Counterfeit Challenge

How one industry is taking a three-pronged approach to stopping the problem of counterfeits.
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The number of counterfeit report incidents continues to rise and almost no industry is left untouched by the negative impact of counterfeit electronic components. The negative impact to semiconductor manufacturers has been estimated to be $7.5B in lost revenue, according to market research firm IHS. The same firm has estimated the annual risk of failure of counterfeit components to be approximately $160 billion.

Read more about The Counterfeit Challenge in distribution in the latest issue of MDM Premium.

Despite the growing awareness of the dangerous impact of counterfeit electronic components, their infiltration is widespread across verticals ranging from consumer electronics to military/aerospace, healthcare and automotive. For example, IHS Research found that the number of high risk suppliers to the US government, including counterfeiters, increased 60 percent from 2002 to 2011.

The problem has been widely publicized; counterfeits are widespread through all parts of the electronics supply chain, impacting every player from the manufacturer to the end consumer. Caught in the middle is the distributor, who must try to meet the needs of buyers demanding hard-to-find and often discontinued electronic components at low prices, and source from manufacturers who may have turned their attention towards newer, more profitable product lines. Some unauthorized distributors may fall into the counterfeit trap by obtaining product from less-than-reputable suppliers and passing the counterfeits on, sometimes unknowingly, to unsuspecting buyers.

Counterfeits not only harm the reputation of manufacturers to distributors, they also cause significant problems downstream in the supply chain. Fortunately, some distributors have adopted a manufacturer-direct model that ensures 100% authentic components by sourcing components directly from the manufacturer, while also working with buyers to educate them to the dangers of obtaining goods from the gray market which increases their chances of purchasing counterfeit components.

This growing threat has prompted efforts to slow, if not completely stop, the distribution of counterfeits. Because of the importance of electronic components to national security programs, the federal government has passed legislation that sanctions suppliers who allow counterfeits to enter the military supply chain.

In December 2011, President Obama signed the 2012 National Defense Authorization Act (NDAA) which, as a reaction to then-recently publicized incidents of expensive and possibly life-threatening failures of military weapons and transportation systems caused by counterfeit electronic components, for the first time detailed penalties related to counterfeit parts and their suppliers. The burden was placed on military contractors to more effectively prevent counterfeits from entering the supply chain or risk financial and possibly criminal penalties.

Contractors were not allowed to pass the costs for this increased enforcement on to the Department of Defense. This regulatory approach meant that liability for counterfeits throughout the supply chain spread and ultimately aided the buyer in finding recourse.

The immediate industry response was that regulation had gone too far, and that the prevention of counterfeits required a more balanced approach. Federal regulations were subsequently refined in a series of directives but the impetus to hold more parties responsible for counterfeits has not changed, and regulatory efforts have been augmented by industry responses to fight the counterfeit threat.

Distributor innovation for protecting the supply chain
Buyers of electronic components have adopted a ‘buyer beware’ approach to purchasing electronic components, especially in instances where the components cannot be traced back to the original manufacturer. Authorized distributors have a stake in ensuring that their customers are savvy enough to distinguish between distributors of authentic product direct from the manufacturer and counterfeit product sourced from third-party suppliers.

This demand-driven approach has begun to pay off, accelerated by improvements in the way authorized distributors market and sell their products. The Internet is playing an important role in the fight against counterfeit components, through advances in e-commerce and specialized tools offered by distributors to track and stop the unauthorized leakage of counterfeit components into the supply chain.

E-commerce stores for electronic components are becoming more commonplace as distributors respond to buyer demand for online product and pricing information in order to make more educated buying decisions. However, the move to e-commerce carries risks for both distributors and buyers. Distributors must ensure that their warehousing, distribution and fulfillment facilities all comply with industry standards, especially for sensitive and mission-critical components.

At the same time, buyers must use caution in selecting an online distributor, as the Internet has made it easy for non-authorized distributors to set up an official-looking storefront without the processes and controls necessary to ensure a secure supply chain. Once the authorized distributor has established a secure e-commerce store, it can leverage this capability to offer buyers Internet-based tools that compare and search for manufacturer-direct products ensuring buyers are better educated in their purchasing decisions.

Analytics programs also enable distributors to better track components, gaining visibility into any gaps in the supply chain, and ultimately preventing counterfeits from reaching buyers.

This three-pronged approach – adopting more stringent regulation, building awareness through customer education, and harnessing the innovative potential of the Internet – has provided electronic components distributors with useful weapons to fight back against the rise of counterfeits. Other distributors could use a similar approach – albeit one calibrated specifically to the needs of their sectors – to combat the counterfeit problem in their markets.

Steve Martin is the executive vice president of sales for Components Direct, an Avnet Company.

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