Mitigating risk of counterfeit parts in the electronic parts supply chain October 12, 2017 By: Dr. Vidya Mani Department of Supply Chain & Information Systems, Pennsylvania State University Joint work with Dr . Aydın Alptekinoğlu (PSU) and Dr. Jayashankar M. Swaminathan (UNC)
Agenda • Motivation • Introduction to the risk management framework • General risk management framework. • Application of framework to counterfeit risk in electronic parts supply chain. • Research design • Study 1 – Impact of supply-side factors. • Study 2 – Impact of product characteristics. • Study 3 – Impact of demand-side factors. • Cross-cutting risk factors • Importance of information sharing • Conclusions • Follow-on research projects 2
Importance of understanding counterfeit risk for electronic parts $169B market for • counterfeit electronics. Second largest • component (16%) of all counterfeit seizures by CBP in 2016. Counterfeit electronic • parts in public, health, and security applications have doubled in the last year. 3
Risk management framework Supplier failure, production Technology evolution for the delays, change in supplier cost, product, changes to material Supply-side Product quality, and reliability, loss of key and production processes, factors characteristics raw material or supplier, etc. intellectual property theft, etc. Demand-side factors Change in customer preferences, change in market conditions, change due to environmental regulations or 4 government legislation, etc.
Mitigating risk of counterfeit parts Risk analysis of counterfeit parts through study of supply-side factors, product characteristics and demand-side factors, which influence counterfeit risk Original Component Sub-tier Suppliers Authorized Original Equipment Downstream Manufacturer (OCM) • e.g. contract manufacturers, Distributor Manufacturer Customers assemblers, testers, foundries • e.g. semiconductor • e.g. Arrow Electronics (OEM) • e.g. system integrators, manufacturer - Xilinx assemblers, end • e.g. Honeywell consumer Unauthorized sources of supply (independent distributors, brokers, other resellers) 5
Risk management framework Objective: A quantitative assessment of factors that influence counterfeit risk and effective mitigation strategies based on empirical data. Supply-side Product Risk analysis framework: factors characteristics Supply-side factors – what are the supply chain factors that can lead to an increase in counterfeit risk for parts? Product characteristics – are there common Risk Analysis characteristics across parts that make parts more susceptible to counterfeit risk? Demand-side factors – what is the impact of the counterfeit part to the customer? what buyer practices can increase or mitigate counterfeit risk? Demand-side factors 6
Study 1: What supply-side factors lead to an increase in counterfeit risk? 7
What supply-side factors lead to an increase in counterfeit risk? Supply-side factors Conceptual map of supply chain factors Manufacturer Distributor Customer (OEM) (OCM ) •Supply factors - •Distribution •Market and shortages, factors - business leadtime, unauthorized ecosystem inventory sources, price factors - difference regulations, customer preferences Background: According to a study conducted by SIA: “most counterfeit parts are those that are hard to get because the parts were out of production or current production capacity could not keep up with demand” ( from Winning the battle against counterfeiters, SIA 2011 ). “The issue of counterfeit parts is just a symptom of a supply/demand imbalance” – Arrow Electronics (from Sheffi, 2015). 8
What supply-side factors lead to an increase in counterfeit risk? Supply-side factors Data and empirical analysis We collate the following information on active FPGA (field programmable gate array) parts: Number of distributors, average and trend in lead time, average price, number of available substitutes, inventory, price difference between authorized and unauthorized sources, internal and external changes, number of change notifications, and counterfeit reports for the period 2013-2015. Create a timeline of information available for each part. Select a cutoff date based on last information update to predict counterfeit risk after the cutoff date. Run a regression model to identify factors that significantly influence counterfeit risk. 9
What supply-side factors lead to an increase in counterfeit risk? Supply-side factors Impact of supply chain factors and mitigation strategies on counterfeit risk Variable (10% Impact on Factors increasing counterfeit risk increase relative to counterfeit risk mean) Parts more susceptible to counterfeit risk: High value, aging parts. Shortages +15.8% Supply-side factors: shortages, an increasing trend in leadtime. Price difference +9.5% Distribution: number of unauthorized sources, price difference. Number of external +12.2% Market-side: number of external changes. changes Mitigation strategies Variable (10% Impact on Sourcing flexibility - number of available substitutes or increase relative to counterfeit risk sources with inventory mean) Information sharing on upcoming changes with supply Sourcing flexibility -17.4% chain partners. Information sharing -23.6% 10
Risk management framework Supply-side Product factors characteristics Demand-side factors 11
Study 2: What product characteristics lead to higher risk of counterfeit parts? 12
What product characteristics lead to higher risk of counterfeit parts? Product characteristics Conceptual map of product characteristics Functionality Supply Environmental • Reprogrammability • Available in large • Compliance with volume regulations (e.g., • Support multiple ROHS, REACH) platforms and • Availability of low- flexible architecture cost options • Lead-free option • High reliability and endurance Background: Anecdotal evidence suggest that some part-categories are more easily counterfeited than others. From study 1, we know these are high-value parts. Can we isolate common characteristics across a set of parts that make them more susceptible to counterfeit risk? 13
What product characteristics lead to higher risk of counterfeit parts? Product characteristics Data and empirical analysis Focus on programmable logic devices (ASICs, FPGAs, etc.) Collate data for genuine parts from product datasheets and for counterfeit parts from counterfeit reports to categorize them into: Functional characteristics • Supply characteristics • Environmental characteristics • Run a regression model to identify factors that significantly influence the number of counterfeit reports observed for a part. 14
What product characteristics lead to higher risk of counterfeit parts? Product characteristics Impact of product characteristics on counterfeit risk Variable (10% Impact on Product characteristics that increase counterfeit risk increase relative to Counterfeit risk mean) Functionality characteristics: reprogrammability and Reprogrammability +27.6% reliability. Availability in large +11.3% Supply characteristics: availability in large volume. volume Environmental characteristics: lead-free option. 15
Shortages at authorized sources, availability Risk management (price difference) at unauthorized sources, external changes framework Problem of shortages • compounded by counterfeit parts available in large volume and low cost. Regulations can lead to • Supply-side Product shortages and increase the factors characteristics supply of non-compliant parts. Risk Analysis Demand-side factors 16
Study 3: What demand-side factors lead to higher risk of counterfeit parts? 17
What demand-side factors impact Demand- side factors counterfeit risk? Buyer practices Use a survey to understand buyer practices that influence counterfeit risk Use data on repair and Cost of replacement to quantify the recovery cost impact of failure due to counterfeit parts Background: Demand-side Anecdotal evidence suggests that counterfeit parts could lead to untimely failure of sub-assemblies and systems. factors Can we identify buyer practices that could significantly influence counterfeit risk? Given that a counterfeit part may be in the system, can we quantify its impact on cost of recovery? 18
What demand-side factors impact Demand- side factors counterfeit risk? Data and empirical analysis Obtained time and material contracts for the period 2012-2015 for repair and replacement of parts for all four Military Services. Matched data with counterfeit part numbers to identify part failures that are potentially due to a counterfeit part. At the TMS (type/model/series) level, we compare labor and material costs for parts with counterfeit alerts vs. other parts. On average, 7.5% increase in cost for parts with counterfeit alerts (range: 3.8% - 11.3%). Demand-side factors 19
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