Mitigating risk of counterfeit parts in the electronic parts supply - - PowerPoint PPT Presentation

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

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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.

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Risk management framework

Product characteristics Demand-side factors Supply-side factors

Technology evolution for the product, changes to material and production processes, intellectual property theft, etc. Supplier failure, production delays, change in supplier cost, quality, and reliability, loss of key raw material or supplier, etc. Change in customer preferences, change in market conditions, change due to environmental regulations or government legislation, etc.

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Mitigating risk of counterfeit parts

Sub-tier Suppliers

• e.g. contract manufacturers,

assemblers, testers, foundries

Original Component Manufacturer (OCM)

• e.g. semiconductor

manufacturer - Xilinx

Authorized Distributor

• e.g. Arrow Electronics

Original Equipment Manufacturer (OEM)

• e.g. Honeywell

Downstream Customers

• e.g. system integrators,

assemblers, end consumer

Risk analysis of counterfeit parts through study of supply-side factors, product characteristics and demand-side factors, which influence counterfeit risk

Unauthorized sources of supply (independent distributors, brokers, other resellers)

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Risk management framework

Product characteristics Demand-side factors Supply-side factors

• Objective:
• A quantitative assessment of factors that influence

counterfeit risk and effective mitigation strategies based

• n empirical data.
• Risk analysis framework:
• 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

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?

Risk Analysis

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Study 1: What supply-side factors lead to an increase in counterfeit risk?

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What supply-side factors lead to an increase in counterfeit risk?

Supply-side factors Manufacturer (OCM)

• Supply factors -

shortages, leadtime, inventory Distributor

• Distribution

factors - unauthorized sources, price difference Customer (OEM)

• Market and

business ecosystem factors - regulations, customer preferences

Conceptual map of supply chain factors 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).

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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.

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What supply-side factors lead to an increase in counterfeit risk?

Supply-side factors

Factors increasing counterfeit risk Parts more susceptible to counterfeit risk: High value, aging parts. Supply-side factors: shortages, an increasing trend in leadtime. Distribution: number of unauthorized sources, price difference. Market-side: number of external changes. Mitigation strategies Sourcing flexibility - number of available substitutes or sources with inventory Information sharing on upcoming changes with supply chain partners.

Impact of supply chain factors and mitigation strategies on counterfeit risk

Variable (10% increase relative to mean) Impact on counterfeit risk Shortages +15.8% Price difference +9.5% Number of external changes +12.2% Variable (10% increase relative to mean) Impact on counterfeit risk Sourcing flexibility

• 17.4%

Information sharing

• 23.6%

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Risk management framework

Product characteristics

Demand-side factors

Supply-side factors

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Study 2: What product characteristics lead to higher risk

• f counterfeit parts?

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What product characteristics lead to higher risk of counterfeit parts?

Product characteristics

Functionality

• Reprogrammability
• Support multiple

platforms and flexible architecture

• High reliability and

endurance Supply

• Available in large

volume

• Availability of low-

cost options Environmental

• Compliance with

regulations (e.g., ROHS, REACH)

• Lead-free option

Conceptual map of product characteristics 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?

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What product characteristics lead to higher risk of counterfeit parts?

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.

Product characteristics

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What product characteristics lead to higher risk of counterfeit parts?

Product characteristics that increase counterfeit risk Functionality characteristics: reprogrammability and reliability. Supply characteristics: availability in large volume. Environmental characteristics: lead-free option. Impact of product characteristics on counterfeit risk

Variable (10% increase relative to mean) Impact on Counterfeit risk Reprogrammability +27.6% Availability in large volume +11.3%

Product characteristics

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Risk management framework

Product characteristics Demand-side factors Supply-side factors

Shortages at authorized sources, availability (price difference) at unauthorized sources, external changes

• Problem of shortages

compounded by counterfeit parts available in large volume and low cost.

• Regulations can lead to

shortages and increase the supply of non-compliant parts.

Risk Analysis 16

Study 3: What demand-side factors lead to higher risk of counterfeit parts?

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Demand-side factors

What demand-side factors impact counterfeit risk?

Demand- side factors

Buyer practices Cost of recovery

Use a survey to understand buyer practices that influence counterfeit risk Use data on repair and replacement to quantify the cost impact of failure due to counterfeit parts Background:

• Anecdotal evidence suggests that counterfeit parts could lead to untimely failure of sub-assemblies and systems.
• 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?

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Demand-side factors

What demand-side factors impact counterfeit risk?

Demand- side factors

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%).

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Demand-side factors

What demand-side factors impact counterfeit risk?

Demand- side factors

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%).

• 70% of the increase in cost is due to increase in labor cost.
• Common faults associated with parts with counterfeit alerts include fault in

structure or functionality of the part.

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Risk management framework

Product characteristics Demand-side factors Supply-side factors

Shortages at authorized sources, availability (price difference) at unauthorized sources, external changes

• Problem of shortages

compounded with counterfeit parts available in large volume and low cost.

• Regulations can lead to

shortage and increase supply

• f non-compliant parts.
• Counterfeit parts that are not reliable or

reprogrammable can lead to failures that are hard to detect and repair.

• Replacement parts are hard to

find if genuine parts are in shortage and require more time to verify if there are counterfeit alerts.

• Sourcing flexibility can reduce

cost of recovery through use of alternate sources or substitutes.

Risk Analysis 21

Demand-side factors

What demand-side factors impact counterfeit risk?

Demand- side factors Information Sharing

• Level of information sharing on counterfeit part alerts within an
• rganization unit, across organization units, and with supply chain

partners.

• Accessibility to the information across the supply chain.

Risk Management

• Factoring in counterfeit risk into a risk assessment tool.
• Sharing of risk assessment tool across the supply chain.

Effective buyer practices

• Practices to verify that suppliers ensure that parts are genuine.
• Practices to mitigate supply risk (or shortages) for a part.

Survey design

• Same set of questions were

asked to different POCs in each of the four Military Services and DLA.

• 80% response rate.

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Demand-side factors

What demand-side factors impact counterfeit risk?

Demand- side factors Information Sharing

• Low levels of information sharing with other services, more likely to share

with a supply-chain partner than other Services.

• > 50% do not report information in a public database but use GIDEP (govt.

industry data exchange program) to monitor alerts.

Risk Management

• 60% do not use any tool.
• Of the 40% that use a tool, only 5% share it with other organizations.

Effective buyer practices

• > 60% believe periodic audits of suppliers and legal actions are effective.
• > 80% are actively developing alternate sources.
• > 85% rely on documentation to verify authenticity of part.

Developing sourcing flexibility Lack of information sharing Major findings

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Information sharing on identification and testing for counterfeit parts Information sharing on fault types associated with counterfeit parts Information sharing with SC partners Product characteristics Demand-side factors Supply-side factors

Shortages at authorized sources, availability & price difference at unauthorized sources, external changes

Risk management framework

Risk Analysis 17

Conclusions

Mitigation strategies:

• Flexibility in sourcing of parts.
• Information sharing across supply chain partners.

Risk factors:

• Shortages, price difference, and external changes have a significant impact on

counterfeit risk.

• Reprogrammable and high reliability parts are highly susceptible to counterfeit

risk, often available in large volume.

• Failure of parts with counterfeit alerts have a higher cost of recovery.

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Follow-on research

Sub-tier suppliers

• e.g. contract manufacturers,

assemblers, testers, foundries

Original Component Manufacturer (OCM)

• e.g. semiconductor

manufacturer - Xilinx

Authorized Distributor

• e.g. Arrow Electronics

Original Equipment Manufacturer (OEM)

• e.g. Honeywell

Downstream customers

• e.g. system integrators,

assemblers, end consumer

Risk analysis of counterfeit parts through study of supply-side factors, product characteristics and demand-side factors, which influence counterfeit risk Qualitative study on buyer practices through surveys Data collection to map the supply chain risk across the network Understand the role of regulations and standards in mitigating counterfeit risk Explore the role of counterfeit parts in cyber security incidents

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Thank you !!

Vidya Mani (vmani@psu.edu)

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