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Executive Summary .................................................................1

Overview........................................................................................2

Impact on the Sourcing Process ..............................................5

What System Elements Are Listed in The Proposed Rule?......6

Risk Mitigation from A Contractor’s Perspective .....................8

Identifying Issues Early in the Product DevelopmentCycle…..8

Identifying Counterfeit Risk as Part of NPI...............................9

Working with Trusted Suppliers............................................. 10

Screening Counterfeit Components.......................................11

Reporting Counterfeit Parts .................................................. 13

Production Test and Inspection............................................. 13

Conclusion ............................................................................ 14

The infiltration of counterfeit components is a serious

and growing risk in the electronics industry. Long

lifecycle, mission critical products, such as those found

in military and aerospace applications, are particularly at

risk because limited redesign options typically translate

over time to an increased number of components at or

near end-of-life. The costs of counterfeit components

can be difficult to fully calculate because issues driven by

counterfeiting can include production defects that lower

yields increasing rework rates, infant mortality in the field

and partial failures which can impact the unit’s functionality.

There is also a growing administrative cost associated with

identifying counterfeit components.

In 2010, a study by the U.S. Department of Commerce

Bureau of Industry and Security’s Office of Technology

Evaluation (OTE) found that, “the procurement process

has become a main entry point for counterfeits due to the

use of unapproved suppliers, lack of part authentication

procedures, lack of communication and cooperation

between suppliers and customers, insufficient inventory

control procedures, and limited counterfeit avoidance

procurement practices.”1

The OTE study led Senate hearings on the danger

counterfeit components pose to the military supply chain

and modifications in the Defense Federal Acquisition

Regulation System (DFARS) as a result of changes to

the National Defense Authorization Act (NDAA) in Fiscal

Year (FY) 2012 and 2013. The proposed modifications

to DFARS set to take effect in early 2014 are a response

to changes in the NDAA in 2012 which put the burden

for preventing counterfeit components from entering the

supply chain on military contractors. Under the proposed

revision, the burden for counterfeit prevention will now be

shared with the Department of Defense, provided the

defense contractor has internal safeguards in place and

procures parts from original component manufacturers or

authorized distributors.

How does this impact contract manufacturing

relationships? Is simply flowing down requirements

enough? The reality is that the regulations will likely

remain in a state of fine-tuning for the next few years

as unintended consequences arise and are corrected.

Industry groups have raised questions about requirements

which could raise internal costs for incoming inspection

and testing without allowing for added compensation.

There are also questions about whether or not long-

lifecycle products can be effectively supported via a

strategy that allows for procurement only from original

component manufacturers (OCMs) or franchised/

authorized distributors. From a sourcing standpoint, there is

one major question to consider: is your contractor

committed enough to the defense segment of its business

to make the investments in personnel and process

development to provide adequate screening and reporting

mechanisms under a changing set of regulations or will the

changing requirements and increased costs drive them out

of this segment of the business? This paper looks at some

of the recommended best practices and potential issues.

Executive Summary

1www.optimumdesign.com

The reality is that the regulations will likely remain in a state of fine-

tuning for the next few years as unintended consequences arise

and are corrected.

The January 2010 study by the U.S. Department of

Commerce Bureau of Industry and Security’s Office

of Technology Evaluation (OTE) did an excellent job of

identifying both trends in counterfeiting and the issues

contributing to proliferation of counterfeits in the supply

chain. The study looked at five supply chain segments:

2www.optimumdesign.com

• Original component manufacturers (OCMs)

• Distributors and brokers

• Circuit board assemblers

• Prime contractors and subcontractors

• Department of Defense (DOD) agencies.

The survey’s objectives were to assess levels of

counterfeiting, what types of devices were being

counterfeited, what practices were used in procurement

and management of electronic parts, what types of

practices were in place for recordkeeping and recording

identified instances of counterfeiting, what techniques

were used to detect counterfeits and what best practices

were employed to control the infiltration of counterfeits.

The assessment encompassed 387 companies and

organizations who participated in the study during

the 2005 to 2008 reporting period. During the four

year reporting period, the OTE data indicated that 39

percent of those participating in the survey encountered

counterfeit components. The data further indicated a

trend of increasing incidents ranging from 3,868 in 2005

to 9,356 in 2008. 2

The OTE study listed the following findings:

• All elements of the supply chain have been directly

impacted by counterfeit electronics

• There is a lack of dialogue between all organizations in

the U.S. supply chain

• Companies and organizations assume that others in

the supply chain are testing parts

• Lack of traceability in the supply chain is

commonplace

• There is an insufficient chain of accountability

within organizations

• Recordkeeping on counterfeit incidents by

organizations is very limited

• Most organizations do not know who to contact in the

U.S. Government regarding counterfeit parts

• Stricter testing protocols and quality control

practices for inventories are required

• Most DOD organizations do not have policies in place

to prevent counterfeit parts from infiltrating their

supply chain3

During the four year

reporting period, the

OTE data indicated that

39 percent of those

participating in the survey

encountered counterfeit

components.

Overview

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Following Senate hearings in November 2011, on the

dangers posed by counterfeit components within the

military supply chain, the National Defense Authorization

Act (NDAA) for Fiscal Year (FY) 2012 was passed and

signed by President Obama. For the first time, this

legislation included penalties related to counterfeit parts

and their suppliers. It also placed the burden for more

effectively preventing counterfeits on military contractors.

This was considered excessive, since government

agencies often dictated which components would be

used or extended the life of programs beyond the lifetime

of the product’s components. In January 2013, the

2013 NDAA was signed into law. The NDAA for FY 2013

partially remedies the issues of the prior year’s legislation

by providing mechanisms for allowing accountability to

be shared. In May 2013, the Defense Federal Acquisition

Regulation Supplement: Detection and Avoidance of

Counterfeit Electronic Parts (DFARS Case 2012-D055)

was introduced as a proposed rule. The comment period

ended in July 2013 and the final rule is scheduled to go

into effect in February 2014.

According to the documentation, “this revision to the

DFARS is intended to partially implement section 818

(paragraphs (c) and (f)) of the NDAA for FY 2012.

Paragraph (c) of section 818 requires the issuance of

DFARS regulations addressing contractor responsibilities

for detecting and avoiding the use or inclusion of

counterfeit electronic parts or suspect counterfeit

electronic parts, the use of trusted suppliers, and

requirements for contractors to report counterfeit

electronic parts and suspect counterfeit electronic parts.

Paragraph (f) defines “covered contractor” and “electronic

part.” In addition, this revision addresses the amendments

to section 818 that were made by section 833, entitled

“Contractor Responsibilities in Regulations Relating to

Detection and Avoidance of Counterfeit Electronic Parts,” of

the NDAA for FY 2013.”4

According to the proposed rule documentation, the

intent of section 818 is to hold contractors responsible

for detecting and avoiding the use or inclusion of

counterfeit or suspect counterfeit electronic parts. The

DFARS is being modified or enhanced in three specific

areas: definitions, contractor responsibilities and the

government’s role.

Under definitions, DOD is proposing to add a definition of

“legally authorized source” to the definition of “counterfeit

part.”

In the area of contractor responsibilities, a new policy

on counterfeit parts is proposed to be added DFARS

subpart 246.8, Contractor Liability for Loss of or Damage

to Property of the Government and will include a clause at

DFARS 252.246-7007, Contractor Counterfeit Electronic

Part Avoidance and Detection system. In addition,

this rule will modify the existing requirements for the

contractor’s purchasing system by adding compliance,

with requirements for identifying, avoiding and reporting

Overview

counterfeit parts. The clause at DFARS 252.244-7001,

Contractor Purchasing System Administration, has

also been modified to add system criteria for a less

comprehensive review of the contractor’s purchasing

system that targets review of those elements relating to

the detection and avoidance of counterfeit electronic

parts and suspect counterfeit electronic parts, in some

solicitations and contracts depending on the clauses they

contain.

A new subsection, DFARS 231.205-71, prohibits

contractors from claiming the cost of counterfeit or

suspect counterfeit electronic parts or the cost of

associated rework or corrective action as a reimbursable

cost. However, section 833 of the NDAA for FY 2013

provides exceptions which enable cost reimbursement

if a contractor has a DOD-approved operational system to

detect and avoid counterfeit parts or the suspect

counterfeit parts were provided as Government-furnished

property, and the contractor provided timely notice to

the government.

The Government’s role in reviewing and monitoring the

contractor’s process and procedures for detecting and

avoiding counterfeit or suspect counter electronic parts

covered as part of the contractor’s purchasing system

review section in the proposed DFARS 244.303(b). 5

Overview

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The proposed rule links liability for the costs of counterfeits

and reimbursement for the cost of rework to very

specific actions on the part of the Defense contractor

related to procurement practices, implementation of a

DOD-approved operational system to detect and avoid

counterfeit parts and timely reporting.

Procuring through OCMs or franchised or authorized

distributors who either maintain a direct business

relationship with the OCM or can guarantee traceability

back to the OCM is the best way to avoid counterfeit parts.

The ability to provide transparency within the supply chain

has become a key point of value-add in most distributor

business models.

However, given that contract manufacturers typically

handle procurement, incoming parts inspection, assembly

and test, it is also important their systems should be

closely aligned with the contractor’s procedures to

ensure both a system of checks and balances, and timely

reporting. This can be particularly important in the event

that availability issues dictate that a part is only available

from a non-franchised source.

Impact on the

Sourcing Process

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Section 252.246-70XX Contractor Counterfeit Electronic Part

Avoidance and Detection System defines the system criteria

as policies and procedures that address:

• The training of personnel

• The inspection and testing of electronic parts,

including criteria for acceptance and rejection

• Processes to abolish counterfeit parts proliferation

• Mechanisms to enable traceability of parts to

suppliers

• Use and qualification of trusted suppliers

• The reporting and quarantining of counterfeit

electronic parts and suspect counterfeit electronic

parts

• Methodologies to identify suspect counterfeit parts

and to rapidly determine if a suspect counterfeit part

is, in fact, counterfeit

• The design, operation, and maintenance of systems

to detect and avoid counterfeit electronic parts and

suspect counterfeit electronic parts

• The flow down of counterfeit avoidance and detection

requirements to subcontractors6

What System Elements

Are Listed in The Proposed Rule?

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At the date this paper has been written, the DFARS proposed

rule has not been made final. As a result, there are no

examples of approved systems to highlight. That said,

SAE International has developed standards for counterfeit

electronics part risk mitigation which have been adopted

by NASA and DOD. These offer a benchmark in designing

compliant systems.

SAE AS5553 Counterfeit Electronic Parts; Avoidance,

Detection, Mitigation standardizes methods for electronic

counterfeit part mitigation and outlines processes for

electronic design/parts management, supplier management,

procurement, part verification, materials control and response

strategies when suspect parts are found.

SAE ARP6178 Counterfeit Electronic Parts; Tool for Risk

Assessment of Distributors provides a supplier evaluation

tool.

SAE AS6081 Counterfeit Electronic Parts; Avoidance

Protocol, Distributors describes a program which can be

used to certify distributors/suppliers to the requirements of

AS5553.

SAE AS6171 Test Methods Standard; Counterfeit Electronic

Parts defines test methods for counterfeit electronic part

detection. This can be used for accreditation of distributors

with in-house test capabilities or independent third-party test

facilities verifying parts in compliance to AS6081.

What System Elements

Are Listed in The Proposed Rule?

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While Optimum Design Associates will continue to modify its system to conform to industry best practices as this

proposed rule is finalized and the legislation continues to evolve, currently it focuses on six key steps in mitigating

obsolescence component risk:

• Identifying obsolescence issues as early in the product development cycle as possible

• Identifying known counterfeiting risk in each product as part of the new product introduction

(NPI)/project launch process

• Working primarily with franchised distributors and trusted suppliers

• Carefully screening parts which must be purchased from non-franchised distributors

• Immediately reporting suspected counterfeit parts

• Ensuring an adequate test and inspection methodology is present in production

Identifying Issues Early in the Product Development Cycle

Risk Mitigation from

A Contractor’s Perspective

8 www.optimumdesign.com

Unfortunately, even with thorough planning in the design

stage, obsolescence happens eventually in most long

lifecycle products. Silicon Expert does provide a history of

whether or not a component has a high incidence of being

counterfeited. This can help identify what types of

component modifications are most prevalent and support

development of an inspection strategy for parts which

must be procured from non-franchised sources. Other

tools for this risk identification include:

• The Government Industry Data Exchange Program

(GIDEP)

• FAA’s Suspect Unapproved Parts Program

• ERAI and the Independent Distributors Electronics

• Association (IDEA)

A bill of materials (BOM) risk analysis that addresses both

obsolescence and incidence of counterfeiting risk, as well

as any availability issues, should be performed as part of

the NPI process.

Identifying Counterfeit Risk

as Part of NPI

Silicon Expert does

provide a history of

whether or not a

component has a high

incidence of being

counterfeited.

9www.optimumdesign.com

As mentioned earlier, OCMs, franchised distributors

and trusted electronic parts suppliers represent the

best option for mitigating counterfeit component

risk. These companies’ reputations and business

relationships are based on their ability to supply

high quality parts. Comparatively, non-franchised

distributors and electronic component suppliers in

lower cost labor markets can vary widely in their

commitment to identifying and purging counterfeit

components from the supply chain.

Optimum Design Associates works with trusted

suppliers, when possible. As with most contract

manufacturers, customer approved vendor lists (AVLs)

dictate which electronic component suppliers are used.

When component availability issues dictate

the use of non-franchised sources, the customer is

advised. Any data Optimum Design Associates obtains

on counterfeit component risk related to the actual

component or proposed source is shared with the

customer. This partnering process provides customers

with the data they need to make informed decisions on

best options for mitigating obsolescence issues and

counterfeiting risk.

Working with

Trusted Suppliers

10 www.optimumdesign.com

Component counterfeiting can take many forms. Date codes on parts nearing end of shelf life can be altered. Part

labeling on commodity parts can be changed to reflect a high performance part. Actual counterfeit parts with

substandard or non-working elements are manufactured in volume. In short, the job of detecting counterfeits has

become increasingly difficult, as shown in Figure 1 and 2 below.

Compared side-to-side, the difference in the finish and dimensions of the leads are obvious, but without the comparison

to the known good part, the excess solder may not be noticed.

Fortunately, legitimate suppliers have created strong infrastructure to protect their brands. Most component

manufacturers have a counterfeit division. When suspect parts are received, component manufacturers are willing to

provide information and/or samples for a cross comparison of body styles, markings and logos. They will also review

photos for visual evidence of modifications, when provided by the company making the inquiry.

Figure 1. Counterfeit Component Figure 2. Known good component

Screening

Counterfeit Components

11 www.optimumdesign.com

Receiving inspection departments should be trained to look for

potential issues as material is received.

Key visual indicators include:

• Broken seals or damaged outer packaging

• Packaging inconsistent with or insufficient for that brand of

part

• Variance with part number, manufacturer or quantity listed in

documentation

• Variance in country of origin or date codes listed in

documentation

• One or more components reversed in tubes or trays

• Logos that vary from that typically used by the manufacturer

• Smudged markings or evidence of re-marking

• Damaged, malformed or bent leads

• Cracks or chips in body of component

• Inconsistencies in component body formation

• Evidence of burn, blister marks, flux or other chemical residue

• Oxidation, corrosion or solder on leads

• Smashed or discolored BGA balls

• Variance in package dimensions from known good parts

• If inconsistencies are found, destructive testing of samples

should be performed either at the component manufacturer or

via a third-party testing firm. These tests may include a mineral

spirit and alcohol wipe for evidence of re-marking, acetone

wipe for evidence of blacktopping, scrape test, or de-capping

to view the die.

Screening

Counterfeit Components

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The reporting databases listed earlier such as GIDEP, FAA’s Suspect Unapproved Parts Program, ERAI and IDEA only

remain strong if users report all counterfeiting incidents. One of the key findings of the OTE 2010 study mentioned earlier

was that many companies either chose not to report counterfeits or were unaware of reporting databases.

The proposed DFARS modifications will likely drive stronger flow down reporting requirements.

Production Test and Inspection

Production test and inspection represents the final level of due diligence in mitigating counterfeit risk. A robust test and

inspection methodology which includes automated optical inspection and/or x-ray, electrical and functional testing can

help identify components that vary from either dimensional or performance specifications. In truly mission critical

applications, environmental stress screening may also be necessary.

Reporting

Counterfeit Parts

13www.optimumdesign.com

www.optimumdesign.com

Co

nclu

sio

nThe counterfeit component ‘industry’ will continue to grow and poses a grave risk to

national security. The U.S. Government has taken a regulatory approach to driving

greater supply chain accountability that is likely to continue to evolve as costs and

benefits are weighed. These requirements will flow down through the supply chain and

likely drive some companies to choose to focus business in less regulated industries.

Contract manufacturer selection should evaluate a contractor’s understanding of

regulatory trends and its management team’s willingness to invest in compliant

systems and processes.

14

Citations

1. U.S. Department of Commerce, Bureau of Industry and Security, Office of Technology Evaluation,

DefenseIndustrialBaseAssessment:CounterfeitElectronics, January 2010, 207.

2. U.S. Department of Commerce, Bureau of Industry and Security, Office of Technology Evaluation,

DefenseIndustrialBaseAssessment:CounterfeitElectronics, January 2010, i-ii.

3. U.S. Department of Commerce, Bureau of Industry and Security, Office of Technology Evaluation,

DefenseIndustrialBaseAssessment:CounterfeitElectronics, January 2010, ii.

4. Defense Acquisition Regulations System, “Defense Regulation Supplement: Detection and

Avoidance of Counterfeit Electronic Parts (DFARS Case 102-D055),” Federal Register, sec. II, 5 May

2013 [journal online], accessed 27 February 2014; available at https://www.federalregister.gov/

articles/2013/05/16/2013-11400/defense-federal-acquisition-regulation-supplement-detection-

and-avoidance-of-counterfeit-electronic.

5. Defense Acquisition Regulations System, “Defense Regulation Supplement: Detection and

Avoidance of Counterfeit Electronic Parts (DFARS Case 102-D055),” Federal Register, sec. II, 5 May

2013 [journal online], accessed 27 February 2014; available at https://www.federalregister.gov/

articles/2013/05/16/2013-11400/defense-federal-acquisition-regulation-supplement-detection-

and-avoidance-of-counterfeit-electronic

6. Defense Acquisition Regulations System, “Defense Regulation Supplement: Detection and

Avoidance of Counterfeit Electronic Parts (DFARS Case 102-D055),” Federal Register, sec.

252.246-70XX, 5 May 2013 [journal online], accessed 27 February 2014; available at https://www.

federalregister.gov/articles/2013/05/16/2013-11400/defense-federal-acquisition-regulation-

supplement-detection-and-avoidance-of-counterfeit-electronic.

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Raymond Falkenthal is Optimum Design Associate’s Quality Manager.

He can be reached at rfalkenthal@optimumdesign.com

About Optimum Design Associates

Optimum Design Associates (ODA) is a leading provider of award winning printed circuit board

(PCB) layout, engineering, and in-house turnkey electronics manufacturing services (EMS).

Established in 1991, ODA continues to meet the challenge of creating complex, high-density

printed PCB layouts for some of the world’s leading high-tech original equipment manufacturers

(OEMs). ODA has offices in California and Australia. Its California facility is ITAR-registered and

certified to ISO 9001:2008.