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Why You Should Worry about Counterfeit Parts

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Do you have counterfeit parts in your product? Well, if it can happen in the defense industry, it can happen to you. The U.S. Senate Armed Services Committee, in a year-long investigation, found counterfeit electronic parts by the million in critical assets. Counterfeits lurked in the Missile Defense Agency’s computers, in the SH-60B helicopter’s electromagnetic interference filters, and in the Navy’s P-8A airplane, just to name a few.

In 1,800 cases from 650 companies, investigators found vulnerabilities in complex supply networks. In some, investigators uncovered weak testing standards and lax compliance. In one case, counterfeit memory chips were validated based on only 18 samples from millions of chips produced. China was the source of more than 70 percent of counterfeit parts in 100 cases tracked by the Committee. (The UK and Canada were the next two highest sources.) So far, the Chinese government has obstructed attempts to identify and shut down counterfeiters.

Costs to manufacturers will be magnified by new regulations in the 2012 US National Defense Authorization Act (NDAA). Contractors in all tiers of the defense supply chain are now liable for the use or inclusion of counterfeit electronic parts as well as any rework or corrective action resulting from using them. No more passing those costs on to the government. Qualification procedures and processes must be established, and parts procured from authorized suppliers.

When instances of counterfeit parts in circulation are available in a central database, purchasing employees can avoid known sources. The U.S. Department of Defense has its underutilized Government-Industry Data Exchange Program (GIDEP). Only 271 reports were filed in 2009 and 2010. More robust information services are provided by data collection firms like IHS and ERAI.

The U.S. Department of Justice has taken action against counterfeiters. In one procurement scheme, two defendants had received more than $8.5 million in contracts to provide various aircraft parts for KC-135 and E-3 military aircraft. They forged documents and sent them with bogus Boeing parts to the Air Force and to commercial aviation companies. The Florida’s Department of Justice successfully prosecuted them for conspiracy to commit aircraft parts fraud.  The counterfeiters will be spending a few years in prison and pay more than $1 million in restitution.

Not all counterfeits are electronic parts. Automotive parts are also being copied. In Tennessee, a man is serving 37 months in prison for trafficking in counterfeit airbags. He imported them from China, until U.S. Customs intercepted a shipment. Testing of the airbags proved that they could have caused serious injury or death to a vehicle’s occupants.

The website from the Ford Motor Company shows pictures of many fake parts. For example, while all the markings appear to be correct on a pitman arm, inside the tiny oval logo is the word “Food,” not “Ford.” Ford’s reputation for quality was at risk. The fakes didn’t pass fatigue test requirements.

Counterfeit parts cause problems around the world, not only in the U.S. They result in lost revenue, higher costs, time lost due to rework and repair, and impaired product performance. Theft of intellectual property can be devastating and counterfeit parts endanger a company’s reputation.

It’s time to revisit and tune up your risk management plans. It’s time to intensify your vigilance, and protect your company against fraud.

Karen Wilhelm has worked in the manufacturing industry for 25 years. She publishes the blog, Lean Reflections, which has been named as one of the top ten lean blogs on the web.

    August 27, 2012

    Some opinions expressed in this article may be those of a contributing author and not necessarily Gray.

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