“Sprinkling”: Supply Risk Goes Mainstream

US Senator Carl Levin recently sounded the alarm bell about “sprinkling,” which is the practice of mixing counterfeit parts with real ones. An excerpt from the AP article on the Senate hearing is below:

The committee’s ongoing investigation found about 1,800 cases of suspect counterfeit electronics being sold to the Pentagon. The total number of parts in these cases topped 1 million. By the semiconductor industry’s estimates, counterfeiting costs $7.5 billion a year in lost revenue and about 11,000 U.S. jobs.

“The Chinese government can stop it,” said Sen. John McCain of Arizona, the top Republican on the panel.

Later in the day, the Defense Department said in a fact sheet that it has a quality assurance process to determine whether parts are authentic and is taking steps to detect counterfeit parts, including training more than 2,000 personnel in identifying fake material.

The Pentagon also said there has been “no loss of life or catastrophic mission failure due to counterfeit parts.”

During the hearing, photos of cardboard and plastic bins of electronic parts on the streets of Chinese cities flashed on large video screens as Thomas Sharpe, vice president of SMT Corp., an independent distributor of electronic components, described visiting electronic component marketplaces in July 2008.

Sharpe said scrapped electronic parts were washed in rivers or left for the daily monsoon rains, dried on riverbanks and collected in bins, ready for counterfeit processing.

“Counterfeiting performed in Shantou (a Chinese city) was not regarded as IP theft or improper in any way,” Sharpe said. “It was seen as a positive ‘green initiative’ for the repurposing of discarded electronic component material.”

 By coincidence this very week I was speaking with a senior exec at a major Tier 1 aerospace supplier who noted that one of his major risk issues is counterfeit supply. When I asked him if this was material intercepted in transit, he laughed and said, “No. We believe this comes from our suppliers themselves. They are mixing real product with fakes. And it is all coming from China.”

What is amazing is not just the flood of counterfeit materials but that a manufacturer would itself ship fake/inferior versions of its own products. This morning I was on a call with Justin Picard, the Chief Scientist at Advanced Track and Trace (http://www.att-fr.com/) who explained to me what the state of the art is in stopping counterfeit material form entering the supply chain. Dr. Picard explained how his team in France is working on visible and invisible modes of tracing material and detecting chain-of-custody violations. Already their technologies are used in consumer industries and pharmaceuticals, and I predict that soon they will find themselves in industries such as high tech, cars and aerospace. Indeed, if current trends continue by the end of the decade most Tier 1 suppliers will have these technologies in use in their production facilities. The cost — about $50,000 per production line — is dropping as demand for protection increases, and suppliers who implement these ideas now may find themselves with a real competitive advantage.

Needless to say, this problem will only get worse and to understand why a good place to start is Tim Phillip’s book, “Knockoff: The Deadly Trade in Counterfeit Goods” (Kogan, 2005). The study of “black” supply chains is not common but several writers have written penetrating examinations of these parallel worlds. The key point these analysis share is the observation that most  legitimate supply chains, by their very success, generate parallel illegal ones. The Pentagon report I noted at first is interesting because of its source. Yet as we see form Phillip’s book, this is a problem that has been brewing for decades. It will take a lot of ingenuity and science form people like Justin Picard to keep the real supply chains one stead ahead of the fake ones.

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