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Counterfeit Inventory: Vulnerability and Risk in Defence

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Why are defence departments particularly vulnerable to counterfeiting? Jeremy Smith explains why counterfeiting handbags and watches can easily seep into, and break down, defence processes.

Many - perhaps most - readers of this article will be aware of the trade in counterfeit goods, quite probably having encountered them in the form of the copy of the luxury wristwatch, designer handbag, perfume, or other fashionable accessories, usually available at a fraction of the price of the genuine item, at a range of tourist destinations. Many authors have written on the negative impacts of the trade in such counterfeits. These are many and varied, but include the exploitation of the workers who manufacture them, the health and safety implications of products of uncertain quality, the violation of intellectual property rights, and wider costs to the rights holders, not the least being loss in sales and the costs they incur trying to protect their investment in product development and marketing.

Defence departments are particularly vulnerable to counterfeiting associated with the supply of electronic components, where there is a deliberate intent to deceive. Why is this? In maintaining the availability of fleets of complex systems, many of which remain in service for several decades, defence logisticians rely on electronic technology which becomes obsolete every 18 months to 2 years. The challenge of managing this disparity of lifecycles is exacerbated by other factors.

Before the existence of the vast array of digital devices with which we are now so familiar, the defence used to account for a sizeable percentage of the semiconductor market. By the end of the 2000s, it had become a minor player, accounting for less than 1 per cent of demand. This shift resulted in defence departments losing leverage over their suppliers, a reality made acuter by US administrations in the 1990s, which forced a re-appraisal of the need for electronic components produced to exacting and robust military specifications, and forced the greater use of commercially available products with the short lifecycles that accompanied them.

US federal affirmative-action policies, which favoured small and disadvantaged business units, led to a growth in small brokers. Their ability to operate in the electronic components supply chain was enabled by the growth of the internet, a route to trading by which sellers could achieve a high degree of anonymity. Stradley and Pecht, writing in 2012[1], referred to the fragmentation of the supplier base, the growth of the 'shadow market in which many brokers operate', and the suspect character of most of the products coming out of these broker operations. The huge growth in global demand for electronic components led to an improvement in the quality and reliability of genuine components, and organizations began to reduce the size of the quality assurance teams they had previously employed to inspect and test the components they procured; it became easier for counterfeits to enter these organizations’ supply chains.

So, does the growth in counterfeiting present a real threat to national defence departments? The US Department of Defense (DoD) and the UK Ministry of Defence (MoD) clearly believe so and are confronting the threat. In 2011, the United States Senate Committee on Armed Services conducted an inquiry into counterfeit electronic parts in the DoD supply chain[2]. Its investigations uncovered dozens of examples of suspect counterfeit parts in critical military systems, and it concluded that counterfeit parts could compromise performance and reliability, risk national security, and endanger the safety of military personnel. The MoD has published a Defence Standard for its suppliers on the ‘Avoidance of Counterfeit Materiel’[3] and has established its Counterfeit Avoidance Working Group, a joint MoD and industry forum. Both defence departments recognize the critical need for accurate and timely reporting of counterfeit, or suspect counterfeit, activity. Without such reporting, the true scale and scope of the problem cannot be known and appropriate strategies for dealing with it developed.

 

[1] Stradley, J. and Pecht, M. (2012) The Electronics Counterfeiting Problem. Circuit World 38/3, 163-168.

[2] Committee on Armed Services United States Senate (2012), Inquiry Into Counterfeit Electronic Parts in the Department of Defense Supply Chainhttp://www.gpo.gov/fdsys/pkg/CRPT-112srpt167/pdf/CRPT-112srpt167.pdf

[3] Defence Equipment and Support (2014) Defence Standard 05-135, Avoidance of Counterfeit Materiel. Defence Standardization, Glasgow.