If there is one cardinal rule that electronics buyers should follow to reduce the risk of buying counterfeit or substandard parts it is to know the source of the parts.

While that seems simple, all too often buyers who have purchased bogus parts have done so without knowing anything about the supplier. In times of shortages, buyers often scramble for parts and may buy components from a source they would not normally consider if the parts were not in short supply. In other cases, buyers make opportunistic purchases for components priced at below market value. Sometimes those parts end up being substandard or counterfeit.

"In some cases, the parts are from rejected lots with genuine markings from component manufacturers. The parts got into the field through pilferage," says Harvinder Sembhi, vice president supply chain strategy and planning for electronics manufacturing services (EMS) provider Celestica, based in Toronto. "So when you look at the marking, the parts appear genuine, but there is a quality issue on the inside. In other cases, the parts are from suppliers who are knowingly making counterfeit components and selling them in the market," he says.

While there are no figures available about how many fake parts are sold each year, the problem is getting worse, according to suppliers, distributors and buyers. Some say the problem worsened when a lot of electronics manufacturing moved to low-cost countries such as China. Others say the Internet has played a big role because Internet search engines make it easier to sell both genuine and counterfeit parts.

"It is worse than it was 10 years ago only because of the ease of flow of information," says Doug Kelly, president and CEO of Smith and Associates, an independent distributor based in Houston. "It is easy for people to advertise products. The barriers to making contact with people are much lower with the Internet. There always has been bad product in the marketplace, but it is able to move more freely now as information has sped up," he says.

But the blame for the circulation of bad parts in the electronics supply chain is often placed on the doorstep of independent distribution. Nonfranchised distributors buy parts from a variety of sources, including OEMs, franchised distributors, other independent distributors and even from component manufacturers. While the major independent distributors have inspection and warranty programs to protect buyers against fake parts, there are others that are less concerned if the parts they sell are genuine.

"Buyers need to realize that not all independent distributors are created equal," says Debra Eggeman, general manager of the Independent Distributors Electronics Association (IDEA), a Buena Park, Calif.-based trade group representing non-franchised distributors. Independent distributors who knowingly sell fake parts are not allowed to become IDEA members.

Eggeman notes there are several thousand independent distributors and brokers in the world and only 36 are members of IDEA. "I have had to turn down a number of applications. Even if we had every good company out there as members, I question whether our membership would ever go over 100," she says.

Eggeman says there are many steps buyers can take to make sure they don't buy substandard or counterfeit parts and many involve choosing the right independent distributors.

She says OEMs and electronics manufacturing services providers need to have an approved vendor list (AVL) policy the same way they do with franchised distributors and component manufacturers.

"They need to have a quality director or vice president setting policy on what the requirements are for an independent distributor to be on their AVL," says Eggeman.

“When you buy blindly and you don’t know a lot about the source of the product you increase your risk profile dramatically.” —Doug Kelly, president and CEO of Smith and associates

“We ask independent distributors to follow our quality specifications and to maintain a counterfeit parts database and to have component test and measurement capabilities.” —Harvinder Sembhi, vice president supply chain strategy and planning, Celestica

Eggeman also recommends that buyers visit independent distributors. "There is no substitute for on-site audits," she adds. With audits, buyers should make sure the distributor is certified to ISO 9000 and complies with IDEA's 10.10 quality standard, which governs how parts should be inspected to make sure they are genuine.

Distributors should also show evidence of an electrostatic discharge (ESD) program compliant with American National Standard Institute's (ANSI) ESD 20.20 standard. Distributors should also have product liability insurance, she says.

Celestica has conducted audits on all of its independent distributors, says Sembhi and has qualified six independent distributors. "We qualify them more stringently than we would a franchised distributor or a component manufacturer," he says. "We ask them to follow our quality specifications and to maintain a counterfeit parts database and to have component test and measurement capabilities."

He adds that independent distributors must have solderability and continuity testing capabilities and two dimension x-ray imaging and optical inspection.

"We also ask them to provide us with indemnification if by chance we find defective parts, and that would include any rework costs we might incur," he says.

Once independent distributors are qualified, they are the only nonfranchised distributors that purchasers at Celestica's sites can buy from.

Besides choosing independent distributors carefully, Eggeman adds that buyers should be careful when using Internet product search engines (IPSE). Many companies, including independent distributors, use IPSEs such as Broker Forum and IC Source to sell products.

With IPSEs, companies pay a fee to post their inventories on the site. The problem is while there are many reliable sources there are also some unscrupulous ones that list parts.

"The fact that someone paid the subscription fee to get on the search engine doesn't validate them as a business partner," says Kelly. "It doesn't mean that they are bad, but you have to have more to deal with then just a listing on an engine."

But sometimes sources on the search engines are bad and are trying to sell bogus components.

The problem is the way most IPSEs' business models are constructed. The more companies they have posting parts, the more money they make. "In the world of the Internet, you don't have to show anyone that you have the inventory that you say you have. People can post that they have every part number in the world even if they don't," Eggeman says.

"It is critical to know that you are getting product from an authorized source," says George Richter, vice president product management for Arrow Electronics in Melville, N.Y. Richter is in charge of component purchasing at Arrow.

"In order to have integrity in the supply chain and trace back where the parts came from, what Pos were placed, what factory parts were shipped from, you have to buy from an authorized source," he says.

However, there are times when franchised distributors buy from independent distributors. "We recognize the independent channel does play a role in the market. Our first choice is to buy from component manufacturers or from authorized distributors," says Richter.

"If we do need to go into the independent channel we make it clear to the customers that the transaction is being executed." He adds that Arrow segregates parts purchased from independent distributors from its other inventory "so there is no way that product that came in from independent distributors could ever get mixed with an authorized source."

Robin Gray, executive vice president of the National Electronic Distributors Association, based in Alpharetta, Ga., says in most cases franchised distributors buy direct from parts makers or from other franchised distributors. But that doesn't absolutely guarantee that a counterfeit part cannot be sold by a franchised distributor. Franchised distributors sometimes end up with counterfeit parts when they get returns from customers.

"A contract manufacturer may have a need for 10,000 parts and gets 5,000 from an authorized distributor and 2,000 from the gray market and 3,000 from another authorized distributor," says Gray. "But the requirements may change and the manufacturer returns 2,000 parts to one of the authorized distributors. The distributor has no way of knowing from which of those sources the parts came from short of checking every part," he says. The distributor could put them back in inventory and they could go out to customers.

The problem of counterfeit parts will not likely go away anytime soon so buyers need to minimize their risk of buying bad parts.

"The plain and simple truth is you have to know your source," says Kelly of Smith and Associates. "When you buy blindly and you don't know a lot about the source of the product, you increase your risk profile dramatically."