Verical Communications

Vice President Biden spoke at a White House ceremony recently introducing a new approach to regulating the food supply chain. In order to ensure foods are delivered safely to Americans, the administration is pushing for a broad set of supply chain controls that will increase visibility of foodstuffs all the way from farm to shelf.

The global electronics supply chain is far more complex than that of even the American food supply chain and far too globalized for any one country to regulate. Regardless, the supply chain is vulnerable but there is a solution. A market solution.

In recent years, supply chains have made great strides linking manufacturers with a global ecosystem of suppliers and retailers. Advances like just-in-time manufacturing and supply chain automation has created huge efficiencies in manufacturing, but with every advance come new threats and vulnerabilities. As companies have ‘gone global’ they have entered unfamiliar markets, with preferences and rhythms quite unlike their established customers. This lack of familiarity, in turn, has introduced even more volatility into the forecasts. At the same time, supply chains have gone lean, giving them less cushion when their suppliers encounter unexpected problems. The sheer speed and volume of modern supply chains plus the sophistication of criminals mean that physical inspections and testing are obsolete. Global manufacturers today operate on a much larger scale than national ones did a decade ago, and this increased volume combines with greater volatility and a smaller buffer to expose firms to significantly higher risk of shortages. And that’s where counterfeit product can strike.

All counterfeit electronic components enter the supply chain through the gray market, by way of primary market firms dumping their excesses to independent distributors or brokers. Once those legit parts leave the primary channel, they lose all traceability and have to be considered suspect. Until a few years ago, the independents/brokers would filter out the fakes with physical & visual inspections, but since sophisticated manufacturing techniques have made it to China and elsewhere, the fakes are simply too good for the middlemen to spot. Since many unscrupulous independents and brokers will mix bad parts in the good, you cannot ever be totally confident in a part coming from the gray market. This isn’t just a worry for product manufacturers, either. Fakes can sting honest brokers and independent distributors just as easily as anyone else.

Counterfeiting can take many forms: from outright knock-offs, old product refurbished and sold as new, or basic product relabeled to appear to be top-of-the line. Whenever a product is intentionally misrepresented to buyers, those buyers and their customers are at risk. Like a mold, supply chain fraud thrives in the darkest of places. Counterfeit parts will be found wherever there is a lack of information and clarity about a product, where it came from, and how it got to where it is.

Where there are just a few channels, government intervention can be quite effective. The US Department of Homeland Security has made great strides in improving port security by collecting the information about the history and contents of shipping containers. But where they must regulate a global market, governments are incapable of providing real security to the industry and to consumers. There are simply too many jurisdictions, too many vested interests, and too many competing priorities. Governments can regulate until they are blue in the face, but counterfeiters will always infect the supply chain as long as 1) buyers have shortages, and 2) the secondary market does not evolve. There are lots of regulations on the books, but they have proven useless against the ferocious tide of counterfeit parts coming out of China.

Regulations don’t work, inaccurate forecasts are simply a fact of life, #1 is impossible — our industry’s only hope to for the secondary market itself to change.

Traceability, transparency, and trustworthiness are the key.

Buyers of all kinds need to know two things. First, they need traceability into an item’s pedigree. The art market calls this provenance, the military calls it chain of custody. Whatever the name, the more a buyer knows about a part’s history, the easier it is to make a smart purchasing decision. Second, buyers need to know that the information about a part — to include its pedigree — is trustworthy. If a supplier is anything but absolutely transparent, buyers have to be deeply skeptical of anything the supplier says. Without a high level of confidence in their suppliers, buyers cannot tell which parts are good and which are not, and everyone suffers.

As long as independents and brokers do not maintain traceability on their inventory and publicize it transparently to their buyers, counterfeit will remain a threat to the integrity of the electronics supply chain.

That’s why Verical exists. Verical is a marketplace through which primary channel players can sell their excess inventories directly to the manufacturers’ buyers and brokers who need them. Because only primary market players are permitted to sell through Verical, buyers are structurally protected from the threat of counterfeits. Sellers get top dollar while buyers get transparency, reliable data, and accountability. Both sides benefit and, crucially, the market regulates itself. Our goal is to become a source for components buyers of all kinds (primary and secondary alike) to fill their shortage needs safely and securely.

Regardless of how it comes to be, supply chain security will return only when the market can deliver traceability, transparency, and trustworthiness. Until then, every supply chain is at risk.