Written by Matt Hartzell, Chief Operating Officer
Hand-in-hand with IoT growth is the ever-present challenge of ensuring quality along the global supply chain. The challenge comes as new supply connections are forged from new competitive and cooperative opportunities which open markets and supplier relationships but also increase the need for vigilant and meticulous anti-counterfeiting practices. Industry players face the challenge of maintaining the balance between innovation and quality.
The semiconductor and electronics industry outlook is one of dynamic growth; growth in new markets opening in the emerging economies along with growth in industries and sectors once seen as niche and relatively static. Hand-in-hand with this welcomed growth is the ever-present challenge of ensuring quality along the global supply chain. The challenge comes as new supply connections are forged from new competitive and cooperative opportunities which open markets and supplier relationships but also increase the need for vigilant and meticulous anti-counterfeiting practices. Industry players face the challenge of maintaining the balance between the dynamic nature of innovation and healthy competition on the one hand without compromising quality standards on the other.
Rapid growth period ahead for commercial products
Rapid change and dynamic shifts are hallmarks of the semiconductor and electronics industry. The current market situation is exciting and full of growth potential. The Internet of Things (IoT) and the wider mobile economy are driving rapid electronics expansion into emerging economies, greater consumer adoption, and across more industries and market sectors such as health, construction, automotive, and heavy industry, especially. The importance of this new wave of growth is that it is likely to rival both the dominant PC adoption as well as the hot mobile/smartphone adoption phases to date. The sheer number and type of mobile devices making up the IoT added to the millions of new electronics adopters annually is beyond compare to what we've seen to date.
The reasons behind this phenomenal growth go back to basic economics: significant price declines for components and end-products coupled with a growing global demand for internet and mobile access. Device market forecasts are coming in as high as US $70 billion by 2018 for device makers, as cited in Yole Développement recent IoT report: "[…] the next five years will be extremely fruitful for device makers […]. This period represents a key window in which manufacturers must seize the opportunity to grab a piece of the IoT business pie." As a further breakdown, Yole offers that "[…] 'we expect the overall IoT market to reach $400B in 2024, with $46B coming from hardware, $59B from the cloud and $296B from data processing', details Dr. Guillaume Girardin, Technology & Market Analyst, Yole Développement."
The reasons for widespread growth outlooks are similar to the early PC market boom. IoT and the mobile economy are, GSMA notes (p.16), "device agnostic." The fact that consumers have complete device choice and autonomy, the ability to be completely device agnostic, is an important growth component also. Device choice in the midst of rapid market growth due to device expansion supports healthy supply chain competition which, in turn, feeds innovation. With device choices open, OEMs can create market opportunities and differentiators through their supply chains to give consumers new mobile choices based on price, feature, architecture, and functional requirements. IoT growth should further help open the mobile economy. Importantly, the forecasted growth opportunity is rooted in device agnostic growth and growth in connected devices in general because with mobile broadband and smart device proliferation, M2M connectivity and IoT expansion opens many more devices to the IoT device ecosystem. The IoT device market presents critical new market opportunities. The new competition translates into new heterogeneous devices built from component modules strategically sourced and integrated to meet new use-case and pricing demands. With the new component competition and market expansion ahead, procurement departments are also seeing new market opportunities to source at more aggressive prices. Together, these events mean that new relationships are needed. The new opportunities bring with them the question of maintaining industry certified quality standards while also ensuring that quality standards not only protect the industry but also reinforces innovation supported by free market growth.
Supporting quality standards and market dynamics
A dynamic market invites new players and promotes the importance of quality as a differentiator. More importantly, the push of electronics into life sustaining and safety applications, like medical and transportation, casts quality in a heightened position. As we've seen in the past, quality challenges are especially expanded during growth phases. Growth phases generally see increases in counterfeit events because criminals seek opportunistic events when change heightening demand distracts attention or lack of experience limits awareness of counterfeit threats. During growth, it is essential to uphold strict quality standards in the face of broadening global supply chains and accelerated market expansion (across regions, consumer markets, and penetrating new industry sectors); this can be successfully accomplished all while supporting dynamic market growth.
The dynamic nature of our industry necessitates an inherent agility to support innovation and rapid market shifts. The semiconductor and electronics industry supply chain is highly dynamic, mirroring the technology ebb and flow that happens in shorter and shorter cycles with rapidly changing demands by end-users. As a result, our supply chain must be able to handle not only Just-in-Time (JiT) sourcing needs, but also provide inventory management and excess liquidation at best pricing moments. Handling these complex inventory tasks is made all the more challenging by adding the requirement of upholding strict quality standards for business processes and for products. Experienced and leading suppliers provide the types of customized and deeply knowledgeable service solutions that balance these requirements for commercial products. These suppliers are certified to and often above industry standards for operational processes, laboratories, as well as quality control.
Our industry maintains an interesting and essential balance of supporting and encouraging innovative growth while adhering to defined standards for quality to protect consumers and manufacturers. One question that bears asking is whether our industry standards will prove to be sufficient to meet the challenges posed by dynamic market phases such as the one we are entering – are our standards able to guide and ensure quality such that new market entrants, new competitors, will be supported in quality assurance methods as well as supported in free market competition necessary for this next growth phase of commercial products?
Standards are, by definition, necessarily static. The nature of standards is such that a prescribed set of operational and quality levels are set forth and agreed to be met (and hopefully surpassed) in order that a minimum level, a baseline, of functional and operation protocol are understood, agreed upon and then can be expected of those adhering to the standard such that prescribed quality levels are attained, both for operations and for products. Having a baseline ensures the starting point and the level at which market differentiation beyond that standard should begin. There is a level of agreement and industry collaboration to ensure the standards' protocols are supported and respected and act as the socio-economic contract for business events (products, procedures, processes, methods, etc.). Standards are the rules and the guiding principles of market activity; they are the fixed, the static, the guideposts that anchor products and operations across businesses and across markets.
Semiconductor and electronics industry supply chain standards have focused on the issue of upholding quality: quality of business operations (ISO 9001, etc.), of equipment and laboratories (ISO 17025), and processes for particular product and industry segments (AS9120). The core is quality – working to identify and remove non-conforming, fraudulent and illegal parts from the global supply chain. Additionally, the standards also guide businesses to operate in a manner that promotes efficiency and productivity in order to ensure both quality practices and quality parts along the global supply chain.
Standards must support both the industry prescriptivism of providing guidelines to ensure quality while supporting the free market drivers that ensure unique supply chain connections and solution designs that maximize innovation and the critical element of company differentiation. In other words, it is one thing to set base limits for conduct that adheres to general protocols but is uniquely defined at each company as we see in ISO 9001 certifications; similarly for laboratory standards such as ISO 17025. Both of these essential standards allow for and support the design and implementation of unique testing protocols that may be ahead of the market and improve upon quality testing results. Furthermore, the regular cycle of auditing allows for a flexibility, an agility, built into the standard certification for operational advances and improvements to stay in check with commercial industry changes, supporting competition and free market enterprise while ensuring critical quality standards. It is, however, another thing to require that the unique operational solutions, a company's procedural intellectual property (IP) is opened and laid forth to competitors and thereby made available to be replicated, particularly in critical differentiating aspects (e.g., pricing, relationship, quantity deals, etc.), as is stipulated in the latest (5/6/2014) Defense Federal Acquisition Regulation Supplement: Detection and Avoidance of Counterfeit Electronic Parts (DFARS Case 2012-D055) traceability and disclosure requirements.
The requirement of traceability in the latest DFARS regulations is in line with the types of quality metrics that have been part and parcel of the quality standards in place across industries. One critical difference is the DFARS ruling and existing industry standards is the requirement of full disclosure of the traceability (lineage) of components – absent a known problem – which runs contrary to free market competition, innovation and healthy differentiation. Traceability is only as strong as the trust placed in those providing it. Documentation rarely exists and seldom is given past one or two transfers of product. Some vendors, especially those with large amounts of excess, cannot or will not provide traceability due to upstream agreements. The point comes down to a critical element of disclosure of the full flow down for an electronic part not deemed suspect, fraudulent, or counterfeit with the availability of any component's traceability available for submission upon request. The problem is not necessarily in the maintenance of full traceability, but rather in the impingement or inhibiting element of disclosing competitive intelligence pertaining to supply chain connections and contracts that are IP and are the crux of market differentiation in terms of pricing, contractual relationships, and opportunities that are compromised should they be made available for replication by the entire global supply chain.
Absent the delivery of a known counterfeit, one issue that is raised by open disclosure, as opposed to the requirement of maintaining full traceability but with limited, event-based, disclosure is the question of trust in other industry third-party standards, such as ISO 9001 and 17025 to support quality operations and laboratory testing and reporting. Traceability in and of itself is not a guarantee of quality because parts can be faulty and even unauthorized from the point of manufacture, hence the implementation of quality testing regardless of origin. Traceability is critically important when non-quality parts are identified and the supply chain source must be shut down; in those cases the business relationship is not one that should nor will be replicated, so disclosure is not critical. Similarly, when top-quality parts by original manufacturers are provided and held to industry (or greater) quality standards, and traceability records are kept secure for future reference capabilities, there is no risk to free market competition that is healthy for pricing and fair trade.
The critical balance
The current industry phase is one of dynamic market change. This phase is exciting and holds much promise. However, it also holds greater risk for increased counterfeit part activities due to illegal opportunism. During rapid change events, the opportunity can easily arise for counterfeit parts to quietly enter the global supply chain through new, or less-monitored pathways due to a less-than-vigilant or new sourcing events. As the IoT expansion and dynamic market growth quickly heats up and includes a much wider regional plane than ever before, we anticipate that many new supply chain networks will form. Unfortunately, lurking in the new markets and supply chain connections are opportunistic criminals armed with counterfeit, substandard, or fraudulent parts to introduce to the global component supply chain in order to illegally profit. These counterfeit parts pose significant risk to end-product users as well as manufacturers' reputations. Combating the counterfeit threat in advance of increased activity is important and very possible.
Counterfeit activity and parts are best thwarted and held in check when rigorous testing is performed in sophisticated and industry accredited laboratories under the supervision of certified quality engineers. Coupling the long-standing, industry protocols of testing while holding traceability and flow-down data by distributors combines the best of standards requirements while preserving the important competitive element of forming unique and irreplicable supply chains that benefit consumers and product innovation. In the face of rapid global expansion, new sourcing opportunities are going to arise. What is essential for us to remember is that not all vendors nor distributors are equally vigilant, experienced, nor certified to ensure the top-quality that is essential for market success and more importantly for ensuring the safety and reliability of commercial products. However, we must, as an industry, carefully consider how we define new requirements and what constitutes impingement on free market growth without compromising quality nor supply chain integrity. Zero-tolerance of counterfeit or substandard parts is necessary for the health and growth of the entire, global semiconductor and electronics supply chain, regardless of industry sector. It is possible to extend and reinforce quality standards for the commercial market without inhibiting competitive, free market innovation and growth.