More often than not, the gray market, the unauthorized sale of new, branded products diverted from authorized distribution channels, takes advantage of shifting market demand, inconsistent industry regulations, and errors in forecasting in order to gain profit to the detriment of the end buyer. According to research conducted by the Alliance for Gray Market and Counterfeit Abatement (AGMA) and KPMG, the value of gray market products ranges from five to 30 percent of all IT sales, with an impact on profits between $8bn and $10bn.

Electronic components manufacturers understand that the gray market is an increasing problem, but haven't always been clear on how to stop it, or even identify how or at what point in their supply chains products are leaking into the gray market.  Fortunately, a new generation of franchised distributors has arrived, with a business model built around identifying and curtailing the threat posed by gray markets.

Understanding the problem

In a recent supply chain analysis for a leading semiconductor supplier of both analog and digital devices, more than 124 million units of the supplier's product were found floating in the gray market across 6,500-plus part numbers. Components with date codes of less than one year accounted for 22 percent of its gray market product. A further 5 percent had date codes over 11 years, demonstrating that whether one is an OEM looking for the newest product or a military sub-contractor looking for obsolete components, no end customer is immune to the presence of unauthorized product in the gray market.

It is not just high-tech companies that suffer from the gray market. Consumers and other technology end-users, including military and defense, are also impacted negatively when products are advertised as new and authentic, but in reality could be used, refurbished or even worse, counterfeit.  The consequences of using counterfeit or non-conforming parts are significant, and in the case of military components, can be catastrophic.

There are several commonly-used methods by which electronics components are entering the gray market, and these range from quite simple to very sophisticated. This diversity provides a dilemma for those seeking to safeguard the supply chain as a "˜one size fits all approach' is insufficient to prevent leakages.  Below, we've highlighted three of the more commonly-used methods.

"¢ Ownership in outsourced manufacturer - More and more, companies are moving their production to outsourced manufacturing companies in order to realize cost savings and bottom line efficiencies.  Some independent distributors (brokers) maintain direct ownership in these outsourced manufacturers, through which they gain access to legitimate inventory. Occupying two roles in the supply chain may sound like a good idea, but often the procured inventory is rerouted internally once received causing direct-manufacturer traceability to be lost and these components then more easily enter the gray market. Not only is a portion of the legitimate product potentially being diverted from intended channels, but also, there is risk of counterfeit components also entering into the gray market.  In some cases, by conducting unauthorized, after-hours product runs, with none of the required inspections and approvals, the gray market distributor/manufacturing facility is able to profit from additional inventory which looks and feels, but doesn't always perform, like authorized components.

"¢ Reliability "˜façade' - The emphasis on a supplier and products that have a legitimate "˜look and feel' is a prime driver for gray market distributors. As long as they can pass off product to the next link in the supply chain, and distance themselves from the end buyer's reliability and performance testing, gray market distributors stand a good chance of succeeding. To this end, gray market distributors, who don't have the credibility and brand strength of larger, well-known, legitimate distributors, will often present a "˜façade' of authorized reliability. To unsuspecting buyers, the gray market distributor will provide ample references, citing customer and product volume statistics, and highlighting experience and guarantees, all or some of which may not be true. By finely parsing terms to represent themselves as more legitimate than they actually are, for example by claiming to be ISO (International Organization for Standardization) "compliant" (a meaningless term) versus ISO "certified" (which requires significant effort and third-party validation), these gray market distributors insert themselves into the supply chain at critical junctions and expose buyers to gray market components.

"¢ Obsolete and end-of-life components -  With widely divergent lifecycles for components among consumer, enterprise, and military electronics, original manufacturers increasingly discontinue components where demand still exists while they move on to newer, and more profitable, product lines. These obsolete and end-of-life, but still legitimate, components may then enter the gray market by being sold for pennies on the dollar to gray market distributors. Test failures and excess inventory also enter the gray market this way. These components are then resold within the gray market to unsuspecting buyers with all traceability back to the end manufacturer eliminated.

Defining a solution

In order to avoid the gray market, there are two primary methods. On the buyer side, one should purchase components only from franchised distributors who maintain a direct business relationship with the original manufacturer and/or authorized distributors who also guarantee direct traceability back to the manufacturer. On the supplier side, one should seek trusted distributors who are able to trace products through the supply chain by producing and analyzing data using specialized tools. The franchised and authorized distributors who meet the needs of both buyers and manufacturer partners are able to differentiate themselves by offering full transparency into the supply chain, providing pass-through warranties where needed, along with the best-in-class warehouse and process controls such as ISO 9001, and ESD 20:20 certification (not just "compliance").  Franchised and authorized distributors serve as valued partners to the original manufacturers, providing visibility into gray market activity across region, date code and vendors so that original manufacturers can better mitigate the risks to their brands and bottom lines.

While the gray market may never be completely eliminated, suppliers and buyers are very aware of the problems associated with components that are sourced from it, and are doing all they can to stop their infiltration into company supply chains. The best guarantee against gray market components is to source products with 100-percent direct traceability from the original manufacturers and their franchised and authorized distributor partners. By relying on a thorough understanding of the electronics supply chain and performing focused, value-added analytics, these distributors have been able to bolster confidence and ensure integrity by combating the lack of transparency and murky distribution path that characterizes aspects of today's electronics components supply chain.

Source: Components Direct


Keywords: supply chain risk management, supply chain liability, sourcing solutions, electronics parts sourcing, counterfeit electronics, anti-counterfeiting initiatives