DoD’s First Pass at Grey Market Regulation

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More Vendors, More Problems

The government acquisition process is a complex one. It is not set up to be nimble, nor is it structured to keep pace with the commercial sector, of which the majority of grey market material is supplied by. The U.S. government gets a great deal of heat for many things, including fostering the introduction of counterfeit components into the supply chain, but when you really study how their procurement process is setup, when you break down the layers, it’s not hard to see how a counterfeit component or suspect material can find its way in. Think about it this way: AVL management is often considered the first line of defense in protecting the supply chain. Now consider how vast and far reaching the government’s AVL is, and it’s easy to see how what passes as quality control can vary from agency to agency.

Over One Million Counterfeit Semiconductor Devices in DoD Supply Chain

The reliance of DoD’s supply chain on the global grey market as it pertains to lifecycle management for semiconductor devices can be traced back to the Perry Memo written in 1994 by Secretary of Defense William J. Perry. The release of the Perry Memo increased the procurement of commercial items (COTS) and systems, in addition to an increase in the use of commercial practices and specifications. The rapid change in key technology sectors and the military’s new-found dependence on COTS items have had an adverse effect on the supply chain, influencing the decisions of the PEOs and PMs responsible for the acquisition of components and equipment in the sustainment phase of a weapon system.

Additionally, the burden is also felt by the OEMs and Integrators in the construction phase of a weapon system. For example, it is not uncommon to have a fleet of subs or surface ships constructed by the same prime contractor to have different components installed in the same control panel in ship 1 compared to that of ship 2, manufactured just one year later. The control panel design did not change, but the electronic components used in the design of ship 1 may have become obsolete in the building of ship 2, leading to the possibility of the semiconductor in ship 2 to be superior to that in ship 1. Circling back to the sustainment responsibilities for ship 1 and ship 2, the sustainment team is faced with different parts used for the same application. The program manager responsible for generating a DMSMS plan in order to support the weapon systems is always looking for ways to increase readiness, assure reliability, and do it at lower cost. The grey market has been used as source for DMSMS issues in the past, and its use continues today. For many years, the grey market was sold by the actors in the market as a place where excess inventory could be had for pennies on the dollar. This is attractive to PEOs and PMs who were looking for solutions that allowed their project to be delivered on-time and under budget.

The grey market was, and still is today, and will be going forward, a market for which the government directly supplies product through DRMO sales by DLA depots. However, the grey market and those entities that supply product from this market are now looked at as the greatest threat to the supply chain. This notion became fact when the NDAA 2012 mandated the implementation of Section 818, based on the findings of the 2012 Senate Armed Services Committee, which disclosed that there were over 1 million counterfeit Semiconductor devices are in DoD’s supply chain.

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Editor's Note: This article originally appeared in the September 2015 issue of SMT Magazine.