Over the last several years there has been a marked increase in the use of Commercial-Off-The-Shelf (COTS) components in configuring new weapon systems. This initiative has been driven by Commanders in-theater requiring the rapid fielding of new weapon systems to fight a new type of enemy.

The traditional approach of sourcing components that are Developmental Items has been recognized by Program Manager (PM) Offices as being much too lengthy to meet the urgent needs for most new weapon systems; our Special Forces commands have been the most aggressive in using COTS based weapon systems. COTS items have been identified as the solution to field a weapon system quickly and relatively inexpensively.

System integration efforts are typically higher for COTS based systems compared to those of Development Item based systems, but due to the materially lower unit costs of COTS items, the overall weapon system is often an attractive value proposition to the PM Office.

Note that there is also a macro-issue that is driving greater use of COTS items; the commercial market dwarfs that of the defense community and contractors have been more and more “forced” to look for COTS solutions for their customers. In 1980 US defense costs were approximately 10 percent of GDP.

By 2000 it had dropped to about 3.2 percent and now is at about 3.8 percent due to our current conflict in Southwest Asia. It is estimated that in five years, due to the reduction in the current conflict and a continually growing economy, defense expenditures may fall below 3.2 percent. From all indications, COTS items will come to dominate most US defense weapon system acquisition programs.

The majority of PM Offices, working closely with contractors, have been very effective in providing field commanders with COTS based solutions. The PM’s track record in being efficient in dealing with the upgrading of COTS products, as well as in dealing with the product support of a system, has been at a lower level of performance compared to that of acquiring the system.

Joint PM Offices have been the most challenged in dealing with these shortcomings. The Congressional passage of the Weapon System Acquisition Reform Act (WSARA) of 2009 is direct result of attempting to address these cost overrun issues.

Note that as a result of an abundance of supplemental funds to pay for system acquisition, as well as for paying for a good part of the product support processes employed during the early years of a fielded system, most PM Offices have had little pushback from leadership regarding the often unfavorable variance from planned Total Ownership Cost (TOC); a good fitness report for an O5/O6 is still being primarily driven by the effectiveness of fielding a new weapon system.

As supplemental funds begin to decrease in the next one to three years, due to many reasons, many of the acquisition/product support business models crafted by the PM Offices will begin to be severely challenged due to a reduction in the amount of funds that a PM Office is able to utilize to deal with “problems;” system availability levels will decrease and product support costs will increase. Unfortunately, the PM who had crafted the business model for the COTS based system will have long been gone, leaving the current PM and Product Support Manager/ILS Lead in the PM Office to cope with multiple challenges.

Vice Admiral Mark Edwards, Deputy of Naval Operations for Communications Networks (N6) in April 2008 stated below his opinion regarding the promise of COTS technology and the reality of the acquisition and product support processes.

“Millennium sailors were born with laptops in their hands…but when we get them into the Fleet, the disconnect between what they were promised and what they find will be profoundly disappointing–a veritable bait-and-switch scheme. They will discover that our “leading-edge-off-the-shelf” and “state-of-the-art” technology is at best ancient….

The two-way communication bandwidth of a single BlackBerry is three times greater than the bandwidth of the entire Arleigh Burke destroyer. Looked at another way, the Navy’s most modern in-service multi-mission warship has only five percent of the bandwidth we have in our home Internet connection…. By the time it gets to the people who need it, it is already out of date.

The important point that the Admiral was making is that our men and women in uniform are often technology savvy for COTS items; it is what they use as consumers on a day-to-day basis. Think PC, think router, think cellular phone and think GPS. Young adults, the majority of military personnel, have been conditioned as consumers to replace their technology every one to two years.

When members of our volunteer military see COTS technology, which they know is three to seven years-old, they can easily feel that they have been “betrayed” in not being provided with the latest and greatest technology to fight our enemies. As for Developmental Items, our soldiers have had none or very little experience as a consumer and cannot equate whether an item is in fact state-of-the-art.

Note that Al-Qaeda can cruise the internet for new COTS technology, place an order with a credit card and have it delivered via DHL to their country of choice within 48 hours. It is not hard to see why our Warfighters are confused as to understanding why our PM Offices cannot have similar flexibility.

Ron Giuntini

Note: A related webinar: Success with COTS Components: How to Estimate the Costs of COTS Items During the Product Support Stage of a Weapon System Lifecycle will be conducted by the author of this article Ron Giuntini, you will not want to miss his Success with COTS components webinar, taking place August 17th, 2010.

For those unable to respond to this increased demand, the lost revenues will be felt across the board room, by supply chain execs, shareholders and customers alike. Supply chains that have been “leaned” down by many companies over the last year or more are already feeling the pinch; anyone trying to chase down factory-allocated TI parts right now can attest to that! Three Certainties in Life: Death, Taxes, and the Forecast is Wrong

“For years, there’s been a global race to find a low-cost way to manufacture plastic circuits,” said Paul Smith, laboratory manager, Xerox Research Centre of Canada. “We’ve found the silver bullet that could make things like electronic clothing and inexpensive games a reality today. This breakthrough means the industry now has the capability to print electronics on a wider range of materials and at a lower cost.” Xerox Scientists Develop “Silver Bullet” Needed to Replace Silicon Circuits with Low-Cost, Durable Plastic

As the economy rebounds, buyers and sellers are growing more and more vulnerable to the risks of inventory excess and shortages that drive grey market activity and increasingly sophisticated counterfeit methods. In either a rebounding or floundering market, the Verical Marketplace optimizes transactions within the industrial supply chain for sellers faced with disposing of excess inventory and buyers faced with shortage purchasing.

Market opportunity: of the $600 billion annual market for electronic components, the time-critical segment is an estimated $22 billion, approximately $12 billion of which is serviced by unauthorized distributors, and 13 percent of which is counterfeit, according to the trade association IPC. The U.S. Department of Defense found that 15 percent of the shortage parts in its supply chain were fakes, with the number growing at a compound annual growth rate of 25 percent from 2005-2008.

“Today, the electronic component secondary market is fraught with risk and inefficiencies — buyers have no visibility into the true source of their components; they can only guess at a part’s authenticity or warranty, and have incomplete information about what the part really is and what a fair price is,” explained Stephen P. Kaufman, senior lecturer of Business Administration at Harvard Business School, and former chairman and CEO of giant distributor Arrow Electronics. “At the same time, sellers have to worry about not getting a decent price for their surplus inventory, protecting their brands, and the hassle of not having a single place in which to sell their parts. There is a significant opportunity to upgrade the entire supply chain by addressing the current flaws of the secondary market, and Verical is addressing this challenge head on.”

Growing exponentially since its beta introduction in January, the Verical Marketplace currently serves 3,200+ buyers from small electronics firms to global high tech manufacturers, with 27,000+ unique part numbers from 230+ manufacturers, including IDT, Molex, NXP Semiconductors, Texas Instruments, and Tyco Electronics.

Verical Redefines the Electronic Components Marketplace

To redefine the electronic components marketplace, Verical relies on a deep leadership team in supply chain software that includes industry veterans from Solectron, Agile Software, Dept. of Homeland Security, Classic Components, and Lockheed-Martin. Company president, CEO and co-founder Josef T. Ruef has over 16 years of experience with the secondary market, specifically in developing anti-counterfeiting best practices. John P. Brown, Verical’s vice president of marketing and strategy and company co-founder, has a wide range of experience in operations and the management of information-sharing networks between organizations. Additionally, VP of supply chain and operations Chris Cookson brings more than 20 years of supply chain and consulting experience; VP of sales and community development Bill Aston brings 20 years in enterprise supply chain software; and VP of Engineering Jes Lefcourt has 15 years in software management.

The secondary market is being exploited by fraudsters and profiteers,” said Ruef. “Our deep experience with systemic failures in the secondary market led us to build the Verical Marketplace as an extension of the primary market. We believe ‘information’ and ‘traceability’ are the keys to retaining component part value for sound decision-making and confident transactions. By providing buyers and sellers with the pedigree scoring of component parts, a measure of each part’s traceability, we are uniquely positioned to complement franchise distribution as a trustworthy source of inventory when traditional sources cannot fulfill demand.”

Unlike third party auction houses and consignment sales, the Verical Marketplace permits only authorized channels and original owners of component parts to sell pedigreed inventory. Its innovative pedigree system assigns a score to each component part based on how far back Verical is able trace its chain of custody. The higher the pedigree score, the further up the supply chain the component is traceable. The end result is sellers can monetize unused assets at a greater return on their inventory investment, and buyers can manage their purchase risk and expedite their shortage fulfillment.

“For sellers, writing off excess inventory equals lost revenue. Typically, sellers of excess inventory get 4-8 percent return. Today in the Verical Marketplace, they’re getting 8-10 times that with the average seller recovering 60 percent of the historical cost,” noted Cookson.

The Verical Marketplace is available today at www.verical.com or call 415.281.3866. For more information on Verical, Inc., please visit Company Overview or Newsroom. For additional perspectives, please visit and subscribe to the Verical blog, The Electronic Components Source at http://blog.verical.com/, and follow Verical on Twitter at @Verical.

Additional Resources

Counterfeit White Paper: “The Real Solution to Fake Parts: Securing Supply Chains through Data Transparency and Better Market Design” (October 2009); http://bit.ly/counterfeitwhitepaper

Newsroom: https://www.verical.com/about/resources/newsroom.html

Industry Insights: presentations, articles, websites; https://www.verical.com/about/resources/industry.html

Blog: “The Electronic Components Source” http://blog.verical.com/

Twitter: @Verical

About Verical

Verical is the creator of the Verical Marketplace, an online trading platform for electronic components that reduces the risk of chronic inventory surpluses and shortages. For sellers, Verical works with component manufacturers, OEMs and contract manufacturers to monetize excess inventory at substantially higher yields. For buyers, Verical provides small electronics firms to global high-tech manufacturers with a unique pedigree scoring system that hastens sound shortage purchasing. Founded in 2007, Verical is a San Francisco-based start up backed by Valhalla Partners. The company is experiencing rapid growth with over 27,000 parts available today in the Verical Marketplace at www.verical.com

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