Expert Insight: The Executive View
  By Gene Tyndall  
  June 19 , 2007  

Counterfeiting and Supply Chains


The Problems are Growing, As Recent Examples Demonstrate; Time to Get More Aggressive in Finding Solutions

Tyndall Says:
It would seem that the time is right for supply chain managers and logistics service providers to take a more active role in fighting, or mitigating, this growing drag on corporate earnings and customer/consumer risk.

What do you say? Send us your comments here

We have all recently been reminded of the problem of counterfeiting of merchandise, with the FDA recall of fake toothpaste believed to be toxic, falsely packaged and labeled as “Colgate." While we knew of this issue as a persistent problem of international trade, as global brand companies stretch their supply chains farther and deeper around the world, they face a growing danger from counterfeiters.  Cheaper sources of production, the internet, on-line auctions, lower freight costs, and other factors have intensified the problem and its effects on businesses and consumers.

No product sector is immune to this problem.  Consumer goods and electronics have received much of the publicity, but auto parts, footwear and apparel, prescription drugs, sunglasses, and all types of components are at risk. The World Customs Organization reports that 7% or more of the world’s merchandise is counterfeit, amounting to over $512 billion of fake goods. In some regions, some 40% of certain categories of goods are believed to be fake. Some $350 billion of the total is estimated to cross the US borders each year. US Customs is able to seize only about one-third of this, even though they increased the number of seizures by over 80% in 2006, to over 14,000. 

China is by far the major source of piracy and fake goods.  As companies turn to China for more production of products, the risk of piracy and unauthorized technology transfer increases. The protection of intellectual property is made more difficult when companies share not only their production technology but their marketing and packaging as well.

But China is not the only source.  Eastern Europe, India, South America, and others in the Far East also produce and ship copies. This is truly a global problem for all businesses and, for health and safety reasons, for consumers as well.

A recent informative article in Forbes discussed the issue from the perspective of the Zippo lighter company, along with a few other brands. The Zippo company estimates it has lost one-third of its earnings to counterfeiters. While it has finally located and constrained the major sources in south China, others have sprung up.  Some of the cases have taken years for court resolution, even with the Chinese government's assistance.  Often one company makes the lighter cases; another makes the internal assembly; another the packaging; another does the full assembly; and yet another handles shipping.

It would seem that the time is right for supply chain managers and logistics service providers to take a more active role in fighting, or mitigating, this growing drag on corporate earnings and customer/consumer risk.  Virtually all the copied products somehow move through supply chains established for legitimate purposes.  In the Zippo case, some legitimate factories were using the so-called “third shift” to make fake goods that were quite authentic. In other cases, it is excellent packaging and labeling that does it.  In yet others, it is simply the lack of adequate processes for quality assurance, inspection, control, and authentication.

Consider one other case: Johnson & Johnson attacked the growing problem a few years ago by assembling a multi-disciplinary team, getting some outside specialists, and analyzing its supply chains.  They found significant diversions – selling legitimate products in markets other than those intended – which opened the doors for counterfeit products to enter the chains.  The solutions involved more central monitoring and control, getting common operating processes among business units, and improved information and supply chain visibility.  The corporation has also stepped up checking of finished goods in the market and in different buying channels, as well as enhancing its risk management programs.  They found that supply chain managers could do more to discover, and report, on incidents where diversions, counterfeiting, and gray market products were present.

Supply chain and logistics managers can indeed help.  Whether your company has in-house investigators or not, there are methods – some straightforward, some more complex – that can be instituted.  For example, we can:

  • Better scrutinize labels, packaging, and contents of items we are moving.
  • Collaborate with suppliers, and our own teams, to improve quality assurance processes and practices.
  • Verify bar codes and other automatic identification methods prior to shipping and receiving.
  • Verify bills of lading against orders and other controls.
  • Work with logistics service providers to improve their risk processes.
  • Examine all our internal processes  - and those of our trading partners -- for accepting, moving, and delivering cases or items – both for security reasons and for intercepting counterfeit goods that have somehow entered our supply chains.

Not only do we want to keep dangerous items out of our supply chains for security and health reasons; to deny the handling of product that is not quality assured, inspected, verified, and authorized is an equal business objective.

There are some new methods and solutions now on the market to help with this brand protection challenge. RFID, especially in the pharmaceuticals industry, offers some potential, but is not by itself enough. A more comprehensive solution that has recently caught my attention is a company named SADT  (Stanford Anti-Counterfeiting Digital Technologies, ), which provides an array of technology and services that help companies not only detect fake goods, but also locate counterfeiters, seize the counterfeits, and stop the process.  Another company looking to address this problem is called Verify Brands ( I am sure there are others, or soon will be.

Surely, supply chain managers are swamped already with managing supply chains on a daily basis, keeping goods in motion and meeting customer needs, all at minimum costs while dealing with substantial risks.  But, the pervasiveness, severity, health risk, and growth of this common problem affect all of us – whether in corporate earnings or in our lives as consumers.

We should get proactive with this problem and improve our business processes to help mitigate it.  This supply chain challenge is undoubtedly only going to become worse.

Agree or disgree with our expert's perspective? What would you add? Let us know your thoughts for publication in the SCDigest newsletter Feedback section, and on the web site. Upon request, comments will be posted with the respondents name or company withheld.

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