Supply Chain Integrity is Not Discussed Publicly

There are certain supply chain topics that are rarely discussed publicly. “Supply chain integrity” is one of them. Companies don’t want to admit that their products are being counterfeited, or that theft and grey market diversions are hurting profitability. They also don’t want thieves to know about the security measures they are taking to protect their products.

At the Supply Chain Integrity track at ARC’s forum earlier this month, we conducted a think tank session where professionals shared, confidentially, their experiences and insights on this topic. Here are some of my key takeaways from the session without attributing them to a particular person or company.

Companies that have experienced counterfeiting issues do not have to face this problem on their own. The Department of Homeland Security (DHS) will undertake investigations and prosecute offenders, particularly if companies provide them with promising intelligence. DHS can do this while keeping the name of the company that brought the matter to their attention private.

No one wants to say this publicly, but companies that outsource manufacturing to China are at greater risk. With branded apparel, for example, there are cases where a contract manufacturer produces goods and ships them to the brand owner, then at night they continue to produce the same products and sells them into black market channels.

If you are using a contract manufacturer, the contract should include a provision that allows you to conduct spot inspections at any time without cause. Even better would be having staff on site during all hours the factory is in operation.

Service parts counterfeiting can put manufacturing companies at risk. For example, Oil and Gas companies have found counterfeit electronic components in their plant floor automation. If key components fail, the risk of safety incidents is greatly increased.

This is one reason why addressing supply chain integrity issues after products come to market is too late; companies should start thinking about supply chain integrity during product development. Some key questions that companies should ask: How long will this product be on the market? And for how long after that will we continue to provide service parts? And if we don’t supply the service parts, how can our customers be assured of safe replacement parts?

Companies should use multiple technologies to detect counterfeit products. Track and trace technologies, particularly serialization, are one key set of technologies. But track and trace is not sufficient. Some bar codes can be counterfeit. Tough to counterfeit bar codes have been scraped off returned goods and reapplied to counterfeit goods.

Serialization can help companies detect gray market diversions, which can actually be legal. For example, in Europe, drugs might sell at different prices in different nations. It is perfectly legal for a distributor to buy more goods than it needs in a low retail price nation and then ship them to a high price nation. However, serialization gives a pharmaceutical company the ability to detect this and tell the distributor, “Knock it off or we are going to stop doing business with you.”

Track and trace technologies are being piloted in consumer-facing applications. For example, a consumer might be able to use their smart phone to read a QR code and call a hotline number to make sure a drug is legitimate. Or a customer in a store might scan a QR code at a produce bin to see what field the produce was grown in, whether domestic or foreign, and whether it is truly organic.

Many pharmaceutical pilots of serialization will begin next year because of the California ePedigree mandate that starts to phase-in in 2014. We will likely also soon see serialization requirements for spare parts sold to the Department of Defense.

Companies should segment their supply chains. Not all customer segments require the most expensive supply chain integrity technologies. Customer segments with less stringent requirements should not be burdened with extra costs.

And finally, companies can use the same continuous improvement processes that they have used to improve manufacturing and logistics to improve supply chain integrity.

Supply chain integrity is a topic that is gaining importance. But it is a topic that is best discussed in small and confidential settings.

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