Advances in digital commerce and international logistics have transformed our supply chains. But while today’s global marketplaces have created many exciting opportunities, they have also allowed counterfeit products to reach epidemic proportions around the world.
Today, we’re starting to hold supply chain professionals accountable for knowing the full provenance of the products that our companies buy and sell. In other words, we need to know what the products are, where they’ve been, and what’s happened to them along the way—because companies that don’t manage supply chain provenance are easy targets for criminals who commit product fraud.
How big is this problem? Right now, the International Chamber of Commerce estimates global trade in counterfeit goods to be $2 trillion. To put that into perspective, the global trade in fake goods is equivalent to the entire GDP of Canada! If your company hasn’t felt the effects of counterfeit products, then you’ve either been very lucky, or else it’s happening and you just don’t realize it.
But managing provenance is a new challenge for supply chain professionals. As we come to terms with this enormous issue, we need to stop and ask how we can truly know whether the products we buy were made in the right facilities, using the correct materials and processes, and whether they were actually approved for use. Manufacturing companies and brand owners also need to prepare for the risk that criminals could be selling replicas of their products.
Let’s look at the eight common types of product fraud that affect many companies. Then, we’ll look at a framework that can help you develop a supply chain provenance strategy that addresses all of your risks. And we’ll talk specifically about the need for establishing controls in a manufacturing supply chain.
Common Types of Fraudulent and Unapproved Products
Product fraud comes in many forms, but here are eight common types that supply chain professionals should be concerned about.
- Mislabeled and substandard products. Many products require labeling to indicate their ingredients, approvals, or compliance with government regulation. But labels are only useful if you trust the company applying the label. “A Wall Street Journal investigation found 4,152 items for sale on Amazon.com Inc.’s site that have been declared unsafe by federal agencies, are deceptively labeled or are banned by federal regulators.”
- Rejected and expired products. Criminals can sell rejected or expired products to inattentive customers as-is, or they can alter the labels to make them appear to be valid.
- Blacktopping and relabeling. The features of some products evolve over time, with little change in their appearance. This is common, for example, with integrated circuits and electronic components. That makes it easy for criminals to take an old item and print new markings on it, so it appears to be a new (and more expensive) product.
- Diversion. Authorized supply chain participants sometimes resell their products into unapproved channels or regions. For example, a product which is manufactured specifically for a low-cost market might end up being diverted and sold into a developed market.
- Third shift /production overrun. Manufacturing facilities, especially offshore contract manufacturers, are known to order additional raw materials and produce their customer’s product or packaging in greater volumes than is authorized on the purchase order. This additional unlicensed product is sold into unauthorized retail and counterfeit markets. Production overruns are generally indistinguishable from authentic product.
- Blatant counterfeits. Some criminals will make copies of a product, including the brand markings. These blatant counterfeits can be hard to identify because it’s common for counterfeit products to work, marginally. At one point, Apple announced that 90% of the “genuine Apple” products sold on Amazon were actually counterfeits. Some of them caused fires, and even deaths.
- Tampering. Criminals can do harm by altering a legitimate product. In the case of electronics, they may tamper with a device to disable a security feature or to embed malicious code. In the case of physical products, tampering could be motivated by a desire to sabotage a process or to harm people.
- Dilution. Criminals can take a legitimate product and dilute it with a cheap filler. This is a common problem for alcohol and for pharmaceuticals. But it has also been observed in supply chains for mechanical and electrical components, where low cost, substandard parts are mixed in with legitimate ones.
The Five Elements of Supply Chain Provenance
While there are many different forms of product fraud, the key to defeating all of them is to have an effective strategy for managing supply chain provenance. There are five elements that should be addressed in any provenance strategy. The five elements are interconnected, and they also need to align with supply chain processes such as sourcing, producing, delivering, and returning products.
- Product characteristics. Are there uniquely identifiable characteristics of the product itself? These are the equivalent to biometrics in people. A common example are imperfections that can be observed and measured but cannot be cloned or replicated.
- Product data. What data do you store about each product? For example, when and where was it made? What tests were performed on the product, and what were the test results? The data is only as secure as the system used to capture and store it. This could be a database, but, increasingly, we’re seeing business moving to blockchain solutions.
- Tamper protection. What systems do you have in place to prevent and detect tampering? These can mitigate the risk of having an authentic product altered by having parts added or removed. A circuit board that has been altered, or an assembly that has had parts swapped out, may not perform the way that it is intended to.
- Markings. Have you applied or attached security marks to your products? Some tools, like barcodes and RFID, are easy to use. But they can also be easy to copy and compromise. Consider employing a commercial and robust marking technology to reduce this risk.
- Serialization. Last, but not least, is the serialization system. Each product needs to have a unique identification number. Supply chain managers need to consider how to assign these numbers to meet their requirements, while making it difficult for counterfeiters to copy or compromise the numbering scheme.
Securing the Factory
For manufacturers and brand owners, securing the supply chain starts at the factory, regardless of where it’s located. Once the factory is secure, it’s much easier to secure the rest of the supply chain—from your supplier’s supply to your customer’s customer.
By integrating an effective supply chain provenance strategy with Industry 4.0 technologies, supply chain managers can monitor and take control of manufacturing equipment, for example, with a solution that tracks the number of items produced by a machine and disables the machine once an order is completed. That allows them to ensure that a factory produces exactly the ordered quantity of legitimate product, and that there isn’t any genuine-but-unlicensed merchandise that can slip out the back door.
It’s worth noting that many companies have started to implement processes to secure their packaging. But they’ve found that to truly protect a manufacturing process, it’s also necessary for brands to implement systems that uniquely identify the individual products. That way, the product’s provenance can be maintained regardless of what happens to the box, package, or label.
As professionals working in a global environment, we also need to be realistic and recognize that if a contract manufacturer is offering a deal that seems “too good to be true,” there’s a high risk that they see an opportunity to target our products for production overruns and other forms of fraud.
Now Is the Time to Take Action
For most companies, issues related to supplier fraud and brand protection have generally been handled reactively by the legal department. But hiring lawyers to fight these battles after the fact is an expensive solution that seldom solves the problem. And law enforcement is often reluctant to get involved in these cases, unless the scale is huge or there are clear ties to larger criminal activity.
So, companies need to explore proactive solutions, and develop a robust supply chain provenance strategy that integrates with their sourcing, logistics, manufacturing, and distribution operations.
In an age where counterfeit products are known to be common, we have to protect our brands and our customers from this serious threat. “Buyer beware!” might have been acceptable in the past, but the risks have now grown too severe.
Today, our brands and our customers are demanding a new approach to supply chain provenance, with a focus on solutions that allow us to “Trust, but verify.”
Learn more about how Oracle’s Supply Chain Management technologies can help your business prevent fraud. https://www.oracle.com/industries/industrial-manufacturing/digital-supply-intelligent-trace-track.html
About the Authors
Daniel Stanton is a supply chain executive, entrepreneur and educator. Known as “Mr. Supply Chain,” he’s the author of Supply Chain Management For Dummies and several courses on LinkedIn Learning (formerly Lynda.com). Stanton is also co-founder of SecureMarking, Inc. whose proprietary anti-counterfeiting technology was selected for the 2018 Air Force Technology Accelerator Powered by Techstars. For more insights and perspective, you can follow Daniel here on LinkedIn and Twitter.
Mark Manning is the Founder & CEO of iTRACE Technologies, a Silicon Valley company specializing in supply chain security. Mark is a serial entrepreneur and has been involved with brand protection and product security for over 15 years, delivering technology solutions to some of supply chains biggest problems. You can follow Mark here on LinkedIn and Twitter.