Just In Time -- How To Fix A Leaky Supply Chain

Our cover story this month looks at the dirty little secret of globalization -- the likelihood that somebody in another part of the world is getting rich off of your product, and you're not making a single dollar -- or yuan -- from it. No matter how much you're investing in product development and manufacturing technology, there always seems to be somebody who's figured out a way to undercut you on cost and components.

These product pirates, predominantly based in emerging nations, have exploited the dark side of lean -- not only have they cut out all the waste, but they've cut out the quality control, too (not to mention all your profit). And worst of all, it's typically your reputation, not theirs, that takes the hit when counterfeits flood the market.

Certainly the business case for selling products to emerging countries is compelling. According to a recent study from consulting firm Deloitte, more than half (56%) of the global manufacturing executives polled expect a substantial increase in sales revenues from emerging markets over the next three years. In contrast, only 23% of those same executives expect a similar increase from developed markets.

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Given the size and potential of this emerging marketplace, Gary Coleman, author of the Deloitte study, poses the question, "Why aren't more major manufacturers developing new products for the emerging markets in which they compete?" One of the main reasons, Coleman suggests, is fear, specifically "the theft of key process and product know-how by staff or joint-venture partners and the counterfeiting of branded products."

He points to U.S. government estimates that intellectual property violations in China alone cost global manufacturers $60 billion per year. And according to the U.S. Customs and Border Protection, 88% of all the counterfeit goods seized by Customs last year originated in China (81%), Hong Kong (6%) or Taiwan (1%).

Any manufacturer's globalization plan should begin by identifying risks in the emerging markets, as well as a strategy on how to manage those risks, Coleman suggests.

On top of the outright pirating and counterfeiting of products, there's another large problem that's hampering global manufacturers -- the so-called "grey market." According to Archstone Consulting, grey market product is "real product that is leaked into the marketplace where the manufacturer does not receive the full market revenue potential." This leakage typically occurs when global supply chains are not well managed, explains Archstone Consulting's John Ferreira, which leads to the entirely unacceptable situation where some members of your own extended partner network are cheating you on pricing.

Voice Your Opinion See Chain Reactions: David Blanchard's blog about supply chain management.

Some manufacturers have basically ceded a certain percentage of their profits to the grey market, chalking it up as a cost of doing business overseas, but the good news, Ferreira notes, is that manufacturers can effectively combat the proliferation of grey market products by plugging up the leaks themselves. That's not necessarily easy -- the process involves redesigning your supply chain so that everybody wins if they play by the rules -- but it's certainly achievable.

Whether it's foiling faceless counterfeiters overseas or grey marketers within your own supply chain, the key, Coleman says, "is to always remember your business' core competencies and continuously adjust your strategies to make sure you are positioned for profitable growth." Just as it's wrong to assume that you'll instantly strike it rich by expanding into China, don't give up if you find your supply chain has sprung a few leaks.

David Blanchard is IW's editor-in-chief. He is based in Cleveland. Also see Chain Reactions: David Blanchard's new blog about supply chain management.