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Supply Chain Management: Foiling Fakes

April 9, 2007
Counterfeit products are depriving manufacturers of revenue, harming brand integrity and in some cases, compromising safety. Manufacturers are fighting to keep phony goods out of their supply chains.

"Alarming" is how Anthony C. Laplaca describes the rate at which counterfeit and knock-off replacement parts are entering the North American market. "Their product depth and level of sophistication are expanding as well," he says. Appearing before a U.S. Senate committee last July, LaPlaca, vice president and general counsel of Bendix Commercial Vehicle Systems, testified that lost revenue attributable to the influx of knock-offs and violations of intellectual property rights costs his company an estimated $10 million to $20 million per year in its valves portfolio alone, with other product lines also affected.

Worse than the financial drain, LaPlaca told lawmakers, is the safety issue. Bendix makes safety and braking systems for commercial vehicles. The risks associated with inferior-quality counterfeit parts range from premature wear all the way to catastrophic brake failure.

Add the loss of brand integrity for manufacturers as customers lose confidence in names they have come to know and trust -- as well as the fact that customers simply are being hoodwinked -- and manufacturers across every industry sector have clear cause for worry.

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The fact is counterfeiting is big business, and it's wreaking havoc up and down the supply chain. The advent of the Internet, increasing complexity of supply chains, and growing sophistication of the people behind these illegal activities are only making the problem worse.

The good news is that many manufacturers are not standing still. Like Bendix, they are fighting to prevent counterfeit products from entering their supply chain, as well as taking steps to remove illegal products that have successfully snuck in.

The Scope Of The Problem

"If there is any weakness in your supply chain, if there is any opportunity for a counterfeiter to insert fake products or divert products from the legitimate supply chain, they will do it," says Pierre Mawet, a senior manager for consulting firm Accenture.

Origins Of A Counterfeit

More than $155 million in counterfeit goods were seized by the U.S. government in fiscal year 2006. Where did they come from?
China 81%
Hong Kong 6%
Taiwan 1%
Pakistan 1%
Korea 1%
All Others 10%
Source: U.S. Customs and Border Protection
Estimates place the costs of counterfeiting and piracy at greater than $200 billion to the U.S. economy and anywhere from $500 billion to $650 billion to the world economy. Of course, given that the activities are illegal, it's hard to know precisely how large a monetary price is truly paid.

The U.S. government certainly keeps busy chasing down counterfeiters. Following an extremely productive 2006 (see "Gotcha! Catching Counterfeits"), U.S. government agencies continue to seize large shipments of counterfeit goods in 2007. On Feb. 22, for example, U.S. Customs and Border Protection (CBP) seized more than 100,000 pieces of counterfeit Fendi and Gucci handbags, as well as other fake merchandise bearing such brands as Chanel, Coach, Mickey Mouse and Louis Vuitton. The fake goods arrived hidden among legitimate merchandise on a container ship at the Port of Oakland, Calif., and were bound for New York. Just four days earlier another haul of counterfeit products -- this time clothing, watches, accessories and handbags -- was seized at the Dallas-Fort Worth International Airport. Thirty-one intellectual property trademark violations were identified.

No industry is immune. Counterfeit or fake products infiltrate all industries, from cigarettes, golf clubs, brake pads and handbags to pharmaceuticals, DVDs and apparel. And even if the product itself isn't phony, U.S. CBP has nabbed a wealth of products bearing fake United Laboratories (UL) labels. Most counterfeit products to the United States originate in Southeast Asia.

Oddly, given the scope of the counterfeiting problem, many top-level manufacturing executives don't recognize its magnitude, Mawet says. Yet, successfully making inroads requires top-level recognition of the problem and adequate resources allocated toward containment, he contends.

Adding to the problem of detection, counterfeit product frequently appears nearly identical to the real thing, even though its quality may not match that of the genuine product. Indeed, many counterfeiters have sophisticated global networks and use sophisticated manufacturing techniques, "but they cut corners to improve their margins," explains Mawet. The U.S. Department of Homeland Security says organized crime groups also are increasingly involved in the smuggling and distribution of counterfeit merchandise.

Fighting Back

Manufacturers are not without recourse in the battle to eliminate counterfeit products from their supply chains. There's litigation, legislation, process improvements, technology solutions and more. The best approach is one that combines elements of all of these actions, industry experts say.

Cigarette maker Philip Morris USA, for example, has a brand integrity department that protects its trademarks through a combination of trade-partner engagement, support for legislative and law enforcement efforts, product security measures and litigation. The department was formed following a rise in counterfeits and other illegal activities in 2002.

Auto parts maker Bendix also takes an approach that attacks counterfeiters on multiple fronts. Bendix focuses on three areas: protection, enforcement, and education and awareness. Among the actions Bendix has taken in its "protection" prong are:

  • Creating an intellectual property rights team that includes both legal and business expertise
  • Reviewing all intellectual property to determine what was at risk.
  • Registering all common law trademarks and patents
  • Developing a standard process for applying for any new intellectual property
  • Making intellectual property consideration a component in the new product development process.

Bendix brand manager Andrew Cifranic says the company also is considering changes to its packaging, labeling and even manufacturing processes to make them less counterfeit-friendly. A challenge Bendix faces with regard to packaging is that end users of its products rarely see them in packaging, mitigating the effectiveness of a packaging solution.

Yet Bendix's efforts don't stop there, the company notes. Bendix has pursued litigation and cease-and-desist letters to successfully halt patent- and trademark-infringing sales. It even has identified infringers at trade shows in which it participates and successfully worked with show sponsors to have infringing products removed from the show.

The third prong in Bendix's program -- education and awareness -- is conducted both internally and externally. Internally the company continually trains its customer service personnel and sales force. Externally, the focus is on alerting distributors (Bendix uses authorized distributors only), dealers and end-users about the scope of the problem. At trade shows and elsewhere the firm provides side-by-side comparisons of its product to knock-off products to showcase the differences. Bendix also is working with business associations such as the U.S. Chamber of Commerce and the Coalition Against Counterfeiting and Piracy to raise awareness.

Take Control Of Your Supply Chain

The better you control your supply chain, the fewer opportunities counterfeiters have to insert fake product into the distribution stream, points out Accenture's Mawet. To that end, he says manufacturers should monitor what occurs with their product during every stage of its journey to the end-user. That means knowing all partners, transit providers and port locations. That means monitoring contract manufacturing partners to assure that they are producing only authorized product, not running an extra shift to produce goods for illegal distribution. That means monitoring sales if you sell to distributors or wholesalers who may sell to secondary markets.

Some companies deal only with approved customers and vendors, Mawet says, and some ask that unwanted goods be returned so the manufacturer can control the secondary market. "If there's a break in the chain of custody, that's when bad things happen," he says.

Another bit of advice: Speed up the supply chain as much as possible. "If product starts sitting around somewhere, at a port, in a warehouse, in transit, then it just creates opportunities for counterfeiters to crack that legitimate supply chain," Mawet says.

Thwarting Counterfeiters With RFID

Several technologies are available to help manufacturers keep control of their products' progress through the supply chain. Pharmaceutical giant Pfizer, for example, began shipping RFID (radio frequency identification) tags on Viagra intended for U.S. distribution in December 2005. Viagra was chosen because it has been a major target for counterfeiters, the company says.

Pfizer tags Viagra at the pallet, case and bottle level, enabling wholesalers and retailers to verify the unique electronic product code, or EPC, on the packaging and assure that the product is genuine Viagra. Peggy Staver, Pfizer's director of product integrity, says the company has tagged more than 3.6 million bottles of Viagra and shipped more than 2.7 million bottles. In excess of 600,000 authentications have occurred since January 2006.

Not yet possible via RFID is completely tracking and tracing Viagra through the entire distribution chain, Staver says. "That is dependent on who is reading the tags," she notes, and currently not all distribution partners are using compatible -- if any -- RFID technology.

Many industry observers expect emerging state and federal requirements, a maturing of the technology, and continuing standards development to drive greater RFID usage.

Counterfeit Viagra

While Pfizer is counting on technology to aid its efforts to fight counterfeiting and secure its supply chain, technology is but one tool. "Technology alone will not stop counterfeiting," Staver says. Indeed, like others, the pharmaceutical firm advocates a comprehensive approach to supply chain security. Pfizer "had a lot of learnings" since 2003, when a counterfeit version of the cholesterol-lowering drug Lipitor was discovered to have infiltrated the legitimate supply chain and distribution channels. In fact, the company added the position of director of product integrity since that incident.

Pfizer's multifaceted approach includes advocating for tighter regulations, modifying business practices, increasing enforcement and using technology effectively. Additionally, "collaborating across the supply chain is important. There's only so much manufacturers can do alone," Staver says.

Pfizer formalized and documented its strategy for securing its supply chain in November 2006. It's one that includes clearly defined goals and objectives, although Staver notes that it is a little too soon to say how they are advancing against those goals. The tactics the company uses to meet those goals, however, "will always be a work in process," she notes.

Another technology said to be available soon to pharmaceutical firms is a nanotechnology encryption solution offered by NanoInk Inc. CEO Cedric Loiret-Bernal says the technology allows pharmaceutical manufacturers to encrypt their products beyond the bottle level down to the individual tablet level. The tablet-level identification is important, he explains, because legitimate U.S. drug distributors repackage products.

The encryption, he says, can identify when and where the product was manufactured, which market the product is destined for, and the expiration date. "That's the minimum we can deliver on each tablet," he says. Plus, the technology is not visible to the naked eye. "Covert and forensic," is how Loiret-Bernal describes it.

How are NanoInk-encrypted technologies authenticated? Spot checks can be conducted by sending tablets to authentication centers, with pedigree results of those pills (which are not destroyed) returned within 24 hours, NanoInk says. Currently, one authentication center exists, in Chicago, and plans include adding others in the United States, Europe and Asia.

Loiret-Bernal says NanoInk's first two customers will have product encrypted by the end of 2007.

Can counterfeiting be stopped entirely? Accenture's Mawet doesn't believe so. "There's too much of a demand and too much money to be made in the counterfeiting of just about anything," he says. But it can be contained. "Or you can make it so difficult for the counterfeiters that at some point they're going to give up and try to counterfeit somebody else's products."

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