Posted: June 1, 2007

Nanotechnology is one way to combat the counterfeit supply chain

(Nanowerk News) Counterfeit products are depriving manufacturers of revenue, harming brand integrity and, in some cases, compromising safety. Accordingly, manufacturers and brand owners are fighting to keep phony goods out of their supply chains.

According to Industry Week, the cost of counterfeiting and piracy to the world economy is anywhere from US$500 billion to $650 billion a year. However, given the obvious fact that the activities are illegal, it's hard to know precisely how large a monetary price is truly paid.

Loss of confidence: In addition to losing money, manufacturers lose brand integrity as customers lose confidence in names they have come to know and trust. Customers simply are being tricked, and manufacturers across every industry sector have clear cause for worry. If there is any weakness in the supply chain, or any opportunity for a counterfeiter to insert fake products or divert products from the legitimate supply chain, they will do it.

No industry is immune: Counterfeit or fake products infiltrate all industries from cigarettes to golf clubs, brake pads, spirits and handbags to pharmaceuticals, DVDs and apparel. Oddly, considering the scope of the counterfeiting problem, many senior manufacturing executives still don't recognise its magnitude and, therefore, do not have effective internal controls to deal with it when it occurs.

Size of the market: According to the US Customs and Border Protection Agency, the US government in fiscal year 2006 seized more than $155 million worth of counterfeit goods. Where did they come from? China 81%, Hong Kong 6%, Taiwan 1%, Pakistan 1%, Korea 1%, and all other locations 10%.

Supply chain control: The better control that can be established over a particular supply chain, the fewer opportunities counterfeiters have to insert fake products into the distribution stream. To that end, 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, monitoring contract-manufacturers to assure that they are producing only authorised products and are not running an extra shift to produce goods for illegal distribution. Sales to distributors or wholesalers who may sell to secondary markets must be monitored.

The many shades of grey: Grey-market product is real product that is leaked into the marketplace where the original, legitimate manufacturer does not receive the full market revenue value. This form of piracy occurs for multiple reasons, but most often happens as a result of an extended, global value chain that is not managed tightly. This allows members in an extended partner network to operate in the ''grey'' area and cheat or go around the manufacturer's policy and pricing guidelines. Extended supply chains often have complex pricing, distribution and control challenges that open the door to arbitrage opportunities that pirates are able to lever.

Impact of leakage: At the core, grey-market leakage results from a lack of management discipline and process structure over the manufacturers' end-to-end value chain. There is a direct correlation between the proliferation of grey market product and the use of highly extended supply chains. These chains prey on a broadly distributed networks with a large number of ''extended'' strategic partners.

Often, the partners in the extended value chain, for selfish economic reasons, leak legitimate goods into the market for their own benefit. The fundamental opportunities for a grey marketer are supply/demand balancing for cash flow optimisation and the arbitrage among channels, regions and distribution methods.

Nanotechnology: Adding to tracking tools such as RFID, a new technology available to pharmaceutical firms to reduce piracy 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 often legitimate US drug distributors repackage products. Encryption can identify when and where the product was manufactured, which market the product is destined for, and the expiration date. As the technology is not visible to the naked eye, products can only be assessed in nominated locations.

In summary: Classic supply chain management techniques are still the best way to reduce counterfeiting and piracy. Having consistent, well-documented distribution, labelling and packaging standards help distributors, retailers and consumers alike to quickly recognise legitimate products and identify those that are in their proper and original packaging.

A final opportunity for control is to have exceptional supply chain visibility _ understanding where every case and shipment is going, ensuring its integrity, confirming how it is getting there, and determining when receipt notifications are expected. The key to all these objectives is embracing new technologies and developing excellent working relationships with each supply chain partner – from the suppliers of packaging and manufacturing machinery to distributors retailers and customers.

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