Who's Eating Your Profits?

July 12, 2004
With supply chains extending across the globe, companies with recognized brands face increasing problems from counterfeiters and from their own distribution

With supply chains extending across the globe, companies with recognized brands face increasing problems from counterfeiters and from their own distribution channels, according to Stanley Hart, president, and Anthony Miano, executive partner, of S.G. Hart & Associates LLC.

Counterfeit products are a growing problem in global markets where well known brands carry a premium price. Logistics professionals can help curb counterfeiting by securing supply chains, say the two brand equity protection specialists.

More is known about the financial impact counterfeit products have on companies' bottom lines because counterfeiting is a criminal activity, say the two executives. As such, it is reported when it is discovered. Many companies with premium brands also make highly visible examples of counterfeiters, often staging elaborate events to destroy illegal copies of their products.

Hart suspects diversion can be as big a problem for many companies, or it may be even larger than counterfeiting. But diversion, which involves legitimate product being redirected to alternative distribution channels and markets, is not a criminal act. At best, it is a contractual violation, and may subject the diverter to sanctions by the company that produces the product - which Hart refers to as the brand owner.

Companies lose money on diversion because of revenue losses in the market where the product was intended to be sold and competition with a lower priced source in the market where the product ends up. In an example, Hart says a product that was intended for one market carrying a promotional incentive for the distribution channel to help establish the brand in the new market can end up in a hot market at a lower price. The diverter overbuys product and moves it to the lucrative market where it sells at a discount from the product that legitimately reaches that market. Using the volume discounts and promotional pricing to undercut the price in another market, the diverter makes a huge profit while the legitimate distributor watches sales erode.

One of the first signs a brand owner may see indicating diversions are taking place is a complaint from a channel partner who finds it is competing with a discounted product that may or may not be legitimate. When it is established that the product is legitimate, the questions start on how it got into that market.

Close monitoring of distribution channels, tracking product, and monitoring warranty and other service complaints can help uncover diversion. Covert means may also be necessary to establish the right product has appeared in the wrong market. Unscrupulous diverters watch for markings like batch codes that will identify the product by market and distribution channel and, in a process known as "skinning" will remove the evidence of their activity. It may be necessary to use invisible markings to help combat both counterfeiting and diversion, says Hart.

For a more detailed discussion of vulnerabilities in your global supply chain, watch for Logistics Today's August issue.