Sunday, October 20, 2013

Securing Industry

Neil Alpert and Ron Guido

20-Oct-2013

Lessons learned from someone who exploits the “not-so-best” practices of the pharmaceuticals supply chain.

You don’t know me, but I built my profitable business by exploiting yours. Doing so has been quite simple, just by observing your predictable routines and trusting behaviors.

Your preoccupation with service levels, inventory management, speed of delivery and global sourcing networks has shown me that even the most dedicated and hard-working contributors in the supply chain are also naïve and uninformed. The way you process countless transactions and inventory transfers without verification - my fortune is built upon your trust-sans-verification habits.

To the intellectual property (IP) owners who are shocked by my proclamation, you should consider it a compliment – isn’t imitation the sincerest form of flattery? In fact, I am indebted to you for establishing a trusted brand name among the user community, thereby establishing a healthy base of business to be exploited.

Nevertheless, I’ll share my secrets to prove that you, the legitimate masters of industry, are actually my accomplices. You’ll be unable to render me powerless until you dissolve your competitive strongholds, share control of the supply chain and promote visibility, collaboration and knowledge sharing. This is a chance to see how you’re not only losing the fight against counterfeiting, but you're also unknowingly enabling it.

Global economic growth fuels the counterfeit market

By 2015, the International Chamber of Commerce (ICC) predicts the global counterfeiting market will exceed $1.7trn – or roughly 2 per cent of the world’s economic output. The key to success has been in the growth of outsourcing and cross-border trade. There are ample opportunities available for those who understand international trade, due to the growth and capitalization of emerging markets, combined with a relative lack of respect for the compliance and protection of IP across borders.

There is a perpetual shortage of regulatory and enforcement resources around the world. The rewards associated with counterfeit goods far outweigh the risks of confiscating goods or prosecution. In the rare instances of increased risk, I can always turn to my safe haven - e-commerce. Internet sales are far too globally dispersed to implement international regulations, oversight or policing solutions. Plus, sending goods through parcel services is the easiest and safest trade route we can use - who’s going to dedicate time to authenticate every item in every FedEx shipment?

The biggest targets: global brands

I don’t spend time and resources researching obscure brands with low demand, I go straight to exploiting the biggest, globally recognizable brands. Considering my low manufacturing costs, I value high quantity over quality.  This includes branded apparel, media products, software, electronics, and healthcare products. In fact, you’d probably recognize some of the most counterfeited brands on the market right now: Nike shoes and Louis Vuitton handbags are at the top of the list. These are all targeted and profitable for the same reason — high-volume, popular brands attract less scrutiny than specialty items.

Discreet operations are successful operations

According to NBC News, the American economy loses $250bn annually as a result of counterfeit products! You’ll find that the most successful counterfeiters always work under the radar and remain undetected by the legitimate supply chain. To avoid the same fate as so many of my peers, I stick closely to these three basic principles:

  • Separate yourself from the crime. I send my goods across a border as soon as possible post-production in order to utilize gray-market diverters – those who buy low-end products and repurpose them for the high-end market – to “dilute” fake products among genuine goods.
  • Don’t put all your eggs in one basket. By breaking up my shipments into smaller volumes, I will not have to forego my full investment in the rare instance that my goods are seized.
  • Networking isn’t only for the legit. I can add an extra layer of protection by leveraging my “colleagues,” friends and family for transit operations, regularly distributing trusted contacts throughout port cities to serve as trading brokers.

You still judge a book by its cover

In looking at the most successful counterfeiting manufacturing operations, you’ll most likely find that they all start and end at packaging. It’s incredibly helpful when I’m able to use legitimate products as a template for replicating packaging. Even better is when I’m able to re-purpose packaging in like-new condition from a legitimate product. Whenever possible, I leverage containers, caps, and labels from the same suppliers used by the legitimate brands I’m exploiting. 

On the other hand, some legitimate IP owners have finally begun addressing their packaging vulnerabilities. Some have even become prudent enough to track the full lifecycle of their supply, monitoring all inventories to and from providers. These anti-counterfeiting technologies amuse me, however, because just one solution will not be enough to deter me. To effectively implement a single solution, everyone else has to install and comply with the authenticating technology – an inconceivable option to many. That’s assuming they know how to manage the technology, which is unlikely due to the complexities of supply chain management. Remember, my objective is to get through transit by fooling the inspectors, so I don’t consider consumers or an anti-counterfeit brigade to be a threat.

We like using your own products and processes against you

Any counterfeiter is well versed in the liberal return policies of legitimate IP holders. Our easiest method of profitability is selling fakes back to the company whose brands you are falsifying. If you return a prescription, are they repurposed for another patient? No. This may even ease a counterfeiter’s limited conscience, as goods returned to the manufacturer are not generally re-introduced to the market where fake versions can inflict harm on the patient. Yet, to my advantage the sheer volume of returned goods is usually extensive and therefore too overwhelming to bother with authentication, particularly in industries, such as pharma, where returned items are destroyed anyway.

Lastly, supply chain managers provide counterfeiters with an easy way to salvage legitimate goods due to their lackluster management of destroying damaged, expired or obsolete products. Allowing third-party contractors to bring inventory to a remote site for destruction allows counterfeiters to repurchase such inventory through a simple payoff. Few bother to identify the source of truly legitimate products, so a reintroduction into the supply chain is embarrassingly easy.

I profit off of your disorganized, disconnected supply chain

Profiting off of the lack of visibility of transactions in downstream supply networks is comparable to taking candy from a baby. First, you need to eliminate the use of the term “chain,” and instead recognize it as the “network” it has become. Until then, transaction transparency will never come to fruition. Due to our competitive nature, manufacturers rapidly sell and distribute products utilizing all reasonable means to do so. Consequently, the chain of custody for that unit is lost among a sea of transactions with little coordination of events across trading entities.

Before reaching the consumer, legitimate products will travel through primary, secondary and third-party channels and across many borders and regulatory jurisdictions. Financial records are simultaneously, but separately, generated and processed by the same entities, other importers, exporters, retailers, and brokers along the way. The asynchronous paths of money and inventory flows leave us with a multitude of opportunities to insert false products into the web of unregulated trade.

Legitimate IP rights holders in fear of sharing data and; therefore, acting independently of others, as well as those who sell out their brands to bring in revenue, only attract gray zones outside their purview. External manufacturing sites require separate flow lanes for legitimate trade, while opening the door for shadow operations to arise. Third-party suppliers of legitimate components and services openly seek new customers to leverage available capacity. Trivial checks by government agents create a false sense of security. With so many opportunities to insert fake goods into what is perhaps the most complex of all global supply networks, the only logical way to illuminate the supply chain is to implement and enforce a real-time track-and-trace system, especially one that utilizes covert elements in the process.

Lax authority is my favorite authority

There’s a natural bias of local authorities to favor their own country’s success and growth over international trade. Many will deny or minimize many of the controls, regulations, audits, certifications, and IP rights that can impede free commerce in favor of allowing business success to drive economic growth. Some governments seem to endorse local production of unauthorized generics in the interest of job creation. Others may even argue that knockoffs can stimulate local economies and generating new tax revenue. While genuine brands establish demand for a product category, falsified versions will usually satisfy the overly trusting and/or apathetic consumers.

So there you have it - my true confessions! I do feel bad about all of you honest people trying to figure out how to safeguard the supply chain. Maybe understanding the criminal will help you to better understand and fight against the crime.

 

Exploiting Your Supply Chain: Confessions of a Counterfeiter