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The 3 Strategies Brands Need to Combat Product Counterfeiting and Diversion

April 30, 2019 |

The fraudulent practices of commercial counterfeiting and diversion cost U.S. companies billions of dollars each year. Fake and diverted goods harm legitimate manufacturers, causing them to lose revenue as well as consumer trust and goodwill. They also pose risks to public safety. Superficial products made with cheap materials and shoddy workmanship may break, fail, or in the case of counterfeit pharmaceutical products, even cause illness or death.

There’s no shortage of consumers who might be interested in buying a cheaper version of a popular product, but there are also several ways manufacturers can limit their exposure to knock-off and diverted goods. These approaches fall into three categories: detection, prevention, and deterrence.

1. Detection: Discovery and Authentication

Develop a question tree for consumer call centers

Your customer call center is the front line of detection for counterfeit products. An experienced customer service agent can use a question tree to identify counterfeit products and where they came from. Ask targeting questions such as:

  • Where did you buy the product?
  • Did you normally buy your product there?
  • How much did you pay for it?
  • Was the price lower than what you would expect to pay for it?
  • Was the packaging different from what you would normally purchase?
  • Was there anything different about the size, color, text, or condition?

Conduct audits and inspections throughout your supply chain

To protect your supply chain, make sure the source of your goods is clean. Scrutinize outlets that specialize in discounted goods and ensure distributor compliance. Conduct regular surprise audits or inspections on members of the distribution chain and even foreign manufacturers to ensure that no “ghost shift” manufacturing is taking place. Brands may also do some “mystery shopping” to gather samples of products in different markets to test for authenticity, and to determine the source of any counterfeit goods.

Implement authentication and tracking technologies

Building anti-counterfeit and brand protection into your product packaging and design allows for traceability and monitoring throughout the supply chain. These technologies might come in the form of scannable codes, radio-frequency identification (RFID), or ID numbers built into the product design.

The gold standard for authentication and tracking technology is GPAS, the Global Product Authentication Service, developed by HP. GPAS initially protected HP’s supply chain, the 9th largest in the world, and has since been extended to the external market. Capabilities of a system like GPAS include:

  • Unique identification of products with cryptographically secure codes
  • Full supply chain traceability and visibility
  • Automatic alerts to monitor and prevent grey market activity
  • Validation of products during movement of goods
  • Information about the factory of manufacture, date of manufacture, batch, etc.
  • Advanced consumer engagement and business analytics

In a 2014 best practices and industry benchmarking survey, researchers found that “73 percent [of responding manufacturers] continually review technologies for authentication / tracking applications.” Most of these manufacturers see a benefit from implementing these technologies, with “77 percent stating that customer trust had increased through better brand integrity and 69 percent acknowledging customer safety as a benefit.”

2. Prevention: Education and Obstruction

Make your product difficult to replicate

Unique product attributes in packaging, design, or customer experience can make it difficult for counterfeiters to copy your product. Consider using a unique finishing effect, ink, labeling system, or material to make it easy for consumers to detect fraudulent goods.

Educate retailers and consumers

Education can go a long way toward assuring consumers are aware of counterfeit markets and the consequences of ignoring them. A product awareness program can help educate retailers and consumers on products that are susceptible to counterfeit. For example, luxury good and pharmaceutical manufacturers have posted tips and visual aids on their websites to help consumers distinguish between real and fake products.

Contract with a single solution provider for security and/or packaging

“Contracting with a single security solution provider and purchasing from a single packaging and components supplier are two of the strongest steps to prevent counterfeiting,” according to the FMI / GMA Trading Partner Alliance survey. “A closely controlled network of people that maintains confidentiality, security that understands a product, brand, and company’s overall anti-counterfeit policies is critical.” Brand owners should audit their packaging solutions and security providers twice a year and institute a strict vetting process if manufacturing is outsourced.

3. Deterrence: Punishment and Threat of Punishment

Include right-to-audit clauses in contracting processes

Establishing that you may conduct unannounced audits at any time will deter contractors from conducting illicit product diversions. These audits could include compliance with supply and distribution agreements, security camera footage around warehouses and shipping areas, and processes for handling returned, damaged, or expired merchandise.

Take legal action

Legal expertise may be needed to prosecute offenders or seek damages. A legal route will often be drawn out but may prove successful in the end. For example, in 2001, the clothing maker Levi Strauss won a three-year court battle against Tesco, preventing the British supermarket chain from selling the brand-name jeans unless they were purchased from authorized distributors from inside the European Union. The High Court banned Tesco from importing low-cost, diverted jeans from America. In cases of illicit criminal counterfeiting, law enforcement agencies such as the Department of Homeland Security (DHS), Federal Bureau of Investigations (FBI), or Immigrations and Customs Enforcement (ICE) may need to be contacted.

Protect your brand with GPAS from Lofton

In order to deal with issues relating to commercial counterfeiting and diversion, you want a comprehensive strategy with detection, prevention, and deterrence measures to limit any fraudulent activity throughout your supply chain. Here, we’ve listed some initial actions you can take to begin to understand and combat the problem.

Are you worried that you may be losing money due to counterfeiting and diversion of your product? Lofton Label is proud to be the only label and packaging provider in the Upper Midwest to offer GPAS – a cloud-based brand protection, track-and-trace, and consumer engagement service aimed at ensuring that each of your products is traceable and authenticated. Contact us today to start developing your custom security solution.

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