Supply Chain Management Hot Topic: Cargo Theft and Counterfeiting

Since the beginning of the year I've had a lot of really interesting conversations about supply chain security. It's been an eye-opener to discover just how many of my colleagues have experienced incidents that forced them to learn a lesson, the hard way, about theft and counterfeiting.

Imagine someone holding up two identical items - both apparently produced by the same company, probably in the same factory. One had made a carefully planned journey through its intended distribution channel, with proper quality control and safe handling along the way. You know: right place, right time, right condition, etc. The second - they suspected - had been stolen, and then diverted by criminals into the black market.

But what had really happened to it? When had it actually been made, where was it stolen, and where was it supposed to have gone? Most companies today couldn't answer those essential questions, so there simply isn't much they could do to address the root cause of the problem. In spite of the hype and the investments that we are all making in big data and analytics, our teams often lack the basic ability to connect our digital supply chains back to the physical products that they represent. If only we could interrogate each product, and ask it to tell its own story!

This issue is starting to get a lot more attention. Just last week, Gartner issued a new report warning supply chain leaders that they need to start cracking down on counterfeits. Why? Well, according to their research,

"Counterfeit products plague the global supply chains of online retailers and manufacturers, and can severely damage brand reputation."

Companies have often been reluctant to discuss the scale of theft and counterfeiting problems in their supply chains, out of fear that it could hurt their brand reputation. But now, the damage that comes from not tackling the problem head-on might be even more severe.

Outside organizations, including the FBI, have started to publish hard data on cargo theft and counterfeiting. And the picture that these reports are painting should be a real wake-up call for the whole supply chain management community. My guess is that either your company is already dealing with this problem, or there's a good chance that it will be soon.

For example, in 2014 there were $32M worth of cargo stolen from the 17 states that participated in the FBI study. One interesting note: Florida and Texas are the only two states in this study that have any significant port activity. I'm willing to bet that these cargo theft numbers would be a lot higher if they included California, Georgia, Illinois, New Jersey, New York, North Carolina, South Carolina, and Washington.

Of the $32M of stolen cargo that was reported, less than a quarter of it was ever recovered. So what that really means for supply chains is that in 2014 the FBI positively identified at least $24M worth of legitimate products that were stolen, and almost certainly diverted into the black market. Those numbers might not knock you out of your chair (remember which states are missing) but the bigger issue is that the cost to the supply chain is probably much greater than the original value of the merchandise.

Yes, the owners of the cargo suffered an obvious financial loss from the theft. Hopefully that loss was covered by insurance, which means that all of us will end up paying for it through higher premiums. But the company whose products were stolen probably got hurt in at least two more ways, from the same incident. After the products were stolen, the company lost sales because their customers bought the stolen products, instead of buying legitimate merchandise. And, ironically, those same end customers may still hold the brand responsible for the quality and performance of their products, meaning the company could end up paying for returns, recalls, and warranty repairs on those stolen products. Ouch!

While you might be tempted to think this was only a problem for a handful of high value products, like alcohol and tobacco, the data suggests otherwise.

The top 10 categories for cargo theft, according to the FBI? Probably not the sorts of products that most of us associate with major criminal activity:

1. Consumable Goods
2. Portable Electronics
3. Clothes, furs
4. Trucks
5. Trailers
6. Computer hardware, software
7. Radio, TV, VCR
8. Household Goods
9. Vehicle Parts
10. Building Materials

So cargo theft is becoming a big issue. But counterfeiting is even bigger! A recent report by the U.N. estimates that 2.5% of global imports are actually fakes. That's $500 billion worth of counterfeit merchandise every year that is supporting organized crime, while undercutting the investments that legitimate companies make in delivering value to their customers.

The realization now hitting many supply chain managers is that theft and counterfeiting are, in fact, global businesses in their own right... and the bad guys have the upper hand.

The internet makes it incredibly easy to sell stolen and fake products around the world to unsuspecting customers, and the penalties for these crimes are relatively light. Since companies have not been willing to talk openly about these problems, and have not invested in technologies to address them, the criminals have had little reason to fear being caught.

But as more and more companies are forced to confront this new reality, they are finally beginning to understand that insuring their cargo is simply not an adequate solution. The true impacts of theft and counterfeiting extend far beyond the book value of their merchandise, undercutting the value of their brands, eating away at top-line revenues, and driving up overhead costs. In other words, theft and counterfeiting have suddenly become supply chain priorities. And, increasingly, supply chain managers will need to understand how, when, and where their supply chains are most vulnerable, and then leverage technology to mitigate their risks.

There are many digital tools that can help, but the best solutions are those that link the physical supply chain with the digital supply chain.

These threats are likely to grow worse until we can find ways to reliably identify authentic products, and verify their provenance throughout multi-echelon networks. But with the emergence of tools that effectively link the physical supply chain with the digital supply chain we could gain a powerful new weapon in the battle against theft and counterfeiting. So at the end of the day, it actually might come down to giving physical products the ability to tell their own story... and that is a powerful way to create value using the digital supply chain.

About the Author:

Daniel Stanton is President of SecureMarking(TM) and Associate Professor of Operations Management at the Jack Welch Management Institute. He is also the author of Leading Projects and Business Acumen for Project Managers on LinkedIn Learning.

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