SUPPLY CHAIN INTEGRITY,A Basis to Upset Gray Market Distribution
Executive Summary
The extreme challenges of gray market
distribution and counterfeiting are increasing at an alarming rate.
Not only are the direct costs of counterfeiting and gray market
distribution sizable, they continually drain corporate strength and
distract the corporate knowledgebase from its core competencies.
Absent effective controls, the convergence of these two destructive
business forms, if left unchallenged and uncontrolled will
eventually sap the life of every affected company.
“Supply Chain Integrity” should be an objective of corporate
security and serve as a means to control and manage gray market
distribution and counterfeiting!
Representing an exceedingly large area of exposure, the length and
breadth of the supply chain, coupled with its ability to link all of
the trading partners, offers every potential market predator
unlimited opportunities for counterfeiting and gray market
distribution. With a limitless number of penetration points,
protecting the supply chain can be a daunting task, even for the
most sophisticated companies. While not necessarily occurring
simultaneously, counterfeit products can and do appear with gray
market products in traditional and untraditional distribution
channels. Their appearance in either channel significantly increases
corporate risk to profit dilution and severely threatens brand
integrity. The combination of counterfeiting and gray market
distribution form an unholy alliance, the size, and scope of which
are such that simultaneous treatment best occurs only after each has
been recognized and understood individually.
This white paper will define supply chain integrity; consider the
broad area of supply chain exposure; and explore transportation as a
dynamic corporate process and resource for effective treatment of
gray market distribution.
Description,
Size and Scope
Supply chain
integrity describes a chain that is sound and free of corrupting
influences. Its size and scope ranges across the entire commercial
relationship. The wealth of data produced by its function and
purpose provide all of the appropriate information necessary to
exceed the challenges of gray market distribution.
As the world
economy continues to expand, established companies will face an
increasing number of new competitors and gray market distributors
alike. An expanding market presents new challenges, many of which
can be addressed with traditional solutions, but an expanding global
economy brings with it new cultures and associated business rules.
It therefore demands new solutions and methods. As new markets
appear and traditional markets change, demands for product, and
opportunities for profit can severely tax the security of the supply
chain laying it bare to gray market pressure. The ever-changing
global marketplace requires an appreciation and understanding of
those cultures and business rules, philosophies and operating
styles. Traditional methods that have been used successfully and
employed in well established markets, now requires supply chain
integrity to ward off the exigencies of uncontrolled gray market
distribution.
Description of
the Situation
Gray market
distribution is typically a well orchestrated program that delivers
authentic products into well defined and established markets as well
as new and ever changing global markets. Gray market distribution
generally occurs as a consequence of overproduction and/or
overstock. However, it can also be motivated by new and shifting
market demands not reasonably anticipated by the manufacturer or
primary distributor.
Resulting from
overproduction, usually recognized at the manufacturing level, gray
market distribution can be initiated and engineered by the
manufacturer or primary distributor. An overflow of authorized
customer returns can also cause the manufacturer or primary
distributor to engage in gray market distribution. These forms of
gray market distribution are properly described as “discreet
distribution”. Responding to excessive inventory levels that are no
longer capable of being digested by the authorized marketplace,
manufacturers and primary distributors will contact “trusted” second
tier resellers and offer them authentic products for distribution
into markets that are not supposed to compete in first tier
distribution channels.
Retailers carrying
extremely high inventories of non-performing products, when faced
with the inability to sell the authentic merchandise to their
regular class of trade, for which returns are no longer accepted,
will “dump” authentic products into unauthorized distribution
channels and markets. In some cases multilevel retailers whose
respective stores deal with other classes of trade will offer the
authentic merchandise to “family” stores who are not authorized by
the manufacturer or primary distributors to sell such products. In
other instances and as desperation increases they will simply dump
merchandise into lesser and lesser qualified markets and channels.
New and changing
markets that are not presently served may cause opportunistic
predators to seek out authorized distributors in order to acquire
those products for resale into those unanticipated markets.
Discreet
distribution, dumping and unauthorized acquisition are essentially
similar with the differences manifesting themselves in the
initiator. The results for the most part are the same; authentic
merchandise being sold in unauthorized distribution channels and
markets. Similar results usually cause similar effects, whether
discreetly disposed of, dumped or speciously acquired and disposed;
gray market distribution will result in, at least the following
general conditions:
- “Externally”
created markets
- Artificial
spikes in profits, production and forecast
- Dilution of
profits
- Destruction
of brand identity and manufacturers’ reputations
- Destruction
of product integrity
- Warranty
problems
In addition to
these types of gray market distribution, there are companies that
specialize in buying “promotions and spiffs”. These merchandise
types can be identical to standard merchandise or be of a special
size and/or packaging. Essentially operating as commodities
traders, these gray marketers purchase large quantities of this
category of merchandise; they either resell immediately or wait for
the promotion or spiff to end. They offer the merchandise into both
the authorized and unauthorized markets and distribution channels at
a price that is below the manufacturers’ then current selling price,
but obviously higher than the spiff or promotion price. If there
was ever a description for a love hate relationship in business,
this activity certainly qualifies. Whatever the stated motivation
for the original promotion, quick, large volume sales usually
satisfy short term objectives. Eventually these super
buyers/wholesalers will directly compete in the same markets with
the manufacturer.
The interesting
and important phenomenon about gray market distribution is that
although it has become an effective means of disposing of excess
production and overstocking, rarely do the initiators want to be
identified or associated with the activity. This posture lends
itself to creating, at least the perception that preventative means
are in place and that controls do exist, generally in at least two
forms: real and contrived. In most cases, if not all, gray market
distributors go to great lengths to create schemes of innocence and
disassociation.
Forecasting may be
a primary contributor to gray market distribution; its definition
clearly establishes that it is not precise. Driven by a legitimate
and necessary business tool, perhaps there should be no shame in
gray market distribution and the appearance of innocence may be
completely unwarranted. Nonetheless, this seems to be the historic
and current characterization and is treated accordingly by the
business community. The need for manufacturers and primary
distributors to disassociate themselves from gray market activity
may in fact be significant contributor to the alarming rate at which
gray market distribution is increasing.
Notwithstanding
anything to the contrary, gray market distribution will continue as
a viable solution for overstocking and over production. To remain
an effective solution, gray market distribution must be controlled.
Left uncontrolled it will unfairly compete with authorized markets
and distribution channels eventually destroying those competitors,
the product and brand integrity and maybe even the manufacturer.
There are rules
associated with gray market distribution. The intent of some is
merely for posture, appearance, and public consumption while others
are designed to properly control the flow in order to prevent the
conditions identified above from occurring. Discreet distribution
typically has a higher level of control and imposes more severe
price and market conditions on the gray market distributors than
would occur in dumping. Consequently, gray markets are defined
broadly: somewhat controlled and uncontrolled. Price point, region,
and country restrictions can serve as operating rules, but to be
meaningful, they must be enforced. “Dumped” merchandise can show up
anywhere at anytime. As an example, seasonal influences can cause
products to show up in flea markets and unauthorized retailers whose
class of trade may negatively affect the status of the product and
company.
Flagrant violators
who are authorized resellers can face the harshest of penalties
including the loss of the product line and in some cases complete
loss of the entire line. In many cases, gray market distribution is
a violation of the Terms of Sale/Purchase and actions at law can be
commenced. However, love hate relationships are symbiotic,
consequently there is usually more bluster than imposed penalty;
this then is the essence of the gray market life cycle and will
probably continue as long as overproduction, excess inventory and
opportunity exists.
If you accept this
notion, and believe that gray market distribution, at an extreme can
sap the life of its victims, a compromise, based upon a viable
alternative must be the objective. Accepting this premise next
requires processes and procedures to identify and control gray
market distribution so that it can be properly managed and
effectively controlled.
Scope and
Approach
As the world
economy continues to expand, established companies will face new
competitors and markets. An expanding market presents new
challenges, many of which can be addressed with traditional
solutions, but an expanding global economy brings with it new
cultures and associated business rules. It therefore demands new
solutions and methods. Achieving the competitive advantage and
protecting market position in an ever-changing global marketplace
requires an appreciation and understanding of cultures and business
rules, philosophies and operating styles. Traditional methods that
have been used successfully in well established markets may have to
be replaced.
If we accept the
notion that gray market distribution has a place in business, than
the primary issues that must be addressed are control and the
ability to distinguish between acceptable and unacceptable forms of
gray market distribution, while making a place for discreet
distribution. To effectively control, timely and accurate
information is required. Information that flows from the
transaction stream best satisfies these objectives and does so
proactively. A proactive stance satisfies the need to distinguish
between the gray market forms and offers an excellent opportunity to
maximize control because it effectively anticipates what may occur
from the institution of a well orchestrated plan.
If gray market
distribution is not recognized or appreciated as a dynamic and
complex process, capable of penetrating a limitless number of points
throughout the entire supply chain, its treatment will be relegated
to simple, reactive solutions. As an example, improved forecasting,
in consideration of its definition, “to estimate in advance” can
only go so far and is therefore incapable of effective treatment.
Other historical methods for dealing with gray market distribution
appear to focus on symptomatic treatment. As authentic merchandise
surfaces in unauthorized markets and distribution channels some
manufacturers may look for particular markings on the packaging as a
means to identify the source. However, as each new marking
capability is discovered and employed, gray market distributors find
new ways and sources for “washing the markings”.
The enormity of
the supply chain presents other opportunities to gray marketers.
Moving from raw material through the finishing process, the very
nature of logistics and transportation can provide predators with
the ability to remove authentic products from the supply chain as
they move through various hubs, assembly, and distribution points.
While such theft is more probable during seasonal peaks because of
the ability to move those products quickly, nonetheless, they can
fill authorized markets and distribution channels creating the same
problems that occur from discreet distribution and dumping.
Freight
Transportation Management Capabilities
The supply chain
is the corporate blood line to the market place! Its length,
breadth, and scope offer an unlimited number of opportunities for
gray market distribution. Accepting the premise that gray market
distribution occurs by design as well as default, appropriate
programs that can effectively address the extreme challenges of gray
market distribution are required to prevent:
- Unpredictable
“externally” created markets
- Artificial
spikes in profits, production and forecast
- Dilution of
profits
- Destruction
of brand identity and manufacturers’ reputations
- Destruction
of product integrity
- Warranty
problems
As the omnipresent
and operative component of the supply chain, transportation is
uniquely capable of providing timely, accurate, and ubiquitous
information. As the driving force of the supply chain,
transportation is always positioned on the frontline of commerce.
Consequently, transportation is highly capable of tackling the
extreme challenges presented by the rapidly expanding global economy
and can achieve the objectives of early identification, control, and
management as well as distinguishing between discreet distribution
and the other forms.
The three (3)
forms of gray market distribution: discreet, dumping and theft may
require unique treatment, but in all cases, effective treatment
begins with identification.
Paramount to
effective identification is the ability to thoroughly trace and
track all shipments, including but limited to the products therein.
Today’s freight paradigm views the entire life cycle
of “freight” beginning with its first recognition simply as
an entity and continuing through description, identification and
ultimate consumption. The freight lifecycle provides access to the
entire transaction stream and provides the necessary data from the
following penetration points: pre-shipment, in-transit, and
post-shipment. Examining the
buy-in and sell through analysis in conjunction with the freight
lifecycle data/information will identify exceptions in consumption.
Such exceptions can be an excellent entry point ultimately capable
of identifying the source of the gray market.
Discreet
distribution programs must be acknowledged, at least at the
appropriate corporate levels. Each transportation management
function such as: routing,
document preparation,
auditing, payment
processing, or tracking
have unique advantages
Design and data
specifications for selection the specific transportation management
function such as routing, document preparation, auditing, payment
processing or tracking
“Dumping”
identification and control are also best addressed with the
buy-in and sell-through analysis. Typical shipment transaction
data is usually sufficient when used in conjunction with those
analyses and can readily achieve the objectives of control and
management.
Theft situations
demand greater visibility of the supply chain with specific emphasis
on the purchasing and receiving
parts of the freight life cycle. Of equal importance is the routing
component. Proactive and tight control including live counts at
appropriate points during transportation will reduce and possibly
eliminate access to finished products or components. Incremental
and connective transportation management solutions such as
RoutingGuides will
control carrier selection and the products they handle.
Terms of
Sale/Purchase and the Freight Terms, followed by Bill of Lading
data, freight bill, delivery data, (all of which are available from
the
freight lifecycle) when coupled with other databases such as
accounting and sales will present the most comprehensive information
and achieve category distinction, control, maintenance, and
analysis.
Many of our
previous white papers have discussed the importance of freight
transportation as a process, function, and information base.
Additionally, they have addressed the importance of
thorough carrier negotiations that embrace appropriate
exploitation of the trading partner relationship. The wealth of
data contained in the entire freight transportation process,
singularly and collectively, when interrogated by effective tracing
and tracking systems such as TRaIDS
that respect pre-shipment, in-transit and post-shipment activities
and document “who, when and where” are necessary to address the
complexity and dynamism of gray market distribution. Through
pattern recognition, not only can the objectives of each form of
gray market distribution be satisfied, the data is capable of
presenting new, legitimate markets for consideration.
Finally, capable
of producing a natural collaboration of information and process,
transportation makes the entire supply chain visible. Reverse
engineering of the gray market process offers those companies that
understand the importance of gray market distinction,
identification, control, and maintenance, with insight into gray
market operations. From this perspective and coupled with a well
orchestrated plan, control and maintenance of the gray market can
continually improve.
Conclusion
The ever expanding
global economy continually increases the vagaries under which
commerce is conducted. Gray market distribution has been and will
probably continue as an effective means to deal with overproduction
and excess inventory. At risk are those companies that fail to
recognize the influence of rapidly expanding global markets because
of the new cultures and business rules that are part and parcel of
such expansion and resulting market. As the engine of the supply
chain and its position on the frontline of commerce, transportation
is a primary source and
transportation management tools offer the solutions that can
effectively motivate supply chain integrity and meet or exceed the
extreme challenges of gray market distribution.
About
TransportGistics, Inc.
TransportGistics is a global,
multi-product and services company that provides market leading,
simple, incremental solutions for transportation management and
logistics functions within the supply chain.
TransportGistics commitment to
education is portrayed through its advancement of professional
logistics and transportation programs. Its
white paper site presents important and timely transportation
and logistics subjects each month, and is regularly visited by more
than 125,000 clients and readers representing companies in the private and public sectors, universities
and governments, worldwide.
TransportGistics is a founding
partner at the
Center of Excellence in Wireless Internet and Information Technology
at the State
University of New York-Stony Brook.
Continuation
Please
consider this white paper as a continuum in this subject area,
succeeding white papers will address common issues and address them
with common solutions. We encourage our readers to direct any
specific questions or comments to
papers@transportgistics.com.
Disclaimer
The
information presented herein represents the opinion of the author, but
not necessarily the opinion of TransportGistics, Inc. This white
paper is not presented as a legal position or as a recommendation.
“Freight Lifecycle Management”, “Convergence”
and “Today’s Freight Paradigm” are sales marks of
TransportGistics, Inc.
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