Illegal Trade and Supply Chain Security

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A brief overview from Fraunhofer FOKUS Institute

Illegal trade covers a wide field of illegal activities and has taken on enormous dimensions that are barely known to the general public. In its “Illicit Trade Report 2014”, the World Customs Organization (WCO) lists trafficking of illegal narcotics, environmental crime and illegal trade with natural resources, the infringement of intellectual property, dealing in substances dangerous to health and safety , smuggling  of excisable goods, which causes losses in VAT, and the illegal trade in dangerous and forbidden articles. In addition, there are areas such as the illegal trade in works of art and antiques.

While the phenomenon of illegally copied music or films has been discussed for years by the population at large, counterfeits and the infringement of copyright in other areas have, to date, been discussed primarily among experts.  However, even in these areas, which are less noticed by the general public, the financial damage is immense. The OECD report “Trade in Counterfeit and Pirated Goods – Mapping the economic Impact” provides a preliminary evaluation. This report estimates the damage caused by counterfeit and pirated products as well as infringements of copyright and patents at US$461 billion. At US$1.8 trillion, the NetNames report “Counting the cost of counterfeiting” arrives at a significantly higher figure, which was also forecast on a similar scale in the Frontier Economics report “Estimating the global economic and social impacts of counterfeiting and piracy”. According to NetNames, counterfeit pharma products worth some US$ 200 billion worldwide present the largest item.

In the case of Germany, concrete figures are available for one of its key markets, the mechanical engineering industry.  The VDMA report on product piracy 2016 estimates the “loss in revenue caused to German machine and plant manufacturers in 2015 at 7.3 billion Euros”.

With respect to consumer goods and luxury goods, the European Observatory on Infringements of Intellectual Property Rights conducted a series of surveys that ascertained the respective monetary losses caused within the European Union. All these surveys reveal a 5-10% loss of sales for the respective industry.

In addition to purely monetary losses caused by a loss in their own sales, counterfeit and pirated products and brands potentially cause further consequential damage, too. They may, for example, damage the brand equity if products have a shorter shelf life or efficacy – especially in cases of counterfeit or pirated components or spare parts of inferior quality, which may result in warranty cases that are not really due to actual fault. Ineffective or contaminated counterfeit drugs may even put lives at risk.

Most counterfeit and pirated products originate in China and South East Asia, where they are far less frowned upon due to cultural differences. While the majority of high tech products are created by direct competitors, classic branded products for the end-customer market are often produced by small factories that have specialised in counterfeit and pirated goods.  This includes the phenomenon of the so-called “day & night factories” that carry out custom orders for brand manufacturers during the day and produce the same products for their own account at night.

Depending on the line of business, a great variety of methods are employed to take action against counterfeit and pirated products. In addition to organisational measures, such as the introduction of   a Brand Protection Manager, continuous monitoring of markets for potential counterfeit and pirated products or the provision of information material that helps customers identify such products, technical measures are increasingly gaining in importance, too.

Under the heading “Supply Chain Security”, two particular approaches are currently being pursued. One the one hand, products are fitted with visible and invisible security features, on the other hand individual product numbers are assigned, applied and stored in a database. Identification of an original requires the product number, the security features or a combination of both. In addition, the products are tracked beyond the logistics supply chain, thus making it possible to not just track where the product is at any given moment in time, but also where its intended destination is and where it came from. It is this specific combination of security features, product number and correct location that allow for an effective crackdown on counterfeit and pirated products.

Security features are subject to continuous technological innovation, with a constant race between counterfeiters and manufacturers of security features in recent years. For the most part, special patterns, microprint or materials are applied or incorporated as security features.  A distinction must be made between security features that can be recognised by people and those than can only be identified by means of special procedures, e.g. in a laboratory. The best known example for the application of security features are banknotes, which have a large number of features both applied and incorporated.  While some are known and can be spotted easily, others are secret and can only be identified by means of special procedures.

One new method is the use of natural variations of the material structure that may be filmed with a camera and then act as the fingerprint of the packaging. These characteristics, which are random and inherent to the material, do not require a separate creation and can be identified easily, while making it virtually impossible to forge them. In combination with a unique product number that contains a reference to a database entry with the exact material characteristics, this allows for a very high degree of product authentication.

Following the products along the entire logistics supply chain by scanning in product numbers is called Track & Trace. In this process, each product is assigned a unique product number, which is then applied. This is stored in a database and used to track and trace the product along its supply chain. For this purpose, the product number is usually applied as a machine readable label (data carrier). The best known label is the barcode (in particular ISO/IEC 15420). However, in the meantime a number of alternatives such as 2D codes (in particular ISO/IEC 16022), dot codes or RFID chips (ISO/IEC 18000-x classes) have become available. For each product number, different product characteristics can be stored in the database. In this context, the supply chain data is of particular importance.  Usually, both an intended supply chain and a scan of the product number along the respective locations (warehouse, distribution) are stored. This provides full traceability of where the product was,   where it is going to be delivered to next and any discrepancies ascertained. Thus, track & trace helps to verify the authenticity, as the supply chain can be traced back, and it helps to identify counterfeit and pirated products, as these cannot usually provide evidence of a clean supply chain.

Technical approaches to resolving issues of counterfeit and pirated products offer great potential. Nonetheless, there is a number of obstacles that must be overcome during the introduction of an approach, which result from the interaction of different systems. In the case of Track & Trace systems for example, logistics providers and later on possibly service partners and retailers, too, must be able to handle different labels and establish efficient scan processes and technologies for them.   Any data captured must then be transferred to the database of the company that manufactured the product. In doing so, any differences in the data schemata and interfaces must be handled.

To reduce complexity, it would be useful to aim for the highest possible degree of standardisation.  In doing so, the option of selecting data carriers individually should be maintained on the one hand, without requiring a differentiation of scanning processes on the other hand; the use of standardised technical equipment should be possible. However, the interfaces and data schemata should not require a great deal of modification, even if the attribute set is expanded individually. Technical standards and best practices offer not only a solution for issues of interoperability, but help with synergy effects, too. Furthermore, this is also important in order to achieve the acceptance required from the supply chain partners.

With respect to the security features, the situation is somewhat different. Here, the most important aspect is to ensure that no barriers to innovation arise, which enable counterfeiters at a later stage to copy those features or to introduce new procedures.

The technological possibilities to make the supply chain more secure are available. The next step will be to create a suitable setting through joint organisation and technological coordination in order to fully exploit their potential.

The Initiative “Innovative Capacity for Security in Business” could therefore dedicate itself in particular to the following aspects:

  • Driving forward an agreement on joint standards that would help to burden businesses, partners and logistics provider with as little additional effort and expenditure as possible.
  • Look for synergies in the process of establishing the partly complex and expensive infrastructure.
  • Simplify the exchange on best practices.

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