Magazine article Risk Management

Counterfeit Products and Faulty Supply Chain

Magazine article Risk Management

Counterfeit Products and Faulty Supply Chain

Article excerpt

A Johnson & Johnson Brand Integrity Case Study

Companies confront a broad scope of risks, from compliance matters and regulatory risks to catastrophic threats and reputation risks. The risk management officer's principal role in most companies is to identify, analyze and manage risks for the company. However, the complicated risk profile involved in counterfeiting and the gray market can make it more difficult for risk managers to combat brand integrity risks.

The volume of counterfeit products continues to increase worldwide, most frequently occurring in pharmaceuticals, luxury items and consumer products, making for a long list of stakeholders that face the consumer safety, reputational and financial risks that can arise from fake products.

Ultimately, the business enterprise and those that depend upon it can be threatened. Suppliers, wholesalers and retailers are undercut by unauthorized competition. Governments suffer when they lose hundreds of millions of dollars and other currencies in uncollected excise and sales taxes, negatively affecting the economy and society as a whole.

Johnson & Johnson's Medical Device & Diagnostics business (MD&D)-one of three businesses that make up the Johnson & Johnson family of companies-is one business that has faced brand risks head on and taken a proactive stance to address its current issues and mitigate future risks from counterfeiters and related concerns. This is their story.

In 2001, managers within the MD&D business began to suspect that they had a gray market problem-some legitimate products did not make it to its intended market and was instead being sold through unauthorized dealers. This had an unknown effect on the company's bottom line and raised questions about threats to patient safety. They started two investigations to confirm their suspicion and to estimate the revenue lost to arbitrage.

In 2003, some doctors submitted surgical mesh to MD&D that did not have the handling qualities they were used to with MD&D's product. The company sent the product through its quality assurance processes for authentication and determined it was fake.

This development greatly increased the stakes. The gray market is a concern because it can signal questionable third-party business practices, present a possible avenue for counterfeit products and cause significant lost revenue. Actual counterfeits, though, may jeopardize patient safety. Quashing this threat and protecting the safety of patients became the primary motivator for the ensuing actions.

Once the company had decided to take action, management retained Ernst & Young to validate and extend its findings, quantify the scope of the problem where possible and determine what was driving the company's vulnerabilities. In addition, MD&D asked Ernst &r Young to expand the investigation to regions around the world to identify additional risks.

As a partner with a team of experienced brand integrity experts, Ernst & Young worked with the executives within four of MD&D's operating companies as well as with its European, Asia Pacific and Latin American regional company leaders. Executives in the company's financial, risk, legal and quality operations were also involved in the research. The nature, scope and size of the gray market, the counterfeit incidents, and the industry and business practices that contributed to them were all analyzed.

The study's findings were highly informative for MD&D management, validating that the company had a diversion problem. Diversion involves the selling of a legitimate product in markets other than those for which it was intended, and it opens the door for counterfeit products to enter the supply chain. Further, the estimated effect on revenue was nearly three times the company's original estimate. The findings also confirmed the initial counterfeit product and found that MD&D's operating companies were investigating other brand integrity incidents that were not widely known. …

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