Procurement Intelligence Unit

There is something that no supply chain, regardless of industry, size or location, is untroubled by - the risk of counterfeiting. In recent weeks in the press, I have come across quite a few examples of companies that have become victims to this procurement nightmare. SMEs or no-name companies, you suspect? Not really. 

Often, we hear about big corporate cases. HP's Printing and Imaging Group, for instance, realised that its local distribution and supply chain in Kenya had been invaded by counterfeiters, resulting in a market share erosion of nearly 50%. Similarly, Intel recently had to admit that at least one counterfeit version of its Core i7-920 processor had reached the US market.

Counterfeiting is not only a realistic threat but one that is taking off rather quickly, particularly when it comes to electronic components. According to the US Bureau of Industry and Security, the incidence of parts counterfeiting reported by component suppliers has increased from nearly 3,868 in 2005 to 9,345 in 2008, representing a 142% increase.

How come counterfeiting is on the rise when companies are attentive to risk management, or at least should be, as they emerge from the recession? For one, supply chains become larger and more dispersed. This makes it difficult for procurement to trace back purchased parts or components to their original source. Often this is further compounded by the fact that companies source their parts from suppliers offshore, again, making verification extremely difficult.

The other unpleasant truth is that testing, authentication and certification standards are probably not where they should be at, and sometimes it can take years to realise that parts or components are faulty, as we have seen in Toyota's recall disaster. Also, there is caution to be expressed about supplies that are not really counterfeit, meaning that they are produced in the same factory but are not certified by the brand owner.

Interestingly, in the case of HP, there was yet another factor that allowed counterfeiting to permeate its supply chain. The company was not able to meet the local demand in Kenya in a timely manner, which enabled a number of shrewd suppliers to produce counterfeit HP cartridges and distribute them at a lower price than they would cost if sold under HP certification.

What can companies do to minimise the risk of counterfeiting? An efficient supplier performance-management programme is the bread and butter. This includes conducting regular supply chain reviews and holding suppliers accountable – both legally and financially – for the delivery of fraudulent parts. Sometimes it also makes sense to strengthen the supply chain by clustering suppliers in a region and choosing partners of related products. The bottom line is to always check suppliers and never to let price compromise quality.