Daily Archives: March 1, 2008

Piracy Starts in the Supply Chain

Chief Executive recently ran a great article that asked a great question – are you going gray? It noted that CEOs have a tremendous amount of power to control the gray market – the piracy that robs firms of profits, brand integrity, channel viability, and customer satisfaction. However, the same reasoning applies to CPOs as well.

The article noted that (a large) part of the reason that gray market piracy exists is the complexity of today’s operating environment. Global supply chains have complex pricing, distribution, control, and cross-functional coordination challenges. When managed poorly, these open the door to a number of opportunities that pirates can leverage to their advantage. In addition, poor network management allows members in an extended partner network to circumvent policy and pricing guidelines.

If you don’t put contract terms in place to prevent a customer from reselling your product to an unauthorized distributor, or you don’t insure that security is in place to prevent product from ending up in the wrong hands, then your new handsets destined for Australia could end up in Asia, as Motorola found out in 2006. Similarly, if your software is valuable, and you export it to a third party reproduction house for duplication without appropriate controls and liability clauses in place, you could find your product contributing to the over $40 Billion in legitimate IT products that move through the gray market each year.

However, you can significantly reduce the possibility of leakage by extending discipline over your supply chain and attacking the major drivers of gray market leakage: network partners with poor or unstable financial health, substandard manufacturer operating practices, and sloppy business models. Make sure the network partners you choose are financially stable and that your partnership will help maintain that stability; insure that your distributors agree to appropriate levels of price protection and stock balancing; and make sure that the number of tiers and hand-offs in the supply chain is minimized.

Be sure to implement and police company-initiated measures and process controls to minimize the possibility of supply chain leaks. Self-fund and enforce investigative measures and pursue remedies against all infringers through the courts. Build a reputation as a good corporate citizen – but one that should not be messed with nonetheless.