Sunday, October 18, 2015

Consumer Product Fraud at The Sliding Door Company

Preventing Consumer Product Fraud 

In the CPG industry, the term consumer product fraud refers to economic adulteration and counterfeiting.
Economic adulteration is defined as the intentional fraudulent modification of finished product or ingredient for economic gain through methods such as dilution with a lesser value ingredient, concealment of damage or contamination, mislabeling of a product or ingredient, substitution of a lesser value ingredient or failing to disclose required product information.
Counterfeiting is defined as the unauthorized representation of a registered trademark carried on goods similar to goods for which the trademark is registered, with a view to deceiving the purchaser into believing that he or she is buying the original goods.
See "Beware of Impostors".  This exactly describes what The Sliding Door Company is doing with the Simpson Strong-tie bracket with the intent of deceiving inspectors.  Why else would they make their bracket IDENTICAL to the Simpson bracket?  In my view, the fraud here is intentional.  TSDC produces a bracket that looks identical to the Simpson Strong Tie bracket and inspectors can easily be fooled.  There is far more to TSDC's consumer fraud than this one example of counterfeiting.  Should they ever change their mindset and decide to STOP being a fraudulent company, here are some tips:

Consumer Product Fraud - How to Stop It Now
The melamine scare and similar incidents show that consumer goods remain vulnerable to tampering. Here are five strategies for detecting and deterring this type of fraud in your supply chain.
In 2008, the food and beverage industry was rocked by a major scandal when milk products from the People's Republic of China were found to have been adulterated with the chemical melamine. Melamine is a nitrogen-rich chemical that is sometimes added illegally to watered-down milk to make it appear to have a higher protein content. When ingested by humans or animals, the chemical can cause renal and urinary problems. At least 290,000 people were affected by the contamination and nearly 52,000 were hospitalized. More than 30 local and global milk brands were affected, the giant dairy producer Sanlu filed for bankruptcy, and more than 60 countries banned or recalled Chinese dairy products and other affected products, such as pet food. The total cost of the melamine adulteration has been estimated at US $10 billion.
This incident demonstrated how vulnerable to contamination and disruption the food supply chain can be, despite our modern safeguards and technology. Moreover, industry stakeholders recognized that a single instance of economic adulteration (where a product is altered for economic gain) can have global consequences, with broad and deep implications for a company's brands, an industry's performance, peoples' lives, and entire countries' reputations. 

Economic adulteration—a real risk

It is estimated that on a global basis, economic adulteration and counterfeiting of food and consumer products may cost those industries US $10 billion to US $15 billion per year. The consequences of fraudulent adulteration range from lost sales and bankruptcies to adverse health consequences and possibly even fatalities. Since 2007, prominent contamination cases such as diethylene glycol found in toothpaste, melamine contamination in milk and pet foods, lead tainted toys, and salmonella-contaminated peanuts have resulted in an estimated US $15 billion in costs and damages combined.The impact of such fraud on an individual company could be significant. The cost of one adulteration incident averages between 2 percent and 15 percent of yearly revenues, depending on company size.
The prospect of high profits and the low risk of detection (or if detected, punishment that is often fairly lenient) have always been motivating factors behind economic adulteration and counterfeiting. Today a host of new factors have further complicated industry's and government's ability to detect and deter fraudulent activities. These include: 
 An expanded global marketplace. As companies increasingly outsource manufacturing, sourcing, and logistics, they have less visibility and control of key processes. At the same time, more companies are engaging in sourcing and offshoring in emerging markets, which makes them vulnerable not only to domestic sources of fraud but also to international ones. What was once a local effort to stop economically motivated fraud has become an international challenge... Markets where product adulteration is common (because of less scrutiny) have become key sources of global supply—exposing manufacturers, brokers, and other purchasers to risk of fraud.
The power of the Internet. The Internet serves as a retail channel not only for legitimate consumer products but, increasingly, for counterfeit products as well. Counterfeiters can use the Internet to reach once unreachable consumers while also remaining anonymous, thus reducing the likelihood of being caught and prosecuted. Furthermore, Internet transactions are difficult to monitor and prosecute due to different rules and jurisdictions across geographies. 
More sophisticated perpetrators. Because they now have practically unlimited access to information, perpetrators are becoming more sophisticated in how they commit fraud. They have a better understanding of processes and standards, and they are constantly looking for ways to game the system. For example, in the melamine incident, the guilty parties knew that the methods used to test for protein levels in milk are unable to distinguish between nitrogen in melamine and nitrogen that occurs in milk's amino acids. 
Tighter economic conditions. In bad economic times, when commodity prices fluctuate, ingredients are in short supply, and buyers are pressing suppliers to lower their prices, there is often a spike in fraudulent activity as suppliers are squeezed by costs and surrender to temptation. This is particularly common in the aftermath of natural disasters or in other situations when agricultural supplies become short.
 The "silent" global food crisis. In the last two years, the world's attention has primarily focused on the financial and housing crises. Comparatively little attention has been paid to the global food crisis that is developing as population growth outstrips agricultural output in some parts of the world. On a political level, food shortages appear to be one of the key triggers of the current uprising in the Middle East.
While the looming food crisis might appear to be unrelated to economic adulteration, the two are closely linked. Food shortages, economic instability, and rising demand for goods create an imbalance between supply and demand that can motivate fraudulent activity. For example, in China demand for milk was outpacing supply; this reportedly led some farmers to water down their milk to increase volumes and then adulterate it with melamine so that it would appear to meet quality standards.

Raising the bar on safety and quality

How can we meet these new challenges? We can start by integrating additional fraud-prevention strategies into existing programs.
Step 1. Understand the product portfolio's vulnerabilities
To incorporate prevention of economic adulteration into an existing quality and safety program, companies need to begin by understanding all of the vulnerabilities in their product portfolio. This requires creating a data repository of potential threats, and then using models to forecast potential risks.
Step 2: Enhance detection programs
Most leading companies already use a number of sophisticated testing methods for detecting common, known quality and safety issues. Yet the inherent variability within natural raw materials makes it difficult to test for every unknown threat. Verifying the authenticity of an ingredient, therefore, can be simpler than verifying the absence of every possible adulterant. 
  • Test ingredients as early as possible.  TSDC never tests product ingredients... EVER!
  • Establish the right frequency for testing.  The right frequency for never testing products at TSDC is NEVER.
  • Define ingredient standards.  Instead, TSDC claims to have a "proprietary formula" for their products which they cannot produce.
  • Use multiple testers and testing methods.  Or even one? 
Step 3: Employ a comprehensive set of deterrence strategies
The costs associated with testing for all known and unknown contaminants are enormous. A more cost-effective way for a company to protect its brands and its consumers would be to apply a comprehensive set of deterrence strategies to prevent adulterated products from entering the supply chain in the first place.
  • Develop appropriate ingredient specifications.  Or at least use the ingredients you CLAIM to use when you developed your engineering data.
  • Establish an effective supplier audit program.  TSDC claims to "own" their factory - so they don't need a program to audit their supplier.  They accept whatever their supplier gives them.
  • Employ current intelligence networks. ( Finally, monitoring customer complaints can help to identify issues early on and allow companies to take timely action.)  What consumer complaints?  Oh these?
  • Increase traceability within the supply chain There is no incentive for TSDC to do this.  They are complicit in the fraudulent practices.
Step 4: Understand the implications of local risks
Some regions of the world are more vulnerable to the risk of economic adulteration than others. It's important, therefore, to understand local risks and their potential impact on operations.  China, where TSDC has its factory, is, unfortunately famous for this type of thing, and indeed was cited many times in this article as an example.  TSDC isn't a victim here - they are intentionally producing inferior products as cheaply as possible and representing them as something else ("proprietary formula").
Step 5: Deploy a holistic program across the organization
The steps we have elaborated so far are all proven strategies for detecting and deterring economic adulteration. But any approach to fraud prevention can only achieve its maximum effect if the entire organization is fully committed to that mission.  Unfortunately, there is no evidence to suggest anyone left at TSDC is interested in reducing product fraud.

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