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Insights from Counterfeit Roundtable at NC State Part 2: Interdiction and Block Chain

This past week we held a roundtable focused on “Combating Counterfeiting in the Supply Chain”.  This post is a continuation of an earlier post I wrote on this subject.  Counterfeiting is seen as a major problem facing major manufacturers as well as our defense organizations.  A common theme discussed was that greater public education is needed to ensure that customers know the effects of buying counterfeit products. This is particularly the case for internet sales, as e-platforms are exploited by counterfeiters. An electronics manufacturer has repeatedly sent letters to online retailers complaining of counterfeit products being sold on their site, but often as not there is no response. There are forms that are filled out, but little else. The company has had some success with third parties that are employed to scan Amazon websites using search algorithms using the brand name in the search string, and identifying sites selling fakes, and shutting down these sites. But the sellers just open new ones. Having the company brand in the website is however too common, and there are tens of thousands of sites that have these names I them.

A similar challenge exists with tax fraud. Tax rates in states differ, and for companies to sell their products to comply with these laws requires them to ship and sell in states using a specific tax rate. But criminals will buy products and sell them in other locations, and there is a liability and compliance risk to the brand. The company will often track where the product is being shipped – and show that it was distributed legitimately, but it becomes difficult to track wholesaler activity. There has been increased tightening up of wholesale records, but when it goes to retailers, it is difficult to track. There is very little that brand owners can do to solve illicit activity that is feeding a demand for illicit product on the part of consumers.

An important point that emerges from this discussion is the importance of identifying the “critical interdiction point” where the product passes through a user’s hands. For aerospace maintenance, it will be the maintenance engineer. For instance, Air Force operations are focused on one-on-one training of junior technicians by senior experts, to show them what to look for in a product before it is installed in a repair operation. There is also specific training related to avoiding situations where “emergency orders” are placed through distributors from unidentified sources that claim to be “certified parts”. These parts will often pass preliminary inspection and testing, but once installed, may fail within a matter of hours. A critical location of aerospace counterfeiting origin is the Shenjen area of China, and this has also been targeted for audits. Another example of a critical interdiction point is in currency counterfeiting, where the Federal Reserve has focused its $100M public relations campaign at the cashier level. Training is carried out to educate cashiers on what to look for in a note. There may not be a need to educate the entire public, but the critical point of interdiction should be identified.

Application of Cognitive Technologies and Blockchain to Combat Counterfeiting

At the meeting,Rob Allen from IBM shared insights on how Watson can be used to model correlations in unstructured data that straight line analysis cannot do. For instance, Watson can work on detecting irregularities in transactions that lead to insights into used to authenticity of transactions. The second application is on Internet of Things to track products. Finally IBM is working on block chain, to better track order management. These technologies can be used to drive recommendations and alerts regarding transactions.

Block chain involves a shared ledger and a smart contract, with business terms embedded in a transaction database and executed by transactions. Transactions are secure, authenticated, and verifiable, and all parties agree to the network verified transactions. It is an “append-only distributed system of record” shared across a business network.   An individual can check into the authentication of who shipped a product, and that individual has to be digitally approved.

A potential application of block chain is that it is ‘hack proof’ from counterfeiters. If there is a problem at the end customer, the block chain can be traced to identify where the chain of custody broke down, as a majority of people in the block chain have to ‘approve you’. This would effectively replace EDI.

When combined with IBM global financing, block chain could dramatically reduce invoice disputes on late payments. It is about trust… if you send an invoice and it isn’t paid, you are “voted off the island’. IBM is working on a pilot with Maersk on digitizing customs processes. IBM and Walmart are ensuring food safety and are piloting pork chops with a group of pilot volunteers, with all pork shipments from China going on the block chain. This is extending back all the way to the farm, to enable identification of tainted meat. The farmer would set up the original transactions, and sell 75 pigs to the wholesaler, which is now on your ledger, and then the transference continues down the chain.

A big challenge to consider in the block chain is the degree to which parties can get others in the supply chain to join the block chain. For instance, how can an enterprise get all of their tier 1, 2, and 3 suppliers on their collaborative Elementum platform to share data? Or how to get all suppliers on the Ariba network to join through supplier enablement? There are lots of examples where suppliers may not want to join an electronic network. Some of the challenges inherent in this issue involve demonstrating the value for supply chain participants to join, understanding how gain-sharing and time sharing will occur, defining how these gains will be shared, and developing the governance around the structure of the block chain activities.

Another use case is conflict minerals and understanding their origin. A willingness to expose and be transparent is an assumed and implicit requirement for participation in the block chain. But will the farmer or the miner want to share this information – and how is it monitored? The “permissioning” of data is a big part of the challenge here, and the question of whether the right person is in the chain is also implicit. The block chain assumes the identity of the person is legitimate and known – whereas others may choose to use bitcoin to remain anonymous.

Counterfeiters as Competitors

An important conceptualization emerged from the discussion, and to think of counterfeiters as competitors for your product in the market channel. A participant who worked extensively with a large film producer discussed this paradigm as a way of thinking about the problem. The film producer had problems prosecuting and investigating counterfeiters of digital movies. Digital vendors of their products are everywhere in the world, and they recognized early on that prosecuting these individuals in China and other places was fruitless. So by thinking of counterfeiters as competitors, it changed the way that they attacked the problem. They recognized they needed to find new ways to deceive and disguise the content, as law enforcement was not a legitimate source of protection. Even when prosecution occurred, the criminals paid the fines and went back to their old lanes of supplying product to customers. To truly protect the product requires a way to interdict the market in a way that counterfeiters cannot profit from.

The solution, in this case, was relatively simple. Executives recognized that weren’t trying to avoid paying for movies – they simply didn’t want to wait for the product to come out on DVR, and wanted to view the content as quickly as possible. This simply meant re-thinking the go to market strategy; consumers are willing to pay for the product in a format where they can download the movie right away and watch it, even while it is in theaters, and before it is released. This in fact created a premium market that did not exist before, that allowed the product to get to market faster, and essentially interdicted counterfeiters. Of course, the volume of counterfeit product still exists.

These insights reveal how creative strategies are needed to truly combat counterfeiting in the supply chain.