1. What are some of the most common reasons for the counterfeiting of materials at a company’s overseas supply source?

2. What are some steps a company can take to lessen the impact of counterfeiting its raw materials or finished goods through supply chain partners?

When we think of the wide variety of issues that companies must consider when deciding where to locate partners as part of their supply chain, one unique, but increasingly important, factor to consider is the impact that local counterfeiting may have on their operations. The Agreement on Trade- Related Aspects of Intellectual Property Rights (TRIPs) defines pirated copyright goods as “any goods which are copies made without the consent of the right holder or person duly authorized by the right holder in the country of production and which are made directly or indirectly from an article where the making of that copy would have constituted an infringement of a copyright or a related right under the law of the country of importation.” Although it is well understood what constitutes product piracy in many industries, how do firms address the potential for counterfeiting within their industries, particularly when they manufacture critical or high-risk products?

In the pharmaceutical industry, buying or using counterfeit medicine has the potential for creating safety and health risks. The problem is that in the pharmaceutical supply chain, from the initial raw materials to manufacturing to distribution, there are many opportunities for shady suppliers to provide fake or mislabeled materials and ingredients, leading to possibilities to create a counterfeit product. An example of what occurs when the pharmaceutical chain is not properly controlled and verified against alteration took place in Panama in 2006. Cough medicine that was manufactured and sold there used unauthorized ingredients originating from China. The tainted medication led to more than 78 deaths. Panamanian authorities found that diethylene glycol, which is often used in antifreeze, was used in the cough medicine instead of glycerin, an inactive ingredient used in medicines to make syrup. The barrels had been mislabeled to indicate they contained glycerin when they actually contained diethylene glycol.

Another example of problems with the pharmaceutical supply chain occurred in the United States in 2012, in which Genentech Inc.’s (South San Francisco, CA) cancer treatment drug, Avastin, was impacted by fraud. A Canadian supplier sold counterfeit Avastin that did not contain any of the active ingredients required for the medicine.

The impact from counterfeit products is felt by the brand owner, the consumer, and the companies that unknowingly use or sell counterfeit products. They are all harmed by the distribution of counterfeit products. Substandard drugs that are made from poor quality raw materials, using an improper dosage of the active ingredients, inadequate storage or transportation, or products made from a process that does not follow good manufacturing practices, all create dangerous risks for the consumer. Counterfeiting in the health-care industry is so bad in places that health organizations have found instances of fake drugs that contained harmful ingredients such as boric acid, brick dust, chalk dust, cement powder, talcum powder, floor polish, shoe polish, and antifreeze!

Manufacturers seeking to develop their overseas supply chains must be aware of the potential dangers to be found in their location decisions. In addition to considering the more common factors of ease of operations, political conditions, and so forth, it is critical that they calculate a related, but perhaps often not considered, cost: the potential for local supplier counterfeiting and the equal potential for devastating impact of such counterfeiting on an organization’s reputation and ongoing profitability.