Driver Gray
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Theft. Piracy. Counterfeits. Gray Market Activity
These words and their implied threat to any company’s bottom line intimidate even the most intrepid executive. While some executives chalk up gray market activity as “the cost of doing business,” New Momentum believes that companies can proactively recapture lost revenues, market share, and brand reputation through tightening their value chains.
Do You Know What Gray Market and Counterfeit Activity is Costing Your Company?
According to the Alliance for Gray Market and Counterfeit Abatement (AGMA) and KPMG, the value of gray market information technology (IT) products alone averaged $58 billion in 2007. Counterfeiting has been conservatively estimated as a $650-billion problem annually. Of all goods sold worldwide in 2007, 7-10% are believed to have been counterfeit.
The Center for Medicine in the Public Interest estimates that worldwide counterfeit pharmaceutical sales are increasing at about 13% annually—nearly twice the pace of legitimate pharmaceuticals—and could become a $75-billion industry by 2010.
Understanding the Root of the Problem: Three Major Gray Market Drivers
The fundamental opportunities for a gray marketer are supply/demand balancing for cash flow optimization and the arbitrage between channels, regions, and distribution models.
- Know the financial health of partners in the network. Partners may manipulate stocking levels because of the carrying cost of inventory, thus being unable to meet demand with legitimate product. They also might openly stock gray market products alongside legitimate products. They could misreport inventory and sales to realize undeserved price protection and promotion benefits.
- Manufacturers’ Operating Practices. Financial Management practices and capabilities involving invoice accuracy, payment terms, price protection, and return allowances all affect network behavior. Marketing and Sales practices -- beginning with sales force incentive structures, licensing agreements, promotional allowances and programs, stock balancing, and stock rotation -- can drive undesirable behavior.
- Manufacturers’ Operating Model. Criteria to address include the following: the economics of being a distributor; the number of tiers in the value chain; the number of partner hand-offs and coordination events; the degree of dependence the manufacture has on the distributor for end-user fulfillment and satisfaction; the extent of regional and cross-border coverage; the differences in local operating practices; and the cost of managing and controlling small, distant distributors.
How can you solve this problem?
There are several key areas you can focus on to reduce your company’s revenue erosion from counterfeits: legal, operational, and technology (web search, encryption, lock & key).
What can you do through the legal system?
While many big players in the IT industry are making headlines as they break up crime rings, small to midsize enterprises face a tough fight in their struggle to protect their IP. A number of internal and external issues challenge companies’ ability to find, identify, and persecute transgressors. A shortage of financial resources, a lack of coordination between countries, and weak anti-counterfeiting laws in some regions are hurting law enforcement agencies’ ability to detect and prosecute counterfeiters. While it may be easier to spot counterfeit luxury goods, fake semiconductors and pharmaceuticals can result much more dangerous situations.
How about the operational approach?
One important step in reducing counterfeiting is to focus on illegal sales on the gray market. While some gray market brokers are legitimate, the gray market is an excellent outlet for counterfeits. AGMA suggests examining companies trying to enter distribution channels and monitoring contract manufacturers and distributors already in the supply chain. The organization recommends thoroughly interviewing companies and investigating their background before allowing them to become resellers or distributors. Once they enter the supply chain, AGMA advises organizations to establish strict contracts, perform extensive auditing, and maintain close relationships with its outsourcing partnerships.
Technology web search
Though the listings may be hidden in the deep recesses of the Internet, a couple effective search words can bring up product listing after product listing of both legitimate and counterfeit goods.
Many companies that have resorted to manually scouring the Web for unauthorized product listings and counterfeit goods have found this process time-consuming, tedious, and ineffective. The up-and-coming technology is based on the collection and organization of unstructured data. Unstructured data is information collected from a number of electronic sources that hasn’t been arranged or organized into an understandable form. In the context of seeking out product listings, this data can come from a number of sources including market Web sources, XML data sources, B2B sites, forums, auctions, and emails advertising gray market sales.
Software solutions like this bring a number of benefits to manufacturers. Not only do they eliminate the significant number of man-hours and resources manual searching required, these systems can tap into information sources previously out of reach by traditional search methods and thereby increase the amount of “area” a company can keep a watch on the marketplace. They also highlight other market activity exceptions, such as new sellers entering the market and an unexpected amount of selling or buying in a particular geographical region. When looking for an IP-protection solution, make sure all reports and data collected are accessible through a Web portal and that the supplier is a Software as a Service (SaaS) supplier, such as New Momentum www.newmo.com. This makes data available immediately without any extensive installation processes and, more important, without the involvement of other departments that may slow the deployment down.
About the Author
Chris Jensen is the VP of Marketing for New Momentum located in Irvine, CA