BEHIND EVERY GREAT BRAND IS A SECURE SUPPLY CHAIN

1. BEHIND EVERY GREAT BRAND IS A SECURE SUPPLY CHAIN

2. Brand Protection and Product Traceability: Mitigating Financial and Reputational Losses April 19 2010ETH ZurichCenter for Security Studies Sten Bertelsen

3. Agenda • Threats, Vulnerabilities and Risk • Financial, Economic & Reputational Loss • Brand Protection and Traceability Mitigation

4. Why Brand Protection and Traceability? • Product manufacturing capabilities (cheaply manufacture perfect fakes) and • Globalisation (new consumers/markets serviced by dynamic supply chains) • Product: Counterfeiter enjoys market premium by illegally selling a copy of genuine product without paying cost of product development or promotion. • Supply Chain: Exploit supply, distribution channels and markets that are vulnerable to infiltration, diversion and circumvention

5. Infiltration of the legitimate supply Chain by Counterfeit and contraband Brand Owner Subcontracted Manufacturer Authorised Wholesaler Authorised Trader Authorised Retailer Customer (genuine Purchaser) Know Supplier Foreign Wholesaler Unauthorised Trader Unauthorised Retailer Customer (counterfeit victim) Fraudulent Supplier Fraudulent Manufacturer Fraudulent Distributor Fraudulent Trader Black market & Internet Willing counterfeit buyer

6. Impact of Counterfeit on Business On Traders…… • Affect commercial viability of genuine product • unfair competition • threaten safety of consumers; • poor deal to consumers with no money-back guarantee; • Direct costs of counterfeit borne by the legitimate industries Immediate loss of revenue, long term loss of margins, dealer confidence, reduction in the value of brands. Liability Other….. • cause job losses,; • harm the national economy through tax evasion; • fund other serious organized crime • Professor Michael Porter, ‘Tolerating piracy produces short term gains for a country but undermines the process of economic upgrading and raising per capita” • Economist ‘costs of counterfeiting far outweigh benefits’.

7. Estimates of revenue loss (USD$) Estimated counterfeiting rate (%) Product category Sectors Totalling $ 60 bn today, counterfeiting should move to $100-110 bn by 2010. • Auto spare parts • Drugs • Cosmetics • Wines & spirits • Tobacco • Toys & games • Branded clothing • Footwear • Aero spare parts • Baby food • CDs & DVDs 7 27 526 3 9 938 5 660 7 6 4 389 3 3 276 5 2 494 13 4 932 13 1 893 2 368 3 OECD: US$ 200 billion 331 8 2 640 Source: McKinsey, Datamonitor, Brand protection PIRA report 2006, OECD Measuring counterfeiting

8. Financial Impact • ACG Survey of 52 city analysts • 70%: recall product scare • 25% counterfeits scare more harmful than annual returns falling below expectations or resignation of the CEO! • 46%:brand security issues have affected company valuation • 25%: high profile counterfeiting story result in a company’s share price falling 10% - 23% . And 6 months to recover • 20%: CEOs need to treat brand security with more vigilance. • 83% grey market needs to be made much more of a priority. • Actual Loss • Kellogg’s lost $70 million due to Peanut Butter recall - Q1 09 “$23 million in COGS & $4m SG&A”

9. Corporate hierarchy of IP Protection Legal Enforcement Supply Chain Product Security Brand Protection and Traceability • Legal structure differentiate product and restrict access - market power • Legal basis for enforcement • Legal & enforcement are necessary not sufficient. On their own drive underground/ secondary market • Counterfeiter supply bounded by: • Technology required and cost of production -> product security • Influenced by risk and cost of detection -> supply chain surveillance • Brand Owners need programs that combine all activities • The Internet?

10. European Federation of Pharmaceutical Industries and Associations monitor all drugs dispensed across Europe using serialized information Objective – all pharmacies across Europe to verify product prior to dispensing the serial code exists in the system the item has not previously been dispensed there are no recalls or warnings on the item Centralized data management system EU Draft Directive Secure supply chain; audits, testing, inspection. OLAF Product Seizures FCTC “developing a practical tracking and tracing regime [to] secure distribution system “ Tracking”, monitor movement of tobacco products from the place of manufacture, through the distribution chain, to the intended market of retail sale,. “Tracing” audit seizure of a genuine product, to recreate route of tobacco product from the place of manufacture, through distribution chain, to point where product hwas diverted into illegal channels. Product Traceability Tobacco Pharmaceutical