Preventing Product Diversion

Written by: Jean Champlain, Supplier Development Manager

Just when you think you’ve made it through the most difficult challenges in the supply chain, another problem often catches people by surprise.  It’s product diversion.

Product diversion is when an unauthorized party sells a product outside of authorized distribution channels. It is an increasing practice and one that presents a serious hurdle to profits.

The way these unauthorized retailers and e-commerce sites obtain the products often involves reaching out to an authorized seller of the product. For example, many manufacturers have a signed contract with various salons or shops to exclusively sell their products. These salons, in turn, sell the products per their contract. However, there are salons who don’t respect the deal, that work within the “black market.” The salons or shops that are in the “black market” enter into deals with a third party that offers to buy the items in bulk. The third party then sells the item to an unauthorized seller. The unauthorized seller then sells the items on websites such as eBay and Amazon.

Apart from profit lost, the danger of diverted products going through these unauthorized channels is high for both the consumer and manufacturer. For example, products can be tampered with during the process and the quality level on those diverted products can change. It could cause serious health problems or high damage accidents in consumer hands.  In addition, the manufacturer can receive negative reviews from the public. For example, if a consumer, who has used Brand X cosmetic product for years bought from store at $10 per unit, and then suddenly found the same Brand X cosmetic product sold at $8 per unit on Amazon, cheaper than in store, and has a severe allergic reaction to it, he/she may be tempted to post a negative review.  The problem is that the blame is not on Brand X, but on whoever tampered with the product before it was sent to the consumer. Although the blame is on someone else, Brand X will receive the negative review that will discourage other consumers from purchasing the product. Because product diversion. The impact on the brand can be significant in many respects as it relates to product diversion.

How do you prevent product diversion?

Organizations seeking to stop and prevent product diversion should consider adopting zero tolerance policies within the organization and between several authorized sellers. In essence, a zero tolerance policy must be supported by actual financial consequences to mold authorized distributors’ behaviors.

This structure to ensure zero tolerance policies should start by identifying the potential risk of product diversion within its business distribution channel, and by an internal education within personnel to understand the impact or product diversion that will cause to their organization’s profit.

Another option is to use a tracking system on the packaging. That system consists of placing a discreet tracking sticker on the packaging. It will allow the organization to track what channels the product went through and where it ends up. This type of tracking can occur with just a simple connection to the Internet. A tracking sticker can also help to authenticate the product if the organization wants to conduct an investigation.  A more common method is to inform your consumers of the authorized resellers and to be aware of diverted products from unauthorized parties. The organization can do this by putting a list on its official website listing authorized sellers.

Regular one day on-site surveillance is recommended at the manufacturer to evaluate the level of prevention system established both by the manufacture and its various sellers and distributions. Assessment areas of focus include:

  • ANTI-DIVERSION POLICY
  • SELECTION OF SELLER / DISTRIBUTOR
  • NON-DIVERSION AGREEMENT
  • CONTROL OF AUTHORIZED SELLER / DISTRIBUTOR
  • CONTROL OF UNAUTHORIZED SELLER

Pro QC International also provides on-site product diversion evaluations that can be customized to meet your objectives. Contact us for more information.

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