In my last post I wrote about what I call “parallel supply chains” from China to Western countries: stock lots left in factories, and copies of brand name products.

My clients usually don’t buy stock lots, and they never buy any brandname knockoff. I am sure most importers see parallel circuits as a threat to their business.

What problems do parallels channels create for importers?

• If they order a shipment that is found not to comply with quality/safety requirements, the production will be rejected. What will the factory do with the resulting stock? They will look for another buyer, even if the design and the brand are proprietary. And that buyer will probably be from the same country as the original importer, for obvious reasons of taste and market standards. End consumers will purchase products that were judged unacceptable on their market.
• Copies create similar issues: the factory sells extra production to some type of rogue agent, who in turn will sell the goods on the same export market at much lower prices. Not only does this represent lost sales, it also hurts the brand image… Who thinks all these copies, made under no supervision, are produced in the same workshop, from the same materials, and at the same quality level as the originals?
• In both cases, nobody really knows where the products end up. There is no control on distribution. Some companies that source from China receive calls (for warranty, consumer complaints, reorders…) from countries where they didn’t know their goods were sold!

What can importers do?

Here is the advice I would give to a company facing these risks:

• First things first… If parallel supply chains are a real danger to your business, you have to wonder if there is a good alternative to placing production in China. If there is, go for it!
• There might be solutions in the importing country. If you are lucky enough to be in a highly regulated industry, you might be able to pressure the retailers. For example, an American pharmaceutical company was facing a growing parallel supply chain of its own products–purchased in other countries at a lower price and resold in the USA. What solution did they find? They sent a letter to all distributors, stating that no liability would be accepted by the pharma company in case of consumer complaints. It was immediately effective.
• You might be able to re-think product design in a way that reduces these risks. Maybe the product is highly technical and can only function with a certain part that is embedded when you do the final assembly? Maybe your products can be designed to be technically impossible to copy, like some LV handbags?
• You can set up local operations for sourcing components and taking care of final assembly. This will give you tremendous control over your supply chain… But it represents a large investment in money and time. Some Japanese companies are based in China and propose this as a  service. Passage Maker has started doing the same for Western buyers.
• The most economical solution for oversea buyers is to have a presence on the ground during production. Final inspections (just before shipment) are fine for confirming quality, but they do nothing to avoid parallel channels. As I keep writing, early inspections are strongly recommended. First, very serious issues (which can convince a buyer to cancel an order that is already produced) are less likely to happen. Second, a manufacturer will probably not launch extra production on the side if a representative of its customer is in its premises during production.
• I guess it is possible to require the physical destruction of the goods through a contract (in case the buyer knows about the situation). But I am wondering to what lengths one must go to ensure that a Chinese factory really does destroy a batch of products that has a market value somewhere. Maybe the best is to purchase these goods and pay a third party to destroy them…