Home » Business Continuity » Supply Chain

Unwelcome (Product) Diversions

Product diversion costs manufacturers millions, but often isn't technically illegal. CSOs say combating diversion involves equal parts investigation and corporate politicking.

By Todd Datz

Page 2

CSO: Give me typical diversion tactics you face, and the controls you use to combat them.

Arnt: Internationally, what we would normally see would be a distributor buying huge quantities—much bigger than their markets could absorb—and that product is being turned around and sent back here and resold.

Brenton: Diverters create shell corporations [to disguise diversion], which can change in no time flat. What you have to do is pursue the owners and/or the boards of directors to see if the same people are involved in that particular shell corporation.

Arnt: We do a pretty good job of monitoring new distributors closely. We do a due diligence on [new distribution partners] to find out whether there may have been problems in the past with other consumer product companies. Then for a period of a year we look at their sales, and make sure that we're satisfied that the products are being used for the [agreed-upon] market. We have been able to find good service providers for those due diligence checks. If we uncover issues, of course, then we don't do business with those distributors. It seems that globally there are due diligence or investigative service providers out there that have a long reach and do a pretty good job.

CSO: What about a domestic examplea customer that's bought huge quantities and then resells. Is it typically large, well-known chains? Or the small guy?

Arnt: Many of the big chains purchase diverted goods; their basic premise is that they have a responsibility to their stakeholders to get the product at the lowest price possible. In fact, it doesn't happen to be a customer of ours, but there is a very, very large chain that recently filed suit against one of the hair product providers, suing them for restraint of trade. It turns out that this hair-care company was only selling to salons. And their products would wind up in this chain that had been purchased as diverted product.

So the hair-care company threatened to sue this chain. The chain turned around and sued the hair product company, saying that it was a restraint of trade that they were not able to purchase this product from this manufacturer. Kind of an interesting approach, taking the offensive, I guess, on this. But a lot of big chains just feel that that is the way to do business—that they're going to get the best price they can. If we can get it to them, fine; if we can't, they'll look elsewhere.