Rise of Product Diversion and Counterfeiting

Internationalization and the emergence of new business models has increased the complexity of the food and beverage supply chain. The rise in complexity has resulted in a loss of supply chain visibility and control, which in turn has led to mounting product quality and safety challenges. This article draws parallels between the food and beverage and pharmaceutical industry to illustrate that traditional efforts focusing on the internal quality of manufacturing are no longer sufficient to safeguard consumer safety.

The food and beverage and pharmaceutical industries share many commonalities. One similarity is the importance of product safety, where an external quality failure can represent a serious threat to consumer well being. As the supply chains of both industries have become increasingly globalized, they have faced escalating incidents of external quality failure. The root causes of these failures can be classified into two broad categories: internal—relating to manufacturing, and external—relating to the distribution chain.

As markets become more competitive, corporations across the world are driven to outsource and offshore manufacturing as a means of sustaining profitability. A consequence of these practices is a corresponding decline in quality performance.

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Figure 1: The rise in external ­product failures as ­represented by the number of recalls recorded by the FDA in the food and beverage/pharmaceutical sectors.

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Figure 2: The growth in the number of registered food facilities that are ­potentially subject to FDA inspection.

Combatting Internal Challenges to Product Quality

Both the food and beverage and pharmaceutical industries have taken similar approaches to strengthen internal quality management through the implementation of current Good Manufacturing Practices as a means of governing the manufacture, processing, and holding of product. Irrespective of whether production is domestic, offshored, or outsourced, manufacturers are still required to utilize facilities that comply with all FDA regulatory requirements.

While quality standards have been set, a real problem has arisen in the capacity of the FDA to monitor site compliance. The number of registered food facilities has more than doubled in the period FY 04-11 with an ever-growing proportion of these sites located abroad. In 2011, the FDA inspected 318 international food manufacturing locations, equating to a little more than 0.1 percent of the 271,272 registered sites. While legislation such as the Food Safety and Modernization Act (FSMA) has attempted to address this issue by increasing the planned number of inspections to roughly 20,000 by 2016, this would still represent just 7 percent of 2011 facility numbers.

The FDA faces a similar problem within the pharmaceutical sector and has recently gone as far as increasing the annual facility fees on foreign manufacturing sites as a means of funding the rising cost of foreign inspections.

With an estimated 15 percent of the U.S. food supply, 80 percent of active pharmaceutical ingredients, and 40 percent of finished pharmaceutical drugs now being imported from abroad, the problem of managing quality in foreign locations is one that the FDA will have continuing difficulty in governing.

Manufacturers, insurance companies, and vendors can support regulatory efforts through diligent, conscientious procurement and stringent supplier selection and management. However, even the achievement of internal quality management standards in outsourced and offshore facilities is in itself insufficient to safeguard consumers, as globalization has also produced external threats to product safety in the distribution chain.

External Threats to Product Safety

The problems in the external distribution chain are both insidious and difficult to control. Here, the increasing complexity of the supply chain has facilitated the rise in both product diversion and counterfeiting.

Diversion relates to the transfer of authentic product from its intended point of distribution with an aim to capitalize on arbitrage opportunities. While not necessarily illegal, diversion can compromise product integrity if the affected goods are not appropriately stored.