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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.

February 01, 2005 — CSO — Product diversion costs companies worldwide billions of dollars a year in lost revenue. It's insidious, widespread and, to the consternation of executives who watch products and profits dribble out of their supply chains like milk from a baby's lips, often legal.

To discover how diversion works and how they deal with it in their respective companies, Senior Editor Todd Datz talked with two experts on the topic, Randy Arnt and Max Brenton. Arnt serves as executive director of global security for retail giant Kimberly-Clark, maker of well-known brands such as Huggies and Kleenex. His responsibilities include supply chain security, brand and asset protection, litigation support and all other security-related activities worldwide. Previous stops include Whirlpool, Greyhound and Standard Oil. Brenton is head of corporate security and a 17-year veteran of medical products maker Roche Diagnostics. Brenton also has 20 years of law enforcement experience on his résumé.

CSO: You've both noted that product diversion is a growing problem. Why is that?

Randy Arnt: Partly it's due to globalization. We see a lot of antiquated regulatory enforcement systems in various parts of the world. And certainly the Internet plays a major part. If you go on eBay, for example, or a number of similar sites, you can see a lot that's counterfeit or diverted product.

Max Brenton: It's often a civil contractual problem in the United States, selling outside of the class of trade [for which products are intended]. For instance, if you sell to a certain mail-order distributor, a contractual clause states they can't sell the product over-the-counter. But sometimes that mail-order product will end up online somewhere. Or it will end up being sold on the shelves of local drugstores based on the fact that the chemistry of the product is the same.

CSO: In cases where it's a contractual problem, and not actually illegal, is this something that the board of directors keeps an eye on? The politics of dealing with your big business partners sounds potentially tricky.

Arnt: You have to get management's buy-in for that before you do anything else. Because if you don't, and if they give mixed messages or if sometimes they enforce it and sometimes they don't, it really becomes a mess. So it's been to the top levels of our company. Because if you don't have that, you're wasting your time.

Brenton: I'm fortunate to the extent that I've got the ear of senior management in sales and marketing and the legal division. I report to the legal division and all the way up to our CEO. And we have a partnership, a team created with the sales, marketing and manufacturing groups to look specifically at diversion, theft and counterfeiting.