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Amazon’s Gray Market May Give OEMs a Black Eye

Of all the specters supply chain professionals hope never to encounter, those haunting the chain's last mile to the customer are the most unnerving. So it was with unusual interest — and perhaps concern — that the electronics industry learned last month of a serious dustup between massive online retailer Amazon.com and Johnson and Johnson, the wide-ranging manufacturer best known for toiletries.

What could worry an electronics supply professional about a company that makes baby shampoo? The tiff, which is ongoing, has centered on Amazon's allegedly lax policing of so-called “gray market” goods, sold via third parties. Though the disagreement has begun with a non-electronics industry, it has enormous security implications for electronics OEMs whose supply chains lead inevitably to the Seattle sales behemoth.

J&J's concerns, which led the company to pull thousands of its products from Amazon, included copyright violations, patent concerns, and quality control. If those concerns sound familiar, it's because they're the same ones that many electronics sectors, most famously digital cameras, have been wrestling over with retailers — including Amazon.

The fight couldn't have come at a worse time. With OEMs and Amazon both having calculated their supply relationships months ago, thinking of the current holiday shopping season, doubt is doing no one any good.

A debate in the international financial press about whether an OEM's supply chain really created the product in your online checkout cart is the sort of debate no one wins, least of all the customer. But it's also toxic for OEMs that find themselves defending their various brands, at the height of sales season. Even the suggestion of a retailer's supply integrity creates sudden, sharp fluctuations in sales, and that, in turn, shakes up distribution models. Consequently, that makes it hard to order components six months before. That's what's at stake in an argument that superficially seems to be about soap.

Worse, electronics is particularly sensitive to such debates. Gray market concerns are already high in retail IT, and customers wary. On the one hand, people understand that Amazon (and, to be fair, many other online retailers) is offering OEMs a reliable final destination for mid- to high-ticket items like wide-screen TVs and DSLRs. On the other hand, customers are savvy enough to know that it's also a natural marketplace for counterfeiting, and that electronics has a pre-existing phony problem on its supply lines. Confidence is a fragile thing.

Just days from Christmas, this still isn't resolved. It's a case to watch closely. If Amazon can't negotiate supply chain integrity assurance with a company that makes soap, how will it do so with an OEM producing retail electronics with massively more complex component lists, and much greater opportunities for fakery? For dozens of OEMs and their supply chains, if Amazon starts to seem unreliable, so will everyone upstream along the retailer's supply lines — fair or not.

10 comments on “Amazon’s Gray Market May Give OEMs a Black Eye

  1. _hm
    December 24, 2013

    This looks to be utterly unacceptable, unethical practice. Customer should never be served with gray market products. Sooner or latter this may become few class action law suits.

    Why does Amazon dreams of drones for delivery when they are unable to resolve these basic issues?

  2. Houngbo_Hospice
    December 24, 2013

    _hm: The answer to your question is simple: Amazon is already satisfied with its level of customer satisfaction index. The whole idea of drone delivering packages will come with its own challenges that may bring more negative critics to Amazon. We will see how Amazon will handle that.

  3. Taimoor Zubar
    December 26, 2013

    “For dozens of OEMs and their supply chains, if Amazon starts to seem unreliable, so will everyone upstream along the retailer's supply lines — fair or not.”

    @Marc: Interesting post. I do agree that it's an important issue that Amazon must deal with. It's interesting how no electronics OEM never raised this issue but a consumer goods company like J&J raised it. Amazon must address the issue of gray market before other companies start taking a note of it and take similiar actions.

  4. Taimoor Zubar
    December 26, 2013

    @_hm: I don't think you can correlate the two issues. Just because Amazon is believed to be involved with gray market products does not mean that they should stop all innovations on their other aspects of the business. It's a huge company and issues like the gray market products are a norm. It shouldn't affect other business areas and new developments.

  5. Hailey Lynne McKeefry
    December 27, 2013

    _hm, i think the issue is basic in terms of being ubiquitious, but not basic in terms of the ease of solving it. This extended supply chain makes it harder to monitor the activities of all involved. How do you monitor all that activity? Any ideas of best practices?

  6. Hailey Lynne McKeefry
    December 27, 2013

    @hospice, i have seen evidence that Amazon is working toward solving some of its problems in these areas. For example, it came to their attention that there were a lot of false reviews or reviews from non amazon customers. The company began to marke “verified purchase” when people were reviewing a product they actually bought. that made those reviews more valuable. I thought that was a good solution. I agree that the solution only comes if it gets i the way of customer satisficatoin thought. The squeaky wheel gets the grease.

  7. _hm
    December 27, 2013

    @Halley: To my surmise what happen next is lawyer and lagal action. Some customer orders items from Amazon and consumes them. They may suffer if it is not genuine. If the suffering is loss of life or of similar nature, legal lawsuit will follow to eventually improve these practices.

     

  8. Himanshugupta
    December 27, 2013

    @_hm this is very serious matter because J&J products are for babies and new borns. If any counterfiet happens in the supply chain then this is not be easy for Amazon to escape.

  9. jesse_securecomponents
    December 27, 2013

    Another pending case worth monitoring, and tangentially related to this Amazon / J&J issue, is the suit Xilinx recently filed against Flextronics alleging unauthorized resale of electronic components and more alarmingly the alleged remarking of parts.

    Similar to this Amazon/J&J dust-up, Flextronics is an authorized distributor. Normally there is no reason for customers to question or be on alert for anything other than what they've ordered from a company like Flextronics. The thought that they would be receiving remarked parts likely would not enter their thoughts.

    Again, at this point these are simply allegations, but it certainly bears monitoring. Here is a link to the story http://www.businessweek.com/news/2013-12-11/xilinx-sues-flextronics-alleging-fraudulent-resale-of-chips-1

  10. Hailey Lynne McKeefry
    December 30, 2013

    @Jessie, thanks for pointing this one out. This is a good one to watch, as you said. In an ideal world, you would think that buying from an authorized distributor would be sufficient but clearly there are moments when monitoring is critical. Anybody want to weigh in: What are the best and most useful counterfeit monitoring measures your organization uses?

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