Intellectual property misappropriation along global supply chains: It is a challenge that electronics firms know all too well as fake components flood the market, causing product failures and costing billions. However, efforts to safeguard IP can benefit from the lessons already learned by companies as they grappled with other thorny issues in the global marketplace, such as labor rights, conflict minerals, and environmental practices.
Companies sourcing internationally have wrestled with these social and environmental responsibility (SER) issues for more than two decades, with limited success. But recently companies have started shifting their focus from auditing their supply chain partners to helping them improve how they manage SER performance. These capacity-building programs have produced better results and fundamentally shifted how global companies look at creating sustainable, responsible supply chains.
Leapfrog the painful lessons
A new study published by Stanford Graduate School of Business’ Stanford Value Chain Initiative argues that companies can also address intellectual property protection in the supply chain by applying this capacity-building approach.
When first confronted with the social and environmental violations by their suppliers in far-flung places 20 years ago, many companies didn't even have policies stating their expectations on these fronts. They rushed to create codes of conduct for suppliers, and most companies ultimately turned to auditing to ensure compliance. This approach has been enduring but disappointing. Frequent auditing has proven to be expensive, disruptive, and largely ineffective in driving improvement — often leading to a game of cat and mouse between suppliers and auditors, rather than genuine compliance.
In the past four or five years, some companies have gradually adopted a capacity-building approach to supply chain SER to supplement auditing. At the core of this approach is the use of management systems — an approach originally developed for ensuring product quality and occupational health and safety. It is important to understand that a management system is not just documents. It is trained, committed people routinely following procedures.
This approach has driven SER improvements by creating clear expectations and trusted communication channels. It has encouraged transparency and dialogue between companies and suppliers, and it has sought to engage the supplier's workers and managers in the process.
The Stanford paper argues that companies can more successfully tackle IP violations — and better safeguard designs, trade secrets, and other increasingly valuable intellectual assets — by embracing a similarly holistic, collaborative approach.
Common problems, common solutions
There are differences between IP protection and other compliance issues. Labor and environmental compliance focuses on upstream suppliers, but companies need to address IP risks both upstream and downstream, taking into account distributors and sales agents, for example.
But the Stanford report points out that SER and IP problems share several underlying causes, including the lack of visibility into distant suppliers' practices and, in many emerging markets, weak legal institutions. Suppliers may be motivated to save money by using counterfeits or avoiding software licensing fees, just as they cut costs by underpaying workers or evading environmental regulations.
Through a management systems approach, the company can create incentives for suppliers to be transparent and comply with SER policies. This also creates a clear path for improving through training and education. Some systems now include the supplier's SER performance in the overall supplier performance rating, along with price, quality, and delivery — signaling that future contracts depend on compliance. These strategies can also be applied to IP protection.
Beyond the legal team
Instead of relying solely on the legal department to deal with IP misappropriation — typically after the damage has been done — this approach lays a foundation for preventing the problem.
When an IP violation is discovered, companies still may pursue a legal remedy. But they may find it makes sense to forego it and focus instead on corrective action, the Stanford report notes:
This was the case with a global consumer electronics company, which discovered in 2010 that its largest licensed distributor was selling knockoffs of its product to retailers, mixed in with the real product… The company implemented new procedures to prevent counterfeits from entering the supply chain and rolled out new controls.
The company eliminated the counterfeiting problem within a year, preserved its relationship with the distributor, and averted bad press.
IP misappropriation continues to grow, affecting virtually every industry, taking a toll in company profits and reputation, and posing risks for consumers. In the big picture, IP infringement undermines innovation, consumer confidence, and the health of the marketplace. But companies can be far more proactive and effective in safeguarding IP. And as the Stanford report suggests, they can quickly benefit from two decades of work on SER issues.
When companies take a holistic view of the risks posed by global supply chains, there is no need to start from scratch in the effort to protect intellectual assets.