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Beware of Third-Shift Manufacturing

December 5, 2016 // Deputy Dan

A graphic drawing of an alarm clockA graphic drawing of an alarm clock

Monitoring your retailers is an essential part of any brand protection strategy. However, problematic retailers are not the only threat to your agreed pricing structures. Many companies choose to outsource production to Original Equipment Manufacturers (OEMs) abroad. They grant the OEM permission to make a specific number of products, and then share all of the necessary intellectual property to make that happen. While the practice reduces production costs, it also creates a risk that the OEM will steal their intellectual property and use it to manufacture unauthorized products in addition to the licensed amount.

Unauthorized Third-Shift Products

This phenomenon is often called the "third shift", and originally the term was meant literally. Factories in China would run two ordinary shifts making products for their legitimate customers, but then remain open through the night in order to churn out extra product off the books. These third shift goods aren't counterfeits in the traditional sense of the word. OEMs use exactly the same materials and production processes to make additional products that are then sold through unauthorized channels. This makes it exceptionally difficult even for the brands themselves to tell authorized and unauthorized items apart. When unscrupulous OEMs do choose to cut corners, the consequences can be serious: counterfeit baby formula, counterfeit cellphone chargers and counterfeit pharmaceuticals have all claimed lives.

The Effect to Your Bottom Line

It is important to recognize that untrustworthy OEMs can do huge damage to your brand. When substandard products go out with your logo on them, your reputation suffers. Even when the unauthorized products are made to the same standards as authorized ones, their sellers are able to free-ride on your brand's reputation and marketing efforts while avoiding licensing fees, enabling them to significantly undercut your prices. While many of these products are then sold in the markets in which they were produced, online retailers such as Amazon and Alibaba make it easy for third-shift goods to enter the supply chain closer to home and compete with authorized retailers.

Defense Can Be Dificult

It's difficult to know exactly how common this practice is. While some cases have been widely publicized, companies are understandably reluctant to advertise the fact that their products have been duplicated. High profile victims include footwear company New Balance, who were forced to fight a years-long legal battle in China when one of their manufacturers continued to produce their designs after his contract ended. Defending your intellectual property overseas can be extremely difficult and expensive, and Chinese courts are often unsympathetic to complaints by Western companies. The similarity between third shift and authorized products also makes it difficult to win court cases in your home market. While a judge can prevent a retailer from selling counterfeit goods, some have ruled that third shift products are effectively genuine and can be sold legally.

Proactively Maintain Control

So, what can you do to prevent third shift manufacturing from damaging your brand? Prevention is better than a cure. If you choose to outsource production to an OEM, do your research first, and work only with those with an established track record of trustworthiness. Be prepared to perform regular inspections to ensure that they are producing only the number of products that you agreed. Second, you could follow the lead of many companies who work with OEMs and incorporate a "control component" into your products. This is a part of the product, such as a tag, that is supplied to the OEM only in sufficient numbers to make the contracted number of finished products. Tracking information included in the component allows you to tell real products from fake ones. Third, monitor online sales of your product very carefully. If unauthorized retailers start selling your product at a price lower than your MAP, it could indicate that unauthorized extras are being produced by your OEMs.

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