Strategic Risk • 77
chain. And it is a safe bet that many supply chain managers do not grasp the
strategic risk presented by rare earth metals. While these metals are found
just about everywhere in the earth’s crust, they are found in volume in only a
limited number of commercially viable locations. Rare earth metals include
17 elements: 15 that are known as lanthanoids, plus scandium and yttrium.
ese elements are essential to defense products, such as missile guidance
systems, as well as high- technology products. Unfortunately, at one point
China controlled 97% of rare earth metal output around the globe. And the
country has shown a willingness to play favorites, especially to its own com-
panies. During a recent one- year period a rare earth composite price index
increased 1,500%! Supply chain managers should immediately scan their
supply chain, including subtier suppliers, to identify if and where these met-
als are consumed. Compounding this risk are the relatively few intermedi-
aries that are capable of turning these elements into a seminished form.
Guar and Fracking. e energy boom in the United States from hydrau-
lic fracturing (fracking) has had an interesting secondary eect that
involves, of all things, a bean. Guar, a beanlike vegetable grown mainly
in India is used in countless products, such as ice cream, fertilizer, cattle
feed, chocolate milk, hair conditioner, peanut butter, kitty litter, and cran-
berry sauce. It is what we call a ubiquitous item—it shows up just about
everywhere. e real shock to the guar market occurred when oil and gas
companies began using it as a key ingredient in their fracking solution.
A single oil or gas well can require hundreds of acres of guar production.
During the fracking process guar is mixed with water to thicken the uid
that is forced into the fractures of energy- bearing rock, thereby allowing
oil and gas to seep out.
11
Needless to say, the guar market became quite
volatile aer the oil and gas industry became a major guar buyer. Many
companies that use guar did not even know about the pending commod-
ity market disruptions until it was too late to do much about them.
We could present dozens of cases that all lead to one conclusion—com-
panies that are ignorant about their external environment elevate their risk
exposure. Fortunately, thousands of resources are available that provide
all kinds of valuable information and data. And unfortunately, thousands
of resources are available that provide all kinds of external intelligence.
What we are saying is there is almost too much information “out there.”
e need to converge on a set of trusted external sources of information
has never been greater. Table 4.1 summarizes some carefully selected
sources of external intelligence, including supply market intelligence.
78 • Supply Chain Risk Management: An Emerging Discipline
TABLE4.1
Examples of External Intelligence Sources
www.bls.gov A repository of the Bureau of Labor Statistics of
the U.S. Department of Labor, which is the
principal Federal agency responsible for
measuring labor market activity, working
conditions, and price changes in the economy
www.census.gov e Census Bureau serves is the leading source of
data about the U.S. people and economy
www.nance.yahoo.com An excellent source for current nancial and
company news, including company nancial
statements
www.google.com/alerts A fast and easy way to set up alerts on any word,
company, or topic
www.oanda.com/currency/converter A comprehensive site for exchange rate and
currency rate information. Parts of the site
require a subscription fee
www.dnb.com Dun & Bradstreet provides a variety of business,
market, and supply intelligence products that tap
into its vast database
www.thomasnet.com A comprehensive website containing product,
company, and industry news
www.industryweek.com One of the best repositories of manufacturing
information in the U.S.
www.cia.gov/library/publications/
the-world-factbook/
e CIA World Factbook provides information
on the history, people, government, economy,
geography, communications, transportation,
military, and transnational issues for
267 countries and entities
www.econsources.com A portal to economic information on the web
www.politcalresources.net Listings of political sites available on the Internet
sorted by country, with links to political parties,
organizations, governments, and the media
Unstats.un.org/unsd/demographic is is the website for the United Nations
statistics division
www.coface.com A resource on country risk assessment, industry
sector studies, and assessments of business
climate around the world
www.investorsintelligence.com A provider of research and technical analysis of
stocks, currencies, commodities, and nancial
futures
http://www.havocscope.com/ A comprehensive site for information on global
black market trade
Strategic Risk • 79
PROTECTING INTELLECTUAL PROPERTY
International supply chains present a new set of risks compared with
domestic supply chains. One area where this is of particular concern is the
protection of intellectual property (IP). Intellectual property refers to cre-
ations of the mind, including inventions, literary and artistic works, sym-
bols, names, images, and designs used in commerce.
12
Intellectual property
falls into two main areas—industrial property and copyright. Industrial
property includes inventions (patents), trademarks, industrial designs, and
geographic indications of source. Copyright protects creative works by
providing the copyright holder exclusive right to control reproduction or
adaptation of such works for a certain time. A specic type of intellectual
property the involves counterfeiting, which Chapter8 will explore.
Intellectual property protection is taken seriously, perhaps even for
granted, in developed countries. e United States views intellectual
property protection to be so important that the Constitution addresses
this topic specically in Article 1, Section8, Clause 8. Intellectual prop-
erty protection in the U.S. Constitution includes three kinds of intellec-
tual property: patents, copyrights, and trade secrets. IP rights have since
expanded to include trademarks. e Founding Fathers hardwired the
importance of IP protection directly into the U.S. DNA.
Unfortunately, perspectives about the importance of protecting intel-
lectual property dier widely worldwide. In fact, many social and legal
topics are viewed dierently from culture to culture, including what
denes a normal workweek, child labor, environmental standards, treat-
ment of women, and safe workplaces. Bribery, which some quaintly refer
to as facilitating payments, and reciprocity, while both illegal in the United
States, are oen not illegal overseas.
While reliable gures are next to impossible to calculate, intellectual
property the costs U.S. companies anywhere from $80 billion to $250 bil-
lion annually, a gure that rises dramatically when calculating IP the
from a worldwide perspective. Some argue that these gures are even too
conservative since IP the, particularly when it includes counterfeiting,
involves many hidden costs. What are the costs to individuals and society
from fraudulent pharmaceutical products that harm patients? Precise g-
ures are hard to come by since those that steal intellectual property are not
too open about the scope of their activities.
80 • Supply Chain Risk Management: An Emerging Discipline
Various studies have concluded that while intellectual property viola-
tions occur in many countries, the Chinese are clear oenders. A report by
AMR Research (now part of Gartner) involving 130 international compa-
nies identied China as the “winner” in 9 of 15 risk categories, including
intellectual property infringement, supplier and internal product quality
failure, and security breaches. India earns top or second- place ranking in
9 of 12 problem areas.
13
Overall, earning the rst or second spot in almost
every problem area is a dubious distinction here. A major aerospace OEM
is so concerned about intellectual property the that its employees are not
allowed to take electronic devices that store information into China when
they visit on business trips. e company has also decided not to establish
an R&D facility in the country, even though China is an emerging aero-
space center. Chapter12 will talk about macro country risk indicators.
e search for new markets and lower costs, particularly in emerging
countries, forces supply chain managers to put more eort into protecting
their rm’s intellectual property. A fairly robust set of suggestions relates
to protecting against intellectual property risk.
Develop Contracts. It is always a good idea to have a written and signed
document that describes the expectations of the buyer and seller. is
does not have to look like a U.S. contract. True international contracts
exist if they adhere to the Convention on the International Sale of Goods
(CISG), which the United States has signed. Be sure to perform a thorough
reference check of prospective suppliers before entering a contractual
agreement. And be sure the contract contains a well- written nondisclo-
sure clause.
Limit Exposure to High- Risk Countries. Advanced, industrial coun-
tries will have legal systems that can be trusted to treat foreign companies
fairly, including the protection of intellectual property. On the other hand,
developing countries may not oer eective legal protection against intel-
lectual property violations. While we have a good idea about the worst
oenders, we oen disregard this information. If nothing else, knowing
where the potential trouble spots are located can result in greater caution.
Register Trademarks and Patents. A piece of advice here is to transliter-
ate your language into foreign characters to avoid embarrassing mistakes
or usage by other parties. Transliterating means to represent or spell in the
character of another alphabet. Although transliterating is not always easy,
the process is critical to avoid infringement.
A second piece of advice is to move quickly to foreign trademark oces.
In the United States, the rst entity to use a trademark commercially owns
Strategic Risk • 81
the trademark. In China, the rst to le the trademark owns that trade-
mark. Speed is of the essence or else you might wake up to nd someone
else owning your trademark. Run, don’t walk, to the trademark oce.
And be sure to retain a good trademark and patent lawyer.
A related concept to trademarks is something called trade dress. Trade
dress, a form of intellectual property, is a legal term of art that generally
refers to characteristics of the visual appearance of a product or its pack-
aging that signies the source of the product to consumers. Trade dress
protection is intended to protect consumers from packaging or appear-
ance of products that are designed to imitate other products, or to prevent
a consumer from buying one product under the belief that it is another.
14
Registering a trade dress is a risk management approach for battling copy-
cats and illegal knock- os. According to one entrepreneur, “is [trade
dress] is proving more eective than a patent because it falls under the
Digital Millennium Copyright Act. ere is no debate. Either they [copycat
websites] have to remove it [my product] from the Internet and stop selling
it or Google will shut them down.”
15
Divide Requirements. Another way to protect intellectual property is to
disaggregate purchase requirements among several suppliers rather than
providing a single supplier with access to an entire design. No single entity
gets to see the big picture. Unfortunately, this approach clearly has the
potential to increase costs, which begins to defeat the purpose of sourcing
in emerging countries.
Establish Proprietary Assets in a Foreign Country. Some companies
choose to establish operations in a foreign country or form a joint ven-
ture with a foreign partner, usually for the purpose of greater control. is
may not be a realistic option for smaller companies or when sourcing raw
materials or components. Rather, this is a more likely option when out-
sourcing nished products. Something that works against this option is
reluctance by the nance types to take on new capital assets.
Seek Legal Support and Remedies. Legal experts can help identify pre-
ventive measures as well as legal remedies when intellectual property vio-
lations occur. ese experts can also help develop contract language and
nondisclosure agreements that address intellectual property protection,
including the jurisdiction to resolve disputes. Legal groups can also help
with the ling and protection of patents, trademarks, and copyrights out-
side a home country.
Some companies have taken an aggressive stand by pursuing IP violators
wherever they exist. is strategy is both expensive and time consuming.
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