Confidence in Track and Trace Misplaced?

Many manufacturers believe that if they only added 1:1 tracking–serial numbers, RFID tracking, or QR codes–to their products, then their diversion problems would resolve. In working with 600+ manufacturers, Vorys eControl has observed the gamut when it comes to manufacturers investing in track and trace. In this piece, we dispel some misconceptions, share some considerations, and highlight some common pitfalls of this strategy.

First, let’s dispel some misconceptions.

Tracking and tracing your products will not necessarily resolve your diversion challenges. Indeed, many manufacturers come to Vorys with serialized products, QR codes, and the like and are still struggling with rampant unauthorized sellers on Amazon and elsewhere. Another common misconception is that the brand has to implement track and trace for an effective eControl program. This is simply not true, as the vast majority of brands that we work with do not have the ability to track and trace their products.

Second, let’s share some considerations.

Operationally implementing track and trace can quickly become overwhelming and expensive. Some of the considerations brands should be aware of include, but are not limited to:

• What products merit the capability? Is it the entirety of the product portfolio or a limited subset, like the hero SKUs?
• How long do you want to be able to track and trace–a specific window of time to help solve a diversion scheme or in perpetuity? Vorys has observed many brands give up on track and trace due to the cost after a year or two.
• Tracking and tracing your products is more complicated for manufacturers that use two-step distribution (i.e., Brand > Distributor > Retailer > End User). Indeed, many distributors are unwilling or unable to track which of the brand’s products are sold to distributor’s reseller customers, as the distributor does not have the time, resources, or administrative support to facilitate it in practice. Therefore, before a brand using two-step distribution invests in track and trace, the brand should evaluate its distributors’ capabilities to support.

Third and finally, let’s share some common pitfalls.

FBA Inventory: Brands can easily defeat the purpose of track and trace if they or their third-party sellers have not opted out of co-mingling their inventory inside Amazon warehouses. For example, a brand sells serialized products to (i) Seller A and (ii) Distributor B who supplies Seller C. Sellers are not supposed to sell on Amazon without the brand’s separate consent, and Seller A and Seller C have not received that permission. Nevertheless, both Sellers A and C are impermissibly selling on Amazon, using Amazon fulfillment, and have not opted out of co-mingling. As such, their respective inventory is getting mixed with each other’s inside Amazon warehouses, as well as getting mixed with any other unauthorized sellers who are commingling the brand’s product in an Amazon fulfillment center. The brand sees an unknown storefront name on Amazon (“Unknown Seller 123”) and decides to perform a test-buy to determine who is impermissibly selling on Amazon. When the brand receives the product bought from “Unknown Seller 123,” it is ultimately receiving a co-mingled product, so it is not going to know which seller shipped that product into the Amazon warehouse. Thus, any of the following scenarios could occur:

• Scenario 1: The brand receives the product that was actually sent to the Amazon warehouse by Seller A to support the “Unknown Seller 123” storefront. In this case, the brand will be able to confirm that Seller A is impermissibly selling on Amazon and can have a businessto-business discussion with Seller A to remove the brand’s product listings from Amazon.
• Scenario 2: The brand receives a product that was shipped into the Amazon warehouse by Seller C to support the “Unknown Seller 123” storefront. In this case, the brand can trace the product back to Distributor B and tell it to stop selling to Seller C via a do-not-sell list, but the brand will not know which Amazon storefront Seller C actually operates (or may incorrectly assume that Seller C is behind the “Unknown Seller 123” storefront, and if Seller C denies that specific affiliation, it will be telling the truth). However, the brand still is able to determine that Seller C is violating the brand’s policies by selling on Amazon and thus can act accordingly.
• Scenario 3: The brand receives a commingled product that was shipped into the Amazon warehouse from some other seller. In this case, the brand may be able to identify the seller or distributor from which the product was originally sold (and can ultimately cut off the source), but the brand may not be able to identify which storefront actually connects to the seller. Alternatively, the seller may have purchased the brand’s product from outside of the brand’s product tracking stream, so that neither the seller, the storefront, nor the seller’s product source is identifiable.

As you can see, commingling inventory often thwarts the benefits of track and trace and does not provide a clear answer as to whom is diverting product. As such, Vorys often recommends that the brand contractually obligates its thirdparty sellers using FBA to opt out of commingling for many reasons, including supporting track and trace.

Product Packaging: Some manufacturers take the step of adding a track and trace feature to the product packaging rather than the physical product. Sophisticated counterfeiters may be able to easily replicate this feature on product packaging, as QR codes are relatively easy to create. As such, the brand may want to consider a tracing method inside the physical product or a secret QR code on the product packaging in addition to tracing methods on the product packaging.

D2C Sales: Brands committed to track and trace may be doing a good job of tracking product sales except when it comes to their own D2C sales. In addition to being mindful of D2C promotions that invite diversion, brands also need to trace the products that they sell to end users, whether it be through their own proprietary website, a phone or fax order, or a catalog order.

System Failures: Even if a brand and its downstream distributors and retailers are fully committed to track and trace, errors and failures are inevitable. It is common for products to not be tracked as they should because of various issues, including with the recording or software systems, rendering track and trace not entirely reliable.