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Ideas in Motion

New IBM Innovation Could Help Identify Fake Parts in Your Supply Chain

To make an iPhone, Apple fetches parts from 43 different countries across the globe. This demonstrates the extraordinarily complex and far-reaching supply chain needed to manufacture the world's most iconic phone. Such a complex web of suppliers is not out of the ordinary for most of the world's products.  

Unfortunately, the sheer depth of supplier networks, the number of transactions, financial operations, and the complexity of IT processes' means that every link in the supply chain is potentially vulnerable to fraud or misconduct.  

Why does this matter for your business?

Even the smallest weakness in your supply chain can have a significant impact on your business. As well as those associated with continuing lawsuits and audit standards, immediate implications could include financial losses resulting from the fraud itself. Longer-term impacts might include a loss of revenue, reputational damage, and a possible loss of market share.

Intellectual property theft: an enduring global problem

Supply chain fraud affects retail and consumer goods companies of all sizes. Bad actors might engage in a diverse range of nefarious pursuits, from bribery to money laundering. However, passing off counterfeit components as genuine, otherwise referred to as intellectual property (IP) theft, is among the most common forms of supply chain fraud.

Here are some industry-specific examples of IP theft:

  • Auto parts: Car parts counterfeiting is a global issue with an approximate value of over $2.2B annually, according to the online magazine Automation. And counterfeiting continues to grow across all automotive categories, despite continued efforts by governments and industry groups.
  • Pharmaceuticals: Counterfeit or fraudulent drugs are produced using inaccurate ingredients. To look like the real thing, these drugs are then packaged and labeled as genuine. In developed countries, approximately 10-30 percent of medicines sold are counterfeit.
  • Consumer products: A Homeland Security Department report from this year found that: "Many customers are ... unaware of the significant probabilities they face of being defrauded by counterfeiters when shopping on e-commerce platforms". The report suggested that more vital steps be taken to compel e-retailers to take counterfeits even more seriously. 

According to a survey by Deloitte, a rising number of businesses are using analytics to identify and prevent fraud in the supply chain. This measure by itself is likely to be inadequate to address an increasingly global issue, considering the size of the problem.

With crypto-anchors, IBM battles supply chain theft.

A close connection between physical objects and their digital representation is essential for determining their authenticity. A product is commonly connected by a unique identifier (UID) to a digital record. The UID represents either the individual object or a class of objects by model, batch, manufacturing location, supplier, or other identifiers. The UID is printed, embossed, or affixed to the item or its packaging as a code. Many of these identifiers, however, are readily copied and used on counterfeit parts and products. Therefore, a UID identifier alone cannot identify a product securely. 

To combat this issue, IBM researchers have designed crypto-anchors, which are tamper-proof digital fingerprints embedded in products and backed up by blockchain technology's security.

As they are embedded in the product and consist of cryptographic mechanisms that provide a form of identification that can't be cloned, crypto-anchors are highly secure. For example, crypto-anchors can be embedded in a magnetic ink shade that can dye something as small as a pill. "The code could become active and visible from a drop of water, letting a consumer know (the pill is) is authentic and safe to consume," according to IBM.

Supply chain fraud is growing in scale and implications. There are still plenty of reasons for bad actors to commit supply chain violations, even in highly regulated industries. To minimize the risks involved, manufacturing companies must take a diverse range of actions to tackle it before it begins to threaten their bottom line.

However, if all goes well, the crypto-anchors developed by IBM will eventually go some way to turning the tables in the global fight against supply chain fraud.