Fake-Tiffany-Ring.jpgCounterfeiting and Smuggling – Protecting the Supply Chain

A Louis Vuitton knock-off found in downtown Los Angeles, an Ed Hardy shirt purchased at a street fair, an I-Phone purchased from a MBA student who just returned from China, and a Tiffany diamond ring purchased from Ebay for $200 (gasp)……

Counterfeiting is a problem for any supply chain. It poses the most significant problem for supply chains in which a large portion of value is derived from branding and retailing. This is certainly true of the diamond supply chain and the Tiffany diamond product. How can a supply chain protect itself against counterfeiting and illegitimate competition?
In a recent Supply Chain Digest article entitled “Companies Pulling Out All Guns to Thwart Counterfeit Goods,” the author noted that “in many parts of the world, counterfeiting of western goods is not seen as law breaking but as smart business.” So, how can a company like Tiffany’s who is positions themselves competitively as a provider of a luxury good confront the growing tide of counterfeit merchandise being sold in such places as the United States? The answer is not easy. The Supply Chain Digest article also describes in detail how expensive it is to prevent the influx of these imitation products. Many firms are hiring former FBI agents and prosecuting violators. But, is the expense worth it? Do these illegitimate products impact the purchaser of a real Tiffany ring? Probably not (after all a woman can only hope that her engagement ring is not purchased on Ebay or from someone’s trunk), but for those consumers who purchase lower end products such as the ring pictured above (retail price $250) these fakes do impact the bottom line.

Counterfeit goods are not the only fakes in the diamond industry. There has been a recent incident in which counterfeit Gemological Institute of America (GIA) Diamond123979-DiamondGrading.jpg Grading Reports were issued in conjunction with diamond sales made on the internet. If you remember from earlier in our discussion, diamonds are graded based on the overall quality of the diamond, these grades are formally documented in paperwork that is provided at the time the diamond is sold. Ironically, these reports are not just used to justify the price of the diamond they are also used to prevent counterfeiting or the sale of diamonds which are not real (cubic zirconium).

Finally, although more relevant to the issue of “conflict diamonds” diamond smuggling also has major ramifications for the diamond supply chain. On one hand this “illegitimate” supply chain directly supports militia and terrorist organizations. For example in Sierra Leone, the government encourages alluvial mining efforts and free mining which resulted in diamonds being used to purchase arms and wars. But also keep in mind that the diamond supply chain is tightly controlled by major players who see the diamond through all aspects of production including retail (such as the De Beers and Tiffany’s supply chain). In this scenario, especially when one considers that managing the supply of rough diamonds has resulted in a competitive advantage, one should carefully consider the issue of diamond smuggling. First, many diamonds are legitimately mined from “free miners” in areas of Africa and Central America which permit this form of mining (remember the California gold rush). What becomes more complicated is how these diamonds not produced in mines owned by large diamond firms enter a supply chain so they become legitimate diamonds (if not Tiffany quality than perhaps sold in the jewelry district in Los Angeles). You see in many parts of the world it is difficult for these diamonds to enter a valid chain to be exchanged in the open market. This issue is only being raised because supply chains are complex and intricate systems subject to the economic and socio-cultural forces that surround them. Perhaps, the diamond supply chain like the cotton chain in the Petra Rivoli’s book is less clear cut that it might originally appear.