By Matt Smith, icix
Watching Lumber Liquidators founder Tom Sullivan’s world fall apart on 60 Minutes earlier this month, I couldn’t help but think how avoidable the whole crisis was.
For those readers who didn’t see the program, 60 Minutes did an expose on Lumber Liquidators and their imports of flooring from China that contain formaldehyde. Sullivan insisted the company goes through great pains to ensure that all imported flooring complies with the standards set by the California Air Resources Board (CARB).
Turns out that the factories producing some of their laminated products are using levels of formaldehyde deemed unhealthy and attaching fake CARB certifications to the packaging. The day after the broadcast, Lumber Liquidators’ stock dropped 25%. This was on top of an additional 25% drop the week prior when news of the story was provided to investors.
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The truth is that counterfeiting and fraud are problems faced by hundreds of companies throughout the country and the world. These issues not only have the potential to do serious harm to the health of the consumer, they also can ruin the health of the retailer selling the tainted product — destroying brand loyalty, incurring fines and potentially resulting in jail time for company executives. In addition, as Lumber Liquidators found out, these issues can cause serious harm to a public company’s market cap.
So, how to address the problem? In answering this, I first think of President Reagan’s slogan, ‘trust, but verify’ (not going to try the Russian he was famous for repeating). For consumer packaged goods manufacturers and retailers this means using reliable testing labs to ensure compliance with federal and state regulations and, equally important, company-mandated specifications. The labs are the verifiers of trade and their effectiveness in managing testing is what has resulted in a product safety system that prevents major disasters.
The extended retail supply chain also needs a vetting system to ensure that such key information is provided straight from the validated sources to avoid fraud or other issues. Companies need to adopt policies that won’t accept shipments if compliance requirements are not met — e.g., appropriate tests and documentation available. And, this process needs to be automated to drive efficiencies and empower small teams to manage critical programs and focus resources where needed most.
Fortunately there are tools available and being used today by leading retailers and brands to help ensure that safe products are brought to market. These solutions help companies ensure that inbound product has been tested for safety by independent labs and has the valid paperwork to prove it. Most importantly, the systems verify this documentation for every order.
I don’t think anyone wants to wind up the focus of a 60 Minutes expose. An important way for retailers and brands to avoid that is to implement effective systems and assign appropriate resources needed to ensure all product ordered complies with contractual agreements and safety requirements.
Matt Smith is the Founder & Chief Strategy Officer of icix, which helps many of the world’s largest companies manage risk across their global supply chains.
