Supply Chain Reaction

By Larry Barrett  |  Posted 2005-02-01 Print this article Print

Your distribution network is vast. You sell your product to distributors. You have no way to track what happens after that. So how can you be held accountable for how your cartons and packages hit the stores—or the street? A $1.25 billion settlemen

Supply Chain Reaction

But the bar code is primarily used to scan each carton or pack of cigarettes when it is sold by a legitimate retailer. If a pack has fallen into the hands of an illicit distributor, Philip Morris won't be notified.

Indeed, the bar code doesn't even tell either the retailer or the manufacturer how the pack ended up at the point of sale. Right now, it tells Philip Morris only that a product has been sold and at what price, but not with much specificity. It's merely a "Marlboro carton" or a "Marlboro pocket box" or "Marlboro wraparound soft box."

No carton or pack has a unique identity. "There's precious little information that can come from the bar codes," Holleran says.

What happens between the time the cigarettes are packaged and shipped to distributors and when a customer plunks down $5 at the 7-Eleven store for a pack of smokes is the enormous gap Philip Morris must fill if it wants to avoid paying heavy fines in Europe.

PMI and PM USA each has more than 1,000 distribution partners scattered throughout the globe. Philip Morris brands can be found at just about any supermarket, drugstore or sundry shop in the world.

"We don't have perfect traceability right now," Holleran explains. "After a point, the shipments between retail locations get lost and the system falls apart. It's a similar situation at Philip Morris International. At some point, we can't track them all."

At this point, aside from UPC bar codes, PMI and PM USA in the past decade have done little in concert to improve the traceability of products in their supply chains.

Some factories do apply an ink-based code to the exterior of cartons that can tell Philip Morris where and when the cigarettes were manufactured, Holleran says. However, that's mainly a quality-control feature that helps track down the source of inferior cigarettes after customers complain about the product's taste or freshness.

The system the EU wants PMI to put in place would require an overhaul of the supply chain overseen by the tobacco company. The mandate requires PMI to identify the date and place of manufacture of every pack of its cigarettes with embossed markings on the packaging. The information on the packages—both cartons and individual packs—must be able to identify the manufacturing facility, the individual machine used and the production shift.

The settlement also requires PMI to identify the country of intended destination on each pack. PMI must also build and maintain a database of all pack information for the European anti-fraud investigating organization, OLAF, to identify products found in any seizure—and their last known purchasers. This data, which would allow investigators to identify exactly which distributors have received Philip Morris shipments, must be available online 24/7.

During the 12 years of the settlement, PMI is required to carry out research and supply a yearly report on new technologies to improve the tracking and tracing of its cigarettes.

The settlement does not include a specific deadline by which this new system would have to be installed. However, intermediate deadlines have been imposed on associated projects to help fight cigarette smuggling. Thus far, though, it appears PMI has failed to meet these basic requirements.

A database containing the names, addresses, phone numbers and contacts of all PMI distributors was to be made available to OLAF by Oct. 9, 2004. But according to the European anti-fraud office, PMI has yet to deliver this first-purchaser database.

The agreement also requires PMI to develop a database of second purchasers—those who buy cigarettes from the first level of distributors—and provide quarterly reports to OLAF on second-layer tracking. That would include the names, addresses, phone numbers and contact information of retailers or other distributors who buy PMI cigarettes from the first-purchaser distributors. No deadline was set for the second-purchaser database.

Company executives declined to comment on the status of the first- and second-purchaser databases. However, a former Philip Morris executive who didn't want to be identified said that the company has all of the first-purchaser information, including distributor names, addresses, and phone numbers, in a database. That database, he told Baseline, is connected to the SAP business software applications that Philip Morris uses to manage its distribution network.

Senior Writer
Larry, of San Carlos, Calif., was a senior writer and editor at CNet, writing analysis, breaking news and opinion stories. He was technology reporter at the San Jose Business Journal from 1996-1997. He graduated with a B.A. from San Jose State University where he was also executive editor of the daily student newspaper.

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