By Jackie Maguire
Supply chain management can be complex and key considerations include logistics planning, organizational design and transfer pricing optimization. Inventory flow control and supply chain hub management create hurdles to overcome. Areas that can be particularly challenging are where to place and how to protect your intangible assets in a supply chain environment.
Managing intangible assets including intellectual property effectively is vital to business success and placing ownership of IP within effective business structures is important to control costs. The choice of where to locate and protect IP is specific to the company’s operations and is a significant market decision to reach in itself. However, unfortunately, the threat of IP crime is also now real and is a factor to be considered in the decision making process. Counterfeiting and piracy has increased hugely over the years, and is no longer confined to cheap, low-cost counterfeit goods but has spread to large-scale manufacturing plants that can produce, for example, cheap and realistic-looking, and sometimes therefore dangerous, copies of drugs, mechanical parts and electrical appliances.
A report in 2011 produced by consultancy Detica in partnership with the Office of Cyber Security and Information Assurance in the UK Cabinet Office estimated that the economic cost of cyber crime to UK businesses alone is £21bn per annum of which £9.2bn per annum is from IP theft. The report also said that IP theft has the greatest economic impact of any type of cyber crime considered in the study, and is likely to have the largest impact on companies that create significant quantities of IP or those whose IP is relatively easy to exploit.
A marked change in multinational business models, with local business giving way to regional and global supply chain models, and with decisions increasingly being made at international level to facilitate accepted tax structures, all has an impact on the need to carefully locate and protect IP. With increasing complexity in the supply chain, together with more and more pressure to get products delivered faster, the need for a collaborative business model becomes greater. This does however present challenges, which may not always be obvious, to intellectual property ownership, and therefore to the business concerned.
So how should businesses go about making their intangible assets work for them?
There are three key aspects to consider in many supply chain IP strategies: where the value lies (valuation); where the value remains (protection); and where the value is added (efficient routes for monetization).
Key Point 1 – Valuation
Work out where the IP/intangible asset value lies in the chain
The first step in compiling the strategy is to know where the existing valuable IP./intangible assets lie. A thorough audit of where the value is created and study of business accounts can enlighten this process. Whether the supply chain is within one company group or whether there are local suppliers involved, determining exactly who owns what within the supply chain and who has control over what needs to be protected, is important before collaboration and inventory flows are formalised.
Consider all intangible assets
A company’s real intangible asset value is derived from far more than simply patents, registered trade marks and designs. It also resides in its wider intangible assets which include so-called ‘know-how’ as well as branding, skills, policies, creative works, relationships and processes. Identification of all the valuable intangible assets in a company can be done internally or by calling in outside specialists to undertake an audit and valuation exercise. It is only by knowing where its value lies and which of the intangible assets have value, that a company can gain most by managing the value in the supply chain. It is only then that decisions can be made as to how optimise the monetization of those assets through contractual control and tax efficient management of intellectual property.
Develop a valuation matrix
A company group can benefit from developing a valuation matrix for its operations and categories of intangible assets to highlight where value lies within the group and how that value may be effectively managed and monetized.
Key Point 2 – Processes and Protection
Put your house in order
The second step is to ensure that the IP management process is as watertight as possible. An organisation needs to be able to identify correct ownership and registration of ownership of assets to retain value within the supply chain. In order to comply with certain tax laws, it will be important for a group of companies to maintain clear records and have a central inventory of assets and information. Records are also required to prove that the decision-making process around the creation and disposal of assets is being effectively managed and is taking place in the correct locations by properly appointed individuals.
In addition to having the right records and IP in place an organisation needs to ensure, for example, that its employees can’t take ideas to a competitor or another part of the external supply chain. If IP is not protected, or not protected thoroughly enough, for example in each significant country where it may be at risk, there is a real possibility that trading and product names can be stolen as well as its ideas and inventions. Sometimes this could come about because an organisation in the supply chain discloses, possibly inadvertently, a product before it has been given patent protection, which could lead to competitors gaining a valuable edge. In some countries, trade secrets are protected by an expressed or implied contract. That in effect means that because they are not specifically protected by law, they may be protected inadequately or not at all. As professional counterfeiters look to develop their businesses and intercept supply, it becomes ever more important to address the issue of the security of IP in the supply chain.
Ensure that you have the appropriate geographic protection and cultural understanding
Protecting IP in a supply chain particularly when trading across borders, can seem quite a daunting process, because each country has different procedures and there can be pitfalls in obtaining IP in each country. If an organisation has decided to trade in a particular country, it needs to ensure its intellectual assets are protected, particularly for its goods, as soon as possible in that country through an IP right An IP advisor will recommend the best route according to the nature of what is to be protected.
Attitudes to IP vary widely from country to country. Although the situation is improving, in some countries foreign companies have got into difficulties in the past when trying to prevent others using their IP, largely because reproduction of goods and designs historically has been how business is done in those countries, and employees of a company may sometimes not even be aware that such reproduction is forbidden. Cultural differences should always be anticipated.
If local suppliers are involved, the first step, before entering into or expanding a supply chain arrangement, is to determine the extent to which local law protects your IP. Any agreement needs, for example: to ensure that a supplier abides by such laws as do exist; to define the IP that needs protecting in the clearest possible terms; and to be very clear about confidentiality.
Register and assert your rights
We recommend that wherever commercially appropriate a company should register the rights to its inventions, trademarks or designs. Filing an application establishes a record of when rights came into being. In many countries rights that are not registered are very difficult, if not impossible to protect.
As with most things, preparation is vital, and when it comes to the supply chain, careful attention to the nature of contracts is very important as is having a good process in place for dispute resolution from the outset. Contracts with suppliers, for example, should ensure that subcontractors of the company they are dealing with are not allowed to use patents, designs, trademarks (or other IP that needs to be protected) without a specific licence to do so.
Where aspects of product development have been outsourced in the supply chain, it is important to understand exactly how far such a contract will provide protection. For example, will it stop the subcontractor selling a similar, although not identical, design to another company? Or a perhaps a component of the design they have produced for the contractor?
It is also important to consider aspects such as how products and packaging are designed and protected so they cannot be easily counterfeited in the supply chain.
Key Point 3 – Efficient routes for monetization
Optimising the business model
There are many aspects to take into account in choosing the best route for monetizing intangible assets and IP.
There are some basic choices to make regarding how the IP rights might be used within the supply chain in order to maximise the profits and returns from valuable assets. Manufacturing rights, distribution rights, rights of sale and resale and freedom to operate are all rights that need to be managed.
Planning early about how rights will be used is vital. One way of ensuring that the owner of the IP retains control over their rights is through licensing, in which case licensing agreements will need to be put in place, and these will need to be clear about the way rights will be used by the licensor and licensee. This applies within company groups as well as with supply chains involving local suppliers.
Those with central supply chain control will need to ensure that rights flow correctly throughout the chain, from company to company and location to location.
Knowing the competitive and legal positioning
It is important to understand the IP landscape to ensure that no parts of the supply chain are infringing third party rights in the different locations that it might operate and that it has the freedom to operate. There are many tools and techniques available to investigate the landscape and to ensure that the competitive position is understood to avoid penalties further down the road. Several IP Strategists have developed their own tools and techniques to investigate the landscape and my team at Coller IP has developed proprietary processes and techniques to expedite searches and provide visual and legal representations of competitive positioning.
Sometimes if a problem is identified, it may be necessary to acquire additional rights by purchasing IP or entering into an in-licensing arrangement and should this be required then a number of brokerages are available.
Tax/legal/transfer pricing optimization
An area to consider regarding IP in the supply chain, is that transfers of IP assets to different entities or across borders, or adding IP value can have tax implications. There can be complex monetary flows and there is a need to understand how the IP has been created and used in the business so tax implications can be managed, especially where there might be shared brand value. Consideration can be given, for example, to moving IP ownership into an entity in a chosen tax jurisdiction and creating licensing and royalty structures to manage monetary flows. Tax, IP and transfer pricing all need to be understood in these circumstances and experts are required to provide their combined expertise to the business decision-makers.
Getting the right team in place
When developing your supply chain strategy and ensuring that your intellectual assets are fully protected in the supply chain, especially when trading across borders, we recommend taking IP advice, preferably at an early stage to ensure pitfalls are avoided, opportunities are maximized and costs are kept to a minimum. It can be time-consuming and costly to sort out errors later. In addition, IP protection, including contracts, needs to be reviewed on a regular basis to ensure that, as organisations and legislation change, full protection remains in place and the intellectual assets continue to contribute optimally to the business.
A Supply Chain Manager will undoubtedly be working with the Sales Force and Manufacturing/Operational Teams within a global organisation – and possibly the Research, Design and Development Teams that are supporting client needs and satisfaction. However the integration of a Chief Intellectual Property Offer that can advise on the strategic protection and placement of IP will bring value and cost benefits – often with significant monetary gains.
By taking care to ensure that intangible assets and rights are as protected and managed as efficiently as possible throughout the supply chain, companies can trade and remain competitive in an increasingly global world.
[This post originally appeared at Coller IP.]
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