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Manufacturing Insights Supply Chain Risk and Resilience The Most Innovative Law Firm in Europe

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Page 1: Manufacturing Insights - Pinsent Masons Manufacturing Insights Introduction Welcome to Manufacturing Insights, Pinsent Masons’ publication dedicated to discussing the issues important

Manufacturing InsightsSupply Chain Risk and Resilience

The Most Innovative Law Firm in Europe

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Contents1 Introduction

2 Recalls in a global market place: prevention is better than cure

4 Managing automotive recalls in China

6 An industry perspective: put your customer and market first

7 Mitigating disruption beyond Tier 1 suppliers

9 Could you be criminally liable for the conduct of your agents, distributors and suppliers?

10 Big data and its potential to change supply chain management

11 Protecting intellectual property down the supply chain

13 Manufacturing at Pinsent Masons

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Pinsent Masons | Manufacturing Insights

IntroductionWelcome to Manufacturing Insights, Pinsent Masons’ publication dedicated to discussing the issues important to our manufacturing client base.

In this issue we focus on risk and resilience in the manufacturing supply chain. All of the manufacturing businesses we speak to teIl us that supply chain remains a priority area, not just in terms of cost management but in ensuring that quality and service isn’t compromised. In 2013, supply chains were never far from the news with stories like the horsemeat saga seeming to run and run. So far in 2014 we’ve seen a number of high profile product recalls which have arisen as a result of quality failings in the supply chain. All of these have brought the complex and global nature of the supply chain that manufacturers’ rely on into sharp focus and have sparked renewed attention on supply chain resilience and transparency.

This edition examines a range of supply chain issues, from building supply chain continuity to dealing with product recalls. We also look at how to protect innovation and intellectual property in a global supply chain, and we look at how IT and data can be used for the benefit of managing your supply chain. Interestingly, we are fortunate enough to have a ‘view from the inside’ with an article by Nick Adcock, a supply chain director for IMI plc.

Nicole LiveseyPartner, Head of Manufacturing and CorporateT: +44 (0)121 623 8637M: +44 (0)7768 903170E: [email protected]

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Manufacturers are no longer able to hide from consumers either. Dissatisfied or concerned consumers can reach a vast audience via blogging and look up the experiences of others with a few words and a search engine. It is no longer acceptable to ignore problems that customers have found.

The motor industry is not the only sector to face challenges. Industries as diverse as prosthetics, electronics, toys, chemicals, building products and food are all regular victims of a recall, and have equally damaging issues to cope with as a result.

In addition, first world regulatory regimes regard safety as paramount, and customer expectations are now higher. The cost, recall effectiveness and risk are often now subservient to preserving a brand and being seen to do the right thing. 2014 is also likely to see the introduction of tougher market surveillance and safety regulations in Europe.

What to do?It is inevitable that companies have many pressing corporate priorities, and only focus on recall when the disaster occurs. Much time and money is saved if brands make planning of recall management a higher priority and are ready should it happen. Planning consists of two simple parts: • Avoiding problems in the first place• Controlling the scale of an actual problem.

Avoiding problemsMuch of this should be day-to-day good practice for manufacturers, but our experience tells us that you will be hard pressed to find a manufacturer that scores well in each area. Good practice includes:• Operational hygiene• Careful choice of suppliers• Good control of sub-contracting/sourcing• Clearly defined design and strict exclusion of unapproved design

changes• Regular audit of suppliers • Goods inwards sampling and testing• Thorough risk assessment and prioritising of controls according

to risk• Prioritising strong traceability• Ensuring strong contract terms are applied• Requiring arbitration in a reliable centre for disputes for emerging

country suppliers.

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Recalls in a global market place: prevention is better than cureIf the market needed reminding of the damage that can be done by having to recall a product, then it need look no further than early 2014.

In February, Aston Martin announced a recall of 17,000 cars; most of its production since late 2007. The recall was due to concerns that a third tier supplier in China had been using substandard or counterfeit plastics in an accelerator arm component. The unit cost of the material will likely have been trivial, but the damage to Aston Martin is considerable.

The initial cost of recalling and retrofitting a new part to 17,000 vehicles will run into millions of dollars. Given that this is a luxury brand, the inevitable inconvenience and dissatisfaction generated amongst its customers will also be very damaging. Brands at the high end of the market suffer greatly if the customer’s experience of the product is not consistent with the branding. Anything less than a “luxury” service can lead to rapid market decline.

The Aston Martin case was interesting for cultural reasons too. Reuters reported that the Chinese Xinhua news agency waded into the debate, taking collective offence at the blame being placed on a Chinese manufacturer. At a stroke, Aston Martin faced the risk of being painted as anti-Chinese in a market fast becoming one of the most important in the global economy.

For the price of part of a widget in the supply chain, Aston Martin is facing: substantial financial cost; the logistical challenges of handling a recall across the world; customer inconvenience and dissatisfaction across its markets and serious PR damage in an important local market.

Of course Aston Martin is by no means alone in this. GM has just announced a recall of 1.6 million vehicles due to an ignition fault and Toyota has had serious issues with its own accelerator over several continents. Vehicle recalls in the US alone have been climbing inexorably for 30 years, both in the number of recalls and of vehicles affected.

The costs can be ruinous. Some commentators are suggesting that GM’s exposure could run into billions of dollars and certainly the problems at Toyota in 2008 may have cost up to $2 billion before taking account of lost sales. For lesser companies this would mean the end of their business.

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Managing a crisisCrisis handling will have to respond to the specific needs of the problem once it has emerged, however there is much that can be done beforehand to help prepare for a recall. Forward planning is the key, and examples of good planning and implementation include:• Having a written crisis plan and crisis team• Having plan materials outlining (by country) regulatory, risk

assessment, insurance, internal and external communications guidance

• Pre-selection of legal and PR advisers and contacts in the major jurisdictions that could be affected

• Using the crisis plan (it’s no good on the shelf)• Informing relevant insurers promptly• Effective documentation of information to prevent exaggerated

claims and to support claims to responsible suppliers/insurers.

Keep recall on the board agendaGiven the potential scale of damage a recall can do to a business, product risk control should be at the centre of corporate strategy. It should be a constant program, implemented, audited and updated on a regular basis. Until the corporate world puts product efficacy at the centre of its mission, we can expect the volume of recalls to keep climbing.

Andrew MastersonPartnerT: +44 (0)113 225 5457M: +44 (0)7818 004078E: [email protected]

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Any entity or individual is able to raise a complaint about defective automotive products with SAQSIQ. They are not obliged to be owners of the vehicles to be eligible to raise a complaint.

How an investigation into a possible defect may be carried outGenerally, when SAQSIQ becomes aware of any possible defects it will inform the manufacturer about the possible defect and ask it to conduct its own investigation. If the manufacturer fails to investigate, SAQSIQ will itself perform an investigation.

If SAQSIQ anticipates that there are defects which could trigger serious consequences, it will initiate and carry out the investigation.

The legal parameters around SAQSIQ’s ability to instigate direct investigations have not been clearly defined and SAQSIQ has wide ranging powers. For example, employees of SAQSIQ are able to enter the production site and into the offices of the manufacturer and may make copies of the relevant information and records. The recall regulations emphasise that SAQSIQ must keep all information in relation to the investigation strictly confidential.

If SAQSIQ classifies a defect, the manufacturer is obliged to cease the production, sales and import, and to recall the involved cars.

Manufacturers should note that the term ‘defect’ has been very broadly defined under the regulations. For example, there is a risk that an imported car, such as from the UK, will be recalled in China even though this car may comply with UK standards.

Manufacturers have a right to object to the recall within 15 days of receiving a recall notice from SAQSIQ. An objection must be supported by evidence that there is no defect. In those circumstances, SAQSIQ will appoint independent experts who shall undertake assessments and, if necessary, run technical tests. If a defect is confirmed, the recall will be executed and implemented.

What if I do not comply?If ordered to undertake a recall of defective vehicles, manufacturers could have to undertake repairs, provide for replacements and return vehicles, depending on the individual defect and legal situation. As a general rule the costs of these remedy actions shall be borne by the manufacturers.

Manufacturers can be held liable for fines or other sanctions if they fail to comply with the regulations.

For example, if the manufacturer fails to exercise a recall as required under the recall regulations or refuses to exercise the recall, a fine can be imposed of more than 2% and up to 10% of the value of the defective automotive product.

Managing automotive recalls in ChinaAutomotive manufacturers selling vehicles in China are subject to strict rules governing product safety and must follow procedures set by a regulator when undertaking recalls. Manufacturers face financial losses, regulatory fines and significant reputational and brand damage if they fail to comply.

However, perhaps the biggest risk to organisations is in having to disclose business know-how as part of complying with the regulatory regime. Car makers operating in China need a recall plan to manage their regulatory duties and reduce the risks associated with non-compliance.

The regulations and who they apply toThe Chinese automotive recall regulations refer to the recall of automobiles and trailers manufactured or sold in China. They do not apply to those automobiles and trailers manufactured in China and exported abroad.

A number of other players and stakeholders in the automotive industry are also affected by the recall regime, which is overseen by the Chinese State Administration of Quality Supervision, Inspection and Quarantine (also known as SAQSIQ).

The rules automotive businesses need to followManufacturers located in China are obliged to keep records on information in relation to design, manufacturing, logo labelling and inspection of the cars they make, as well as information of the owner of the vehicle upon initial sale, for at least 10 years.

The companies are obliged to submit detailed information on the technical parameters of vehicles as well as information on the repair, replacement and return of cars to SAQSIQ. A significant risk to manufacturers is presented by losing control of their know-how through the requirement to disclose detailed technical information about vehicle design and manufacturing.

Manufacturers must also provide some information to SAQSIQ about recalls which have been carried out abroad. This is the mechanism by which foreign manufacturers, who are actually excluded by the Chinese recall regime, become tangled up in the Chinese recall regime.

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There are a number of additional financial and regulatory penalties that manufacturers could face for non-compliance. In very serious cases the business license of the manufacturer can be revoked.

Given the strong presence of social media in China, there is also a significant risk to brand reputation if information about ongoing investigations into possible defects is leaked on social media before those investigations have been concluded.

Having a plan for dealing with recallsImplementing a recall requires manufacturers to develop and follow a recall plan. The manufacturer must ensure that the recall plan complies with the expectations of the Chinese regulator, and reflects the right balance between all stakeholders, including their Chinese joint venture partner and the parent company abroad.

The manufacturer is obliged to inform the distributors of the recall plan for ceasing the sale of the involved cars. Moreover, there are reporting obligations towards the public and the owners of the cars.

With the Chinese market being one of the most attractive places in the world for the automotive industry to grow their business, foreign-based manufacturers need to focus their attention on the risks of operating in this market.

Wei LiuPartnerT: +86 21 6138 2522M: +86 13 6017 58292E: [email protected]

Philipp SenffLegal DirectorT: +86 21 6138 2533M: +86 189 1756 7695 E: [email protected]

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An industry perspective: put your customer and market firstNick Adcock is the Supply Chain Director at IMI Severe Service. IMI Severe Service is the world leading provider of highly engineered fluid control solutions in the power generation, oil & gas, petrochemical, iron & steel and nuclear industries.

Prior to his current role, Nick fulfilled several other roles within IMI, including being Managing Director of CCI Valve Technology AB. Before joining IMI, Nick held senior operational and purchasing roles for Hendrickson International, Bombardier Transportation and BMW.

From my perspective, supply chain is a key enabler for our growth strategy. Through outstanding supply chain performance we can generate real value to our customers and our approach must start with the market. By understanding our customers, their needs and problems we can work as their trusted partner to support them to solve problems, access new markets and capitalise on new opportunities faster. Ultimately, this approach brings with it a competitive advantage for both our customers and IMI plc.

An example of a real success story for IMI Severe Service is the way we have built new supply chain capability to realise market opportunities in Korea. Previously we had only manufactured our BTG range of Turbine Bypass Valves for our Korean customers from our facilities in Sweden. Through close working relationships with our key customers we recognised that we could serve them better and support their growth plans if we were able to establish local supply chains and provide local engineering, manufacturing and project management. From our perspective, we could see that there were real growth opportunities if this could be achieved.

On the face of it, establishing new supply chain capability in Korea might seem like a relatively straightforward exercise. However, to do this effectively in a way that maintains the high standards that we pride ourselves on involved a complex process. It started with a collaborative approach by our supply chain team from Sweden and

Korea carrying out a detailed gap analysis, understanding the key risks and looking at enabling factors such as:• What engineering and manufacturing knowledge did we already

have and what did we need to transfer?• What technologies were used in our facilities in Sweden that

needed to be replicated in Korea?• What were the customer’s requirements for our local supply

chain? Although we source competitively from all over the world, we knew it was important to recognise and respond to the fact that in many parts of the world (Korea included), there is a need to build a predominantly local supply chain sourcing local materials and using local labour wherever possible.

• What was the availability pipeline like for the materials and labour that we needed in the local supply chain? What engineering knowledge did we need to acquire? What new processes did we need to implement? What type of up-skilling of the local labour force was needed?

• What qualification and regulatory requirements needed to be met and how might these impact on the supply chain we needed to build?

Building any local supply chain needs to be achieved in the context of the IMI supply chain risk management approach. In summary, this involves an intelligent risk assessment strategy focused around:• Continuity risk• Responsible business risk• Compliance risk.

So, how did we do? The project to transfer the technology, qualify the new plant and suppliers and start the supply of turbine bypass valves from our facilities in Sweden to Korea took around 9 months in total. We are now working on orders to supply over 80% of the turbine bypass valves needed by our customers in Korea from our Korean facility and we are already planning for a new, larger plant to serve that market better.

The result: We are able to supply the valves to local customers in Korea more efficiently and responsively on shorter lead times. Our customers are delighted with the local support and our delivery and service performance is greatly enhanced with clear benefits to our Korean customers. From IMI Severe Service’s perspective, through being able to offer great products, build stronger relationships and deliver more customer value, we are well placed to continue to grow this important market sector in the future.

Nick AdcockSupply Chain Director – IMI Severe ServiceT: +44 (0)121 717 3908M: +44 (0)7825 527691E: [email protected]

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Mitigating disruption beyond Tier 1 suppliersThe threat of supply chain disruption was reported as number 8 in the top 10 concerns for businesses in the BCI 2013 Horizon Scan Reports. The World Economic Forum’s Global Risks Report (2013) highlights the risks associated with unplanned IT and telecoms outages.

The CPO Planning Guide 2013 published the table below quantifying the financial impact of supply chain disruption:

Risk event financial impact cost in 2013

Event type Number of events

Average cost exposure (€)

Average likelihood (%)

Political risk 19 253,275,000 31

Economic instability

19 114,112,250 36

CSR-related risk

4 100,000,000 28

Labour shortage

10 44,000,000 40

Asia/China risk

9 32,500,000 52

European economic instability

14 33,666,667 27

Supplier capacity

9 38,678,233 20

Market consolidation

5 12,000,000 55

Logistics/delivery risk

15 9,721,429 46

Commodity price inflation

22 8,263,636 50

Material shortage

13 10,142,857 40

Yet despite this, too many businesses leave themselves exposed to significant business risk by imposing general obligations to implement generic business continuity plans on tier 1 suppliers only.

Many businesses are as reliant on tier 2, 3 and 4 suppliers yet do not have clear visibility of their reliance on them or proper controls over them. Businesses need to mitigate the risks associated with disruption at every point in the supply chain as increasingly disruption occurs lower down the chain. The implementation of an effective supply chain management strategy at all tiers should be a pressing issue for manufacturers.

Current operational focus For many manufacturers, the operational focus is on the production of quality goods at the lowest cost. The pressure to achieve this has led to the widespread adoption of ‘just in time’ practices. While this reduces the need for storage of finished goods on site and means fewer parts and raw materials are held in stock, the difficulty is that they may be unable to supply customers in the event of a supply chain disruption.

Moving forward In considering the potential effect of supply chain disruptions, a manufacturer should be asking “How long would our customers be willing to wait if we suffered a major disruption?” and “How would a major disruption affect our cost base?” It will be too late to ask these questions and implement an effective supply chain management strategy in the aftermath of a major disruption.

To this end, it is important that a specific analysis of the products or services that are critical to the business is carried out. The business should ensure it has visibility of its complete supply chain for critical products or services. There should also be a targeted assessment of the resilience in the supply chain for each critical product or service.

High Priority Risks

Likelihood of Occurrence

Impa

ct o

n Bu

sine

ss

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The role of a supply chain management strategyAn effective supply chain management strategy also involves a clear and tested plan to identify and quantify key risks and a strategy to prepare for, and mitigate, the effect of unexpected disruptive events. It also involves regular monitoring, testing and updating of the strategy.

Identify business critical materials

Assess degree of riskMonitor, review, update

Identify continuity strategies

Develop supply chain continuity plan

The overall objective of a supply chain strategy should be to make the business more resilient by reducing the impact of disruption and, if a disruption does happen, ensuring the business has an effective plan in place to recover within a timeframe that its key customers will find acceptable.

In fact, a robust strategy can deliver a competitive advantage by allowing your business to reach key suppliers in advance of your competitors.

Clare FrancisPartnerT: +44 (0)121 335 2927M: +44 (0)7500 121156E: [email protected]

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Could you be criminally liable for the conduct of your agents, distributors and suppliers? Increasingly, companies need to vet their supply chain for compliance with bribery laws, trade sanctions, export controls, product safety regulations, conflict mineral regulations and health and safety laws. Steps are being taken by businesses around the globe to ensure compliance, and to avoid criminal sanctions.

Business driverLaws regulating business increasingly make companies criminally liable for the failings of its employees, contractors and suppliers. That said, bribery, health and safety, product safety, tax and export control/trade sanction laws all include defences for companies who may be facing such liability. Those defences are based on the company’s compliance endeavours, i.e. the steps that it has taken to prevent the liability from arising. The UK’s Bribery Act and new guidance issued by the US Department of Justice has brought anti-bribery and supply chain diligence to the fore.

The business rationale for conducting compliance due diligence is highlighted by some startling statistics:• In 2013, the average fine in a corporate bribery case in the US

was $80m• More than half of US bribery cases in the last ten years involved

third party intermediaries• Companies’ remediation costs tend to dwarf the fine;

Siemens has purportedly spent $1bn on its anti-bribery remediation programme.

International standardsDue diligence on supply chain compliance can be both costly and time consuming, leaving many companies asking the question: “how much is enough?”

The US Department of Justice’s Foreign Corrupt Practices Act (“FCPA”) Resource Guide notes:“Performing identical due diligence on all third party agents, irrespective of risk factors, is often counterproductive, diverting attention and resources away from those third parties that pose the most significant risks… A company that fails to prevent an FCPA violation on an economically significant, high-risk transaction because it failed to perform a level of due diligence commensurate with the size and risk of the transaction is likely to receive reduced credit based on the quality and effectiveness of its compliance program.”

The UK also takes a similar, risk based approach. British Standard 10500:2011 on anti-bribery management systems recommends that compliance due diligence is carried out where the third party supplier poses “more than a negligible bribery risk”. It does, however, recognise that different levels of due diligence are acceptable depending on the perceived risks posed by the category of third party supplier, where in the world the services are to be performed and the sums involved. Information to be obtained during due diligence may include whether the supplier:• has an anti-bribery management system• has a history of bribery• has been investigated, convicted or debarred for bribery• has shareholders and top management that have a reputation for

bribery, any conflicts of interest, or client or government connections of concern.

Similar sorts of questions should also be asked when carrying out a health and safety competency assessment or “know your customer” checks from an anti-money laundering perspective.

The challenges for businessesJim Armstrong of the compliance technology and solutions business Cerico explains:

“Our clients come to us because they wish to conduct compliance due diligence in accordance with internationally recognised standards and their own policies and procedures. The challenges for businesses are that due diligence can be time consuming, onerous and an administrative headache. Due diligence needs to help companies manage risk rather than become a paper chasing exercise. We have a client which has decided to conduct anti-bribery due diligence on 18,000 suppliers this year. You cannot do that without utilising technology to help issue, collate, and interrogate questionnaires and screening.”

There are many ways to conduct due diligence whether through electronic tools and screening, more manual processes, or a mixture of the two. Whichever way a company decides to approach compliance due diligence, the essential requirements are that the due diligence conducted takes into account the published standards, it is risk based, the output is assessed and monitored, and the due diligence is renewed on a periodic basis. For higher risk relationships, many companies are adopting an approach recommended from an anti-money laundering perspective and renewing the due diligence every two years. In intervening years, many companies now require their suppliers to complete compliance certificates.

Failure to do so may prove a costly error.

Tom StockerPartnerT: +44 (0)131 777 7362M: +44 (0)7912 396242E: [email protected]

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Big data and its potential to change supply chain managementFor most manufacturers the supply chain is both complex and fragile. Often there are a small number of key suppliers who in turn are dependent on others. The efficient management of the supply chain is fundamental to the success of a manufacturer. In the past, supply chain management has been about using IT and processes to increase productivity and profitability, and to decrease operational cost. Supply chain management has been about the use of forecasts based on historic data to determine the level of customer demand, the materials required at any point in the manufacturing process, and the amount of fuel and other resources needed.

In recent years there have been a number of significant events which have demonstrated the need for the supply chain to be flexible, agile and able to take account of financial and natural disasters. The global recession has meant an increased risk that one of your key suppliers or their suppliers may go bust. As a consequence more emphasis has been placed on reviewing the financial health of suppliers and in gathering up-to-date financial data on them.

The recent flooding in Somerset has underlined the changing environment in which we live. The supply chain is particularly vulnerable to natural disasters such as the eruption of Eyjafallajl volcano in Iceland which had a huge impact on air freight and the tsunami in Japan which affected the availability of key components and materials. The upshot is that supply chain managers must find a strategy to deal with potentially cataclysmic events on short notice.

Regardless of the cause, a significant disruption to the supply chain damages the reputation and the revenue of the manufacturer. The need for supply chain planning applications to be fully integrated into the manufacturer’s finance, CRM and other systems has long been known; its importance has merely been underlined by recent events. Supply chain managers need to find more agile ways of anticipating and dealing with potential disruptions.

The answer may lie in the use of big data. “Big” because we are talking not only about the large amounts of data collected by a manufacturer from a supply chain, but also data collected from a myriad of sources about suppliers, availability of resources, economic trends, customer behaviour and even weather patterns and climatic data. This may all sound like information overload, but the developments in data analysis tools mean that vast quantities of data can be mined and analysed to provide high quality management information, that is available in real time.

What’s exciting about the use of big data and sophisticated analytical software tools, is the ability to analyse the vast amount of information and provide tangible results. Basing forecasts and decisions on real time data rather than historic data can provide a real competitive edge. The data can give you the ability to see the most efficient and cheap procurement options in your supply chain at a glance. But the real game changer is to use big data in new ways. An example seen recently is of a manufacturer that used big data to map the geographical locations of its key suppliers with available local weather statistics, seismic data, economic data etc. In this way, it is able to predict the likelihood of its suppliers being affected by a hurricane, earthquake, geopolitical or economic issues. By assessing the risks it was able to ensure that it could plan for continuity in its supply chain.

All of this may sound expensive, not least in relation to the amount of infrastructure needed to manage and process the vast quantities of data. Happily the cloud makes the storage, processing and analysis of this new data both affordable and easy to set up. There can be little doubt that big data is going to be a feature of all of our lives, both social and business. Now is the time to embrace it.

Cerys Wyn DaviesPartnerT: +44 (0)121 625 3056M: +44 (0)7836 527690E: [email protected]

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the costs of defending legal actions and potentially very large damages awards (which in a number of jurisdictions may be punitive and many multiples of the actual damage suffered), and/or the payment of licence fees (both for past and future use). Customers may even be subject to legal action and stopped from using the relevant products or services. Despite this, the manufacturer may have no right of redress from the errant supplier.

Actions to minimise IP infringement risks in the supply chainManufacturers should put this issue firmly on their Board Agenda and when selecting and managing their supply chain should keep it at the forefront of their minds. The following actions in particular will assist in minimising the risks:

1. Risk assessment/traceabilityEnsure you have knowledge of the participants in the supply chain and have identified, so far as possible, where the likely risks of the unauthorised use of IP will arise. Traceability is key in supply chain management for many reasons, including IP infringement.

2. TrainingAdd IP training to your training schedule to educate employees, suppliers and customers of the nature of IP and the risks of infringement. This will increase awareness and demonstrate its importance to the business.

3. IP policyMake it a clear and fundamental tenet of the business that IP protection is of great importance, both in terms of protecting and upholding your rights, but also in avoiding infringement risk and respecting the rights of others. Announce this broadly and publicly to suppliers and customers and include a statement confirming this on your website. A culture of respect for IP needs to be embedded in the business and supply chain.

4. Contractual protection Include terms in contracts with suppliers:• that the supplier will not make unauthorised use of third

party IP and if it does it will indemnify you/pay all of the costs and damages associated with any claim from third parties for IP infringement

• a right to terminate the contract if there is an infringement • an obligation to pass these obligations down the supply chain.

Your ability to enforce such provisions will depend on the suppliers’ financial worth and the jurisdiction in which they are based. Legal enforcement and exchange controls which limit the suppliers’ ability to pay out on contractual obligations without government approval will be highly significant.

Protecting intellectual property down the supply chainManufacturers are familiar with the need to ensure they have the rights to all intellectual property (IP) required to manufacture their products or deliver services. They are also well aware of the risks to their own IP when it is made available to their suppliers. However, less attention is given to the risks of unauthorised use of third party owned IP in the supply chain.

Many global suppliers are making unauthorised use of technologies, designs and information which may be protected by patents, utility models, software copyright, rights in designs and trade secrets owned by third parties. The range of potential IP infringing products is vast, with the use of unlicensed software being particularly common. The Organisation for Economic Cooperation and Development estimates that by 2015 the global value of counterfeit and pirated products will be as high as US$1.77 trillion. If these products make their way into the supply chain, manufacturers face serious legal and business continuity risks. Off-shore supply chains, particularly those based in Asia, increase these risks. The Organisation for Economic Cooperation and Development has recognised that Asia is quickly emerging as the world’s biggest producer of unauthorised products.

Infringement risksAn infringement often does not come to the attention of the IP owner until the products or services are well established in the market. Legal action is likely to follow, with applications for immediate temporary or speedy permanent injunctions available in many jurisdictions. If granted such injunctions will usually require the immediate withdrawal of the products from the market either until the matter can be fully considered in Court or on a permanent basis.

The claimant will select the jurisdiction(s) where action is most certain and easiest to pursue, as rights and enforcement differ across the world, and pursue the defendant who has the “deepest pockets” – often the manufacturer who has put the products or services into the consumer market. The abuser of the IP rights may not be pursued at all, if, for example, it is difficult to bring them within the jurisdiction of the chosen court.

Consequences of actionThe manufacturer will be faced with the business disruption of withdrawal of its products or services (or the threat and uncertainty of potential withdrawal), the reputational damage of such action,

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5. InsuranceSpecialist intellectual property infringement insurance is now more readily available from a number of providers and should be considered as a potential means of addressing IP infringement risk. It is possible to take out both “Before The Event” and “After The Event” Insurance. The former, as its name indicates, needs to be taken out before any dispute arises. The latter can be taken out even when a dispute has arisen, insuring against the risk of losing the case. After The Event Insurance is generally not available to those defending an infringement claim and is in any event more expensive, the premium usually being calculated as a percentage of the claim value. The scope of cover offered for each, as well as the cost, should be carefully assessed. The cost might be borne by the supply chain.

6. Monitoring/auditingEnsure that having selected and appointed your supply chain you monitor and audit their activities on a continual basis. Regular visits to their key facilities should be made.

7. Information sharing/lobbyingConsider involvement with trade/sector associations to develop an understanding of IP and to create IP standards and best practices, as well as trusted networks across global supply chains. Involvement in lobbying for global government regulation of IP protection where IP laws do not exist, are inadequate or enforcement is weak should also be considered. Discussions amongst competitors must however be undertaken with care (and specialist advice) as cooperation amongst competitors may be the subject of scrutiny by competition authorities.

Most manufacturers are already engaging with their global supply chain to ensure improvements in employee protection, health & safety and environmental issues. IP must be added as a key topic in the drive for enhanced supply chain management.

The UK Intellectual Property Office’s IP Crime Group has produced a “Supply Chain Toolkit” for raising awareness of counterfeit goods entering legitimate business supply chains which can be found at: http://www.ipo.gov.uk/ipctoolkit.pdf.

Cerys Wyn DaviesPartnerT: +44 (0)121 625 3056M: +44 (0)7836 527690E: [email protected]

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Pinsent Masons | Manufacturing Insights

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Manufacturing at Pinsent MasonsPinsent Masons acts for global leaders in the field of manufacturing including Hanson Group, IMI plc, Mondelez (Cadbury Kraft), Bombardier and a significant portion of the manufacturing businesses within the FTSE 100 and FTSE 250. Our legal advice and support to clients is driven by an unparalleled understanding of the global manufacturing market and underpinned by a presence across the UK and Europe and the Asia Pacific region.

Our legal specialists use this insight and commercial experience to provide guidance and solutions that enable businesses to achieve competitive success and growth. We help clients minimise complexity and risk within product lines, customer relationships, manufacturing operations and supply chains to improve the core strengths and efficiency of their businesses.

Clients benefit from our full service legal advice, such as supporting the delivery of growth strategies, exploring new markets, products and customer opportunities, potential acquisitions and joint ventures.

We have an international reputation in supply chain management, working directly alongside businesses to build and maintain robust and agile supply chains. In the last two years alone we have advised on 5, £6bn+ supply contracts.

We are positioned at the heart of the market, so we’re always able to advise on the latest challenges facing manufacturing businesses and the opportunities available to enhance growth. Highlighting our commitment to the sector, our insight stretches beyond legal expertise; many of our lawyers have benefitted from working within multinational manufacturing businesses and have undergone an intensive training course at the Warwick Manufacturing Centre. This helps us get to the bottom of issues, identify solutions quickly and provide advice in the way clients need it.

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Contacts

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Neil BlackPartnerEmploymentT: +44 (0)161 250 0177M: +44 (0)7823 533230E: [email protected]

Cerys Wyn DaviesPartnerIP, brand protection and dataT: +44 (0)121 625 3056M: +44 (0)7836 527690E: [email protected]

Tom StockerPartnerCompliance and anti-briberyT: +44 (0)131 777 7362M: +44 (0)7912 396242E: [email protected]

Andrew MastersonPartnerLitigation & ComplianceT: +44 (0)113 225 5457M: +44 (0)7818 004078E: [email protected]

Philipp SenffLegal DirectorAsia PacificT: +86 21 6138 2533M: +86 189 1756 7695 E: [email protected]

Dr. Stephan ApptPartnerGermanyT: +49 89 203043 561M: +49 174 333 28 56E: [email protected]

Florian von Baum PartnerGermany T: +49 89 203043 537M: +49 172 368 01 88 E: florian.von [email protected]

Nicole LiveseyPartner, Head of Manufacturing and CorporateT: +44 (0)121 623 8637M: +44 (0)7768 903170E: [email protected]

Clare FrancisPartner, Supply Chain ManagementT: +44 (0)121 335 2927M: +44 (0)7500 121156E: [email protected]

Wei LiuPartnerAsia PacificT: +86 21 6138 2522M: +86 13 6017 58292E: [email protected]

Christoph MaurerPartnerFranceT: +33 1 53 53 09 65M: +33 6 81 98 67 01E: [email protected]

Annabelle Richard Legal DirectorFrance T: +33 1 53 53 02 23M: +33 6 21 17 64 05 E: [email protected]

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Our offices worldwide

London30 Crown Place (Headquarters)Earl Street London EC2A 4ESUKT: +44 (0)20 7418 7000F: +44 (0)20 7418 7050

Aberdeen13 Queen’s Road Aberdeen AB15 4YLUKT: +44 (0)1224 377 900F: +44 (0)1224 377 901

Beijing 10th Floor Beijing China Resources Building No 8 Jianguo Menbei Avenue Beijing 100005 PRCT: +86 10 8519 0011 F: +86 10 8519 0022

BelfastThe Soloist Building1 Lanyon PlaceBelfastBT1 3LPUKT: +44 (0)28 9089 4800F: +44 (0)28 9089 4801

Birmingham 3 Colmore CircusBirmingham B4 6BHUKT: +44 (0)121 200 1050F: +44 (0)121 626 1040

Brussels* Office 154 rue de la Presse1000 BrusselsBelgiumT: +44 (0)20 7418 7000F: +44 (0)20 7418 7050

DohaPO Box 22758Tornado TowerWest BayDohaState of QatarT: +974 4426 9200F: +974 4426 9201

DubaiLevel 8 The H Hotel, Office Tower (formerly known as The Monarch Office Tower)One Sheikh Zayed RoadPO Box 115580DubaiUnited Arab EmiratesT: +971 (0)4 373 9700F: +971 (0)4 373 9701

DüsseldorfKönigsallee 60 F40212 DüsseldorfGermanyT: +49 (0)211 88271 500F: +49 (0)211 88271 501

EdinburghPrinces Exchange1 Earl Grey StreetEdinburgh EH3 9AQ UKT: +44 (0)131 777 7000F: +44 (0)131 777 7003

Third Floor Quay 2139 FountainbridgeEdinburgh EH3 9QGUKT: +44 (0)131 225 0000F: +44 (0)131 225 0099

Falkland Islands56 John StreetPO Box 21StanleyFalkland IslandsT: +500 22690F: +500 22689

Glasgow141 Bothwell StreetGlasgow G2 7EQUKT: +44 (0)141 567 8400F: +44 (0)141 567 8401

123 St Vincent StreetGlasgow G2 5EAUKT: +44 (0)141 248 4858F: +44 (0)141 248 6655

Hong Kong50th Floor Central Plaza 18 Harbour RoadWan Chai Hong KongT: +852 2521 5621 F: +852 2845 2956

IstanbulBüyükdere Caddesi No 127, Astoria B Kule, Kat 5, No 13-14-15-16Esentepe 34394 Şişli IstanbulTurkeyT: +90 212 336 6050 F: +90 212 336 6051

Leeds1 Park RowLeeds LS1 5ABUKT: +44 (0)113 244 5000F: +44 (0)113 244 8000

Manchester3 Hardman StreetManchester M3 3AUUKT: +44 (0)161 234 8234F: +44 (0)161 234 8235

MelbourneLevel 23360 Collins StreetMelbourneVIC 3000AustraliaT: +61 3 9909 2500F: +61 3 9909 2501

MunichOttostrasse 21 80333 Munich GermanyT: +49 (0)89 203043 500F: +49 (0)89 203043 501

Paris21 – 23, rue Balzac75008 ParisFranceT: +33 1 53 53 02 80F: +33 1 53 53 02 81

ShanghaiRoom 4605 Park Place 1601 Nanjing West Road Shanghai 200040 PRCT: +8621 6321 1166 F: +8621 6329 2696

Singapore16 Collyer Quay #22-00 Singapore 049318T: +65 (0)63 050 929 F: +65 (0)65 343 412

SydneyLevel 52 Bulletin PlaceSydneyNSW 2000AustraliaT: +61 2 8024 2800F: +61 2 8024 2801

Correct as of 15 February 2016. *Representative office

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Notes

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Notes

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Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP, its subsidiaries and any affiliates which it or its partners operate as separate businesses for regulatory or other reasons. Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those subsidiaries or affiliates as the context requires. © Pinsent Masons LLP 2016.

For a full list of our locations around the globe please visit our websites: www.pinsentmasons.com and www.Out-Law.com.