Corporate Governance,Economics & Finance

Can Traceable Product Labels Ensure Product Quality and Authenticity?

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CUHK research suggests that adopting traceability in product label systems may increase the burden on product certification organisations in quality assurance

Accreditation from reputable organisations can signify good product quality, or at the very least, the content of the product matches with its package. Having products accredited is a way to stand out among other similar products in the market. For example, most food products claim themselves to be organic to appeal to customers who have been increasingly concerned about the health and the environment. But, how can a consumer tell if the product is organic or not? When there are two packs of organic pasta on the shelf and one of them has a certification label from a reputable organisation such as the U.S. Department of Agriculture, the consumer will more likely pick the one with accreditation.

In recent years, some accreditation organisations have started to implement traceable product labels to improve efficiency in product quality assurance. Traceable product labels allow manufacturers and consumers to identify and track goods throughout the entire supply chain. So people would know where, when and by whom a product was handled. Untraceable labels, on the other hand, are typically printed on the product packages that only bear the official seal or logo of a company or an accreditation organisation.

The benefits of upgrading an untraceable label system to a traceable system may be diluted by increased costs in quality management.

Prof. Zhu Kaijie

British multinational product testing and certification company Intertek, for instance, has collaborated with the Hong Kong Federation of E-Commerce in the Trust Mark Scheme by launching an electronically chipped label which stores all merchant and product information. However, although the visual aspect of traceable labels provide a sense of security, a recent research study reveals that the adoption of traceable labels may only achieve the desired effect with proper management from the accreditation organisations and that traceable product labels, though currently preferred in the industries, might not always outperform untraceable labels.

In their research study, Combating Product Label Misconduct: The Role of Traceability and Market Inspection, Zhu Kaijie, Professor at the Department of Decision Sciences and Managerial Economics at The Chinese University of Hong Kong (CUHK) Business School and the Director for the MSc Programme in Business Analytics, and his co-author Dr. Shiqing Yao at Monash University, developed a theoretical model to examine the efficiency of fighting counterfeit products under traceable and untraceable label systems from a market inspection perspective.

Traceable Vs Untraceable Label Systems

In theory, a traceable product label system allows accreditation associations to pinpoint quality problems and identify the members who are responsible for producing defective products. Once identified, the member would be made fully responsible for the damages caused and receive subsequent punishments. Therefore, having a traceable label system should save the association’s effort in assuring product quality because it doesn’t have to question every single member to find out who is responsible. On the other hand, members, out of fear of losing the accreditation on their products, would think twice about producing low quality products or committing other unethical behaviour. But in reality, things may not go as planned.

China’s multi-billion-dollar hairy crab industry is one example. The crabs from Yangcheng Lake near the city of Suzhou are considered the best among all hairy crabs and are priced several times higher than the rest. To fight counterfeit Yangcheng Lake crabs, the Hairy Crab Association of Yangcheng Lake started using traceable product accreditation labels since 2004. The association requires crab farmers around the lake to attach anti-counterfeit tags, nicknamed the “platinum ring” – a circular shaped tag that contains a unique 18-digit number representing each crab’s ID, on the crabs before selling them. Consumers can call the association to verify the authenticity of the crabs using the 18-digit ID number. But, numerous news reports revealed that unethical Yangcheng Lake crab farmers sold these “rings” to other crab farmers for profit. As a result, despite the association’s efforts to fight counterfeits, fake Yangcheng Lake hairy crabs still run rampant on the market.

According to the study, having a traceable product label system in force alone cannot guarantee product authenticity. The guilty member would be caught for sure but only when the association inspect its accredited products on the market. Otherwise, the seemingly severe consequences are just “empty threats”.

More importantly, the study highlights that even when an accreditation association decide to conduct market checks, they must pay attention to security leakage inside the organisation. Prof Zhu explains that the news of a possible market audit may be leaked to its members in advance. Or, the members may observe internal signals of a possible market inspection, such as the forming of an inspection team. As a result, unethical members may not trade with outside parties when they suspect a market check is coming up. On the other hand, when an outside party receives an offer of such product label, it can infer that a market check is unlikely and hence it can sell the fake products safely.

Under the untraceable label system, since the accreditation organisation cannot trace back to a specific unethical member for selling the labels, any member who wants to sell the labels for extra profit may choose to collude with an outside party whenever they want. However, the outside party purchasing and using these untraceable product labels illegitimately would not be able to benefit from the “signalling” that happens with traceable labels and would not be able to tell when the accrediation organisation is set to conduct a market inspection. This would make them less inclined to purchase and use untraceable product labels. In other words, the accreditation organisation can have a choice in conducting a market audit or not, and organisations with untraceable label systems would have lower costs for quality management.

“The adoption of a traceable product label system may backfire,” Prof. Zhu comments. “The benefits of upgrading an untraceable label system to a traceable system may be diluted by increased costs in quality management.”

He adds that if any accreditation organisation still plans to adopt the traceable label system, then it should take some precautions to avoid confidential leaks of proprietary information, such as delegating the inspection decision to a third party.

Level of Penalty

The study also points out that when the membership size of a product accreditation organisation (i.e., the companies legitimately licensed to sell the authentic products) grows to a relatively bigger size, then adopting the traceable label system becomes more preferable. According to the study, when an organisation with untraceable label system detects fake products on the market, because it cannot trace back to the guilty member, the organisation must conduct a full market check to locate the guilty parties. Therefore, when the number of its members grow, the related costs of market inspection increases too, and eventually, the organisation may not be able to afford to check all of its accredited products on the market. When this happens, switching to a traceable label system would be more cost-effective as it allows the organisation to conduct partial market checks.

An organisation cannot fully realize the benefits of traceability unless it is able to keep the policy and decision making confidential. If the organisation does not possess that ability, then the government must evaluate the economic influences on the organisation when advocating and enacting traceability.

Prof. Zhu Kaijie

However, Prof. Zhu warns that if product accreditation organisations with traceable label systems want to deter misconduct behaviours by imposing a high penalty, they should think carefully when setting the penalty level and imposing the maximum penalty might not always be the best solution.

Based on their model, if the cost of a market audit is relatively high, then the penalty level should not be too high. It is because a high penalty creates a “signalling effect”, which may imply that the product label has high value and hence provides more profit incentives to its members to collude with outside parties. Yet given the high market audit costs, the accreditation association simply cannot afford to conduct frequent market audits to catch the unethical members. In a way, this would cause more collusion. As a result, the study suggests that organisations should only consider setting the penalty level to the highest when the cost of conducting market checks is low.

Policy Implications

Traceable product labels have become increasingly popular with governments. China, for example, in its many efforts to curb counterfeit products, has issued guidelines for traceability systems in the country’s Food Safety Law in 2015. The EU also has laid out requirements for traceability of food and feed products, which allow stakeholders to trace and follow the food, feed and even ingredients through all stages of production, processing and distribution. Prof Zhu says their research results should raise a red flag to the governments in future policymaking.

“An organisation cannot fully realize the benefits of traceability unless it is able to keep the policy and decision making confidential. If the organisation does not possess that ability, then the government must evaluate the economic influences on the organisation when advocating and enacting traceability,” Prof. Zhu comments.