How product diversion impacts the FMCG industry

Industries with large-scale operations, such as Fast-Moving Consumer Goods (FMCG), often encounter significant fraud-related challenges that can severely impact their brand reputation. Among these challenges, product diversion stands out as a prevalent issue.

The extensive and complex nature of supply chains provides opportunities for fraudsters to redirect products into unauthorized distribution channels. This not only undermines consumer trust but also puts the quality and safety of the products at risk.

What is product diversion?

Product diversion refers to the unauthorized redirection of products from official distribution channels to unapproved ones. A common factor contributing to this issue is the misuse of product waste, where items intended for destruction are deceptively repackaged or altered to appear suitable for resale.

The impact of product diversion

Product diversion can cause companies to incur significant financial losses, diminish consumer trust, and damage their brand reputation. This fraudulent practice allows substandard products to enter the market, potentially compromising consumer safety and satisfaction.

The risks become even more severe, as products that fail to meet quality standards can incur financial costs for consumers and pose serious safety hazards.

Product diversion in FMCG

A real-life case of product diversion highlights the challenges faced by FMCG companies and provides a valuable lesson. The issue was first uncovered when the sales team of a prominent FMCG company noticed their products being sold on e-commerce platforms at prices significantly lower than the market rate.

This discovery raised internal alarms and prompted an in-depth investigation. It was revealed that these discounted products bore identical codes to items produced in one of the company’s factories. Tracing the product codes led investigators to a startling finding: the items in question were actually “waste products”—defective or damaged goods intended for destruction.

The disposal of these goods was entrusted to a designated waste management vendor, with the expectation that the process would adhere to strict environmental and regulatory standards. However, the investigation revealed serious breaches in the waste management process, exposing flaws in oversight and compliance.

Breach of contract 

A thorough investigation uncovered that the waste management vendor tasked with destroying defective products had been engaging in unethical practices. Instead of fulfilling their contractual obligation, the vendor diverted the waste products to another facility, where they were cleaned, repackaged, and sold online at heavily discounted prices.

This conduct was a clear violation of the contract, which explicitly required the destruction of all defective goods to prevent their distribution through unauthorized channels. Such actions not only violated agreed-upon terms but also exposed the company to significant reputational risks.

Consumers who unknowingly purchased substandard products at reduced prices were likely to lose trust in the brand, potentially leading to long-term damage to its integrity and reputation.

Internal control gaps and their consequences

Further investigation uncovered failures within the internal supply chain team responsible for monitoring the waste product disposal process. Standard procedures required the team to verify each stage of the destruction process and ensure waste products were securely delivered to vendors for proper disposal. However, inadequate oversight allowed the vendor to divert these products without detection.

These weaknesses in internal controls, coupled with a lack of accountability, created opportunities for such violations to take place and remain undetected for a prolonged period.

Strategy to fraud prevention, detection, and mitigation

Following the incident, the company implemented significant measures to strengthen internal controls and prevent similar issues in the future. Key initiatives included:

• Enhancing internal control. 

The company revamped its waste product disposal procedures by integrating a real-time tracking system. All waste is now documented, closely monitored, and rigorously verified to ensure proper destruction.

• Vendor due diligence. 

Vendor selection and oversight processes were reinforced with comprehensive background checks, regular operational audits, and stricter contractual requirements. Collaboration is now limited to vendors with proven compliance records.

• Whistleblowing awareness training. 

The whistleblower program was expanded to encourage employees and vendors to report suspicious activities. Training sessions were rolled out across all levels of the organization, equipping stakeholders to identify signs of fraud and report them confidently without fear of retaliation.

• Improved supply chain oversight. 

The supply chain team was restructured, with roles and responsibilities clearly defined. Specialized training on compliance and ethical practices was introduced to ensure waste product management is conducted transparently and adheres to established standards.

These steps are not only applicable to the FMCG sector but also provide valuable guidance for other industries confronting similar challenges.

As a strategic partner in fostering a secure and transparent business environment, Integrity Indonesia offers comprehensive services in fraud prevention, detection, and mitigation. We assist companies in identifying vulnerabilities in their internal controls and strengthening their systems, empowering them to tackle fraud risks with increased confidence.
Image by aleksandarlittlewolf on Freepik