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Case Study: Combating Diversion with a Customized RFID Solution

By: Holly Jensky
Posted: October 1, 2012, from the November 2012 issue of GCI Magazine.

Professional salon products—shampoos, conditioners, styling aids and indoor tanning lotions—are increasingly showing up in unauthorized outlets such as online retail websites, drugstores, grocery stores, flea markets and so on. And this type of product diversion, although not illegal, hurts the beauty industry. Not only are beauty brand owners, distributors and salons being affected, but also consumers due to the fact that they are being sold products that are outdated, damaged, tampered with or counterfeit.

Diversion has had a detrimental effect on many businesses across the US, and it has been an industry-wide problem for professional tanning and beauty salons for years. According to New Sunshine, LLC, “Product diversion is the sale of products through an unauthorized, unofficial or unintended channel that damages brand integrity, erodes distributor loyalty, reduces salon profitability, and puts end-user customers at risk.”

Putting a Stop to Diversion

New Sunshine, a beauty company based in Indianapolis, has been fighting product diversion for more than 10 years. The company manufactures tanning lotions, such as Designer Skin, Australian Gold, Swedish Beauty and California Tan. With a product philosophy and positioning built on “nutrition of the skin” for its Designer Skin line, New Sunshine promises to provide the ultimate in skin nutrition through the use of advanced skin care ingredients and formulas.

However, the growing problem of product diversion has heightened the company’s need to protect its product philosophy and positioning to ensure its customers only receive its highest quality and safest products. To combat the problem, New Sunshine set out in December 2010 to find a way to “diversion proof” its collection of Designer Skin professional indoor tanning products, including its bronzers, lotions and tan extenders.

Diversion is disruptive to salon owners because it reduces sales when third parties undercut the price of salon products and, in turn, reap huge profits. With 15,000 salon partners and 19 distributors, New Sunshine was looking to make an investment in not only protecting the goodwill of its brand, but also in protecting its salon partners and distributors, as well as consumers. New Sunshine does not sell its Designer Skin products directly; therefore, it counts on its distributors to only sell its lotions to professional salons.

“In the past, our customer service department has reported situations in which our bottles have been filled with generic brands of lotion, then sold online as authentic products,” says Scott Matthews, general counsel, New Sunshine. “End users expressed concerns about us having changed or cheapened our formula.” The diversion problem prompted New Sunshine to look for a way to ensure full chain-of-custody protection for its products—from manufacturing to the customer. For help, it turned to WS Packaging Group and its radio-frequency identification (RFID) experts for an innovative solution that would enhance security throughout its entire supply chain and help put a stop to product diversion.

RFID uses radio frequency signals to power a passive RFID tag or label attached to a product to capture the tag's information. The data encoded to the tag or label helps identify and track that product, and this ability to track the product via RFID allows a business to identify product sold via unauthorized distribution channels, such as the Internet.

At shipment, each product’s unique RFID serial number is captured and associated to a particular customer sales order. Therefore, once a business receives the product it can read the serial number and know immediately who the product was sold to originally. And knowing this information, the brand owner can identify who is diverting its products. Without RFID, a business would have no real efficient way to capture serial numbers at shipment and quickly associate a product to a particular customer’s purchase order.

“Within two weeks of launching a new product, New Sunshine experiences diversion with the product being sold on the Internet,” says Michael Manley, RFID consultant with WS Packaging. “Diversion damages a brand’s identity and hurts consumer loyalty. New Sunshine felt it was important to re-establish customer confidence by taking a leadership position with RFID for product protection.”

Defining the Serialization Strategy

WS Packaging representatives met with the executive team at New Sunshine for initial discussions to address its diversion problem and possible solutions. The first step was defining the serialization strategy. Serialization, a requirement of RFID, enables a business to track its inventory by distinct serial numbers given to each individual product. Since RFID tags are serialized, several tags can be read at once, and the serial numbers are recorded and stored in a database.

“In order to define the serialization strategy, New Sunshine needed to make three key decisions—what will the data carrier be (bar code or RFID), how will the serial numbers be managed, and what will be the serialization encoding scheme,” Manley says. “Further, what are the implications to existing business processes with each data carrier.” After gaining a deeper understanding of New Sunshine’s manufacturing and order fulfillment process, it became clear that RFID would have the least impact to operations and packaging design, could scale up quickly, and would be the most efficient approach for downstream trading partners.

WS Packaging created a serialization-encoding scheme that consisted of a grandparent, parent and child RFID tag relationship. The tag on the pallet is known as the grandparent, the tag on the case as the parent, and the tag on the actual product as the child. Each tag consists of a data identifier—“P” (pallet), “C” (case) and “B” (bottle)—followed by a serial number, allowing the RFID reader to easily identify the product and associate it with a unique sales order and determine if the number was an item, case or pallet.