Many companies lose significant revenue to counterfeiters who sell fake products that look identical to the real thing and unscrupulous supply chain partners who divert legitimate products for unauthorized sale on the black market. To effectively combat illicit trade, leaders need to embrace a multilayered approach that includes keeping tabs on the upstream supply chain, using traceable packaging, and educating consumers.

In the past 25 years, major original equipment manufacturers have delegated the management of their supply chains to a handful of first-tier suppliers. Although this approach frees OEMs from the tasks of building and supervising supply subsystems, speeds up product introductions, and helps manufacturers secure larger volume discounts, it has gone too far. In this article, Choi, of Arizona State University, and Linton, a former chief procurement officer of LG Electronics, point out the dangers of relinquishing so much power to first-tier suppliers: it weakens an OEM's ability to control costs, stay on top of critical technology developments and shifts in demand, and ensure that suppliers are operating in a socially and environmentally sustainable fashion. The solution is for an OEM to selectively establish direct relationships with key lower-tier suppliers. Specifically, an OEM should form close ties with vendors that have a significant impact on the OEM's cost of goods sold, have strong innovation potential, don't pose sustainability risks, and can provide insights into important trends. Implementing this approach isn't simple--it may require reshaping the entire purchasing function. But it's essential for manufacturers that want to stay ahead of competitors.

More and more, businesses are counting on their suppliers to lower costs, improve quality, and develop innovations faster than their competitors' suppliers can. To this end, many experts agree that American firms, like their Japanese rivals, should build supplier keiretsu: networks of vendors that learn, improve, and prosper in sync with their parent companies. As history has shown, however, that's easier said than done. Some U.S. corporations created supply chains that superficially resembled those of their Japanese competitors, but they didn't alter the nature of their relationships with suppliers. As a result, relations between U.S. manufacturers and their suppliers have sunk to the lowest levels in decades. But reports of keiretsu's demise are overblown. The Japanese supplier-partnering model is alive and well--in North America as well as Japan. During the past 10 years, automakers Toyota and Honda have struck successful partnerships with some of the same suppliers that are at odds with the Big Three and created effective keiretsu across Canada, the United States, and Mexico. So how do Toyota and Honda do it? The authors, who have studied the American and Japanese automobile industries for more than 20 years, found that Toyota and Honda have built great supplier relationships by consistently following six steps: they understand how their suppliers work, turn supplier rivalry into opportunity, monitor vendors closely, develop those vendors' capabilities, share information intensively but selectively, and help their vendors continually improve their processes.