A significant problem with outsourced manufacturing or contract manufacturing is the sale of unreported product (or excess factory-rejects) by the contract manufacturer or its employees through the “back door” to illicit channels. This issue is particularly difficult as the backdoor goods are technically counterfeit, but for all practical purposes (except warranty) can usually appear authentic.
Backdoor sales can present more issues than just lost revenue—in the case of certain products, especially those with critical safety applications (e.g., aircraft parts) or drugs, such sales can give rise to legal liability for witting or unwitting intermediaries or indeed the manufacturer (for failing to adequately police the disposal of rejects.) A copyright, brand, or technology licensee may also find itself liable to the licensor for all backdoor sales. A key way of preventing backdoor sales is an effective method for auditing and metering of production and sales as well as retaining ownership of Tools, Tooling, Dies, Jigs, Stamps & Moulds. In OEM manufacturing in certain Asian countries particularly China, it is important to put in place an NNN Agreement to prevent backdoor sales.