Lax oversight, globalization erode product safety

NEW YORK (CNNMoney.com) -- Colgate's announcement Thursday that it found fake and potentially dangerous "Colgate"-branded toothpaste sold in some stores is the latest in a series of product scares that have recently spooked American consumers.

More importantly, these incidents of counterfeit toothpaste, melamine-tainted pet food and toothpaste laced with anti-freeze imported from China are raising concern about the quality of food and other products that enter the U.S. and the overall safety of the global supply chain.

"Why this is happening more frequently highlights the limited authority of the Food and Drug Administration and the Consumer Product Safety Commission," Rachel Weintraub, director of product safety and senior counsel with advocacy group Consumer Federation of America (CFA).

"These two agencies don't have pre-market jurisdiction, which means that they can't test products before they hit the market. The FDA has jurisdiction to test drugs but not food. This means that there's no requirement to test other types of products for safety," she said.

What's more, Weintraub said limited budgets have prevented both the FDA and CPSC from implementing adequate product safety mechanisms.

"The CPSC has been working on different initiatives to prevent unsafe products from entering the U.S. But it remains an uphill battle," she said.

Colgate-Palmolive (Charts, Fortune 500), whose brands include Colgate, Palmolive, Softsoap, IrishSpring and Tom's of Maine, warned that counterfeit toothpaste falsely packaged as "Colgate" was found in several dollar-type discount stores in New York, New Jersey, Pennsylvania and Maryland.

The company said the fake products don't contain fluoride but and may contain "Diethylene Glycol."

The fake products aren't manufactured or distributed by Colgate-Palmolive and can be identified because they say they are manufactured in South Africa or have misspellings on the label.

According to the Food and Drug Administration (FDA), which earlier this month advised consumers to avoid using toothpaste labeled as made in China because of Diethylene Glycol contamination, said the chemical if ingested could result in poisoning.

Colgate' spokesman Tom Paolella said he wasn't certain yet about how the counterfeit products made it to store shelves or whether the fake toothpaste was found in other states as well.

"We're still in the process of learning more about this ourselves," Paolella said.

However, a report this month from Deloitte Consulting shed some light on why more contaminated and defective products are making their way into the U.S.

The Deloitte study, entitled "Supply chain's last straw: A vicious cycle of risk," studied 25 leading global companies from various industries with combined revenues of more than $1.5 trillion. It found that not one of them was fully prepared to handle or prevent global glitches in product safety or even potential terrorist risks.

Moreover, the report concluded that as companies cut costs to gain efficiency - and become more competitive globally - the more vulnerable they are to lapses in the supply chain.

"The search for cheaper labor, cheaper raw materials, and cheaper transportation - the quest for efficiency - has forced the focus of companies to switch from revenue growth to cost reduction," Deloitte said in the study. "Individually, these forces have changed the world in which we live and conduct business. But when combined, these forces can create a perfect storm of risk not seen before in the history of commerce or humankind," it added.

Ken Landis, a principal with Deloitte Consulting who worked on the report, said Deloitte initiated the study a year ago after noticing these patterns.

"Historically, supply chain problems pertained to logistical issues or the weather or disruptions caused by union strikes," Landis said. But that has changed, he noted.

"Modern companies are already being impacted by both well-known and newly emerging threats that are more prevalent and destructive than ever before," the report said. "The very leanness and efficiencies that companies have sought in order to build competitive advantage have also created a new genre of systemic risk."

China, the second-largest trading partner of the United States, presents a number of supply chain challenges, the study said. "The road, air and rail transportation systems have trouble keeping up with global [supply] requirements," it said, noting that quality risks "can be significant."

"One issue that doesn't get highlighted enough is that many of the unsafe products are made by American manufacturers with factories in China and elsewhere. These manufacturers should not maintain quality standards that are different for their overseas factories," Weintraub said.

Although Landis said many companies in industries from food to pharmaceuticals to electronics seem to lack common sense in this area, he offered a few suggestions.

"Companies should appoint a senior executive exclusively to manage supply chain risks," Landis said. He declined to name the companies studied in the report.

"Recognize that efficiency leads to vulnerability. As companies move to lower costs across the supply chain, at some point it'll become difficult to buy quality products. History has shown that when you squeeze the supplier, they will skimp," he said.

"Look up any key junctures in the supply chain and monitor it mercilessly," Landis said. "Your brand is at risk if you don't."

-This story is an update of an earlier report that was published on June 4, 2007.