Who has more at stake in solving this problem, Phillip Morris or the European Union? Why?

The European Union has much more at stake because smuggling and illicit activities cause them much more problems than it does for Phillip Morris. The more cigarettes are smuggles, the more work and money they have to spend on seizing illegal shipments of cigarettes. The smuggling of cigarettes does not hurt Phillip Morris very much because it means that more people are using their cigarettes, which only contributes to their business. The implementation of solutions like RFID technology would cost the company much more than they are willing to spend and would slow down production. This is something that they are very much against because the less they produce, the less money they will make. Phillip Morris has already had to raise prices of its cigarettes to accommodate the high costs of the advanced technology solutions it is considering. The higher the prices of the cigarettes are raised, the more customers may be turned off from buying their products and that is something Phillip Morris does not want. The company seems to find problems with every solution that is proposed and that is why little progress has been made in the months following the settlement. PMI has still not provided a first-purchase database and has provided little information about any improvements it has made in tracking and tracing its cigarettes.

What is the best solution for PMI? Why? Do you think PMI will be successful in solving the problem?

RFID and SICPATrace are good solutions for PMI and would help solve the problem, but PMI may not be ready for these solutions just yet. In particular, the RFID technology is not a solution the company can handle just yet because of the high costs associated with the technology. PMI is not ready to spend the amount of money that RFID technology requires and that is why the SICPATrace is a better solution for PMI right. SICPATrace costs much less than RFID has detailed product marking, and has the capability to spot check products at different points along the supply chain. An absence of the code would reveal counterfeit merchandise. The problem that PMI has with SICPATrace though is that it does not meet the speed requirements of its cigarette manufacturing. SICPA though believes that its solution does meet all the requirements and that Phillip Morris is being too lax towards the smuggling issue and not dealing with it like they should.

PMI will be successful in solving its problem if it continues making a full commitment to the solution, but if it continues point out problems in every solution that is created for them, the problem will continue to exist and even get worse.

What solutions were considered by PMI? Were these solutions appropriate to the problem?

PMI currently uses bar codes that only provide limited amounts of information and carry no unique information identifying each carton or pack. Unauthorized dealers have been able to bypass this by not scanning the cigarettes at all meaning the cigarettes could not be tracked. The limited amount of technology that PMI currently has led to more advanced technology solutions that would help them comply with the agreement.

The solutions that PMI is considering include the most expensive solution, RFID technology. This solution would involve placing tags with antennas and computer chips on products so they could be tracked. An RFID pilot program would cost between $1 and $3 million and a full rollout with tags, readers, and software would end up costing $13 to $23 million dollars. To meet the demands of the agreement, the company would have to place tags on every carton of cigarettes. At 50 cents each, the tags would cost them over $2 billion dollars and that price does not yet include the cost of software, readers, and other required hardware.

Another solution PMI is considering is an ink-based bar code created by a Swiss security firm known as SICPA that also makes inks for currencies such as the U.S. dollar. Their solution to the problem is to sue a SICPATrace that would encode packages with a special bar code made with ink that the naked eye cannot see. The bar code is created by a sequence of light and dark squares and can store more information than a regular bar code. Unlike the RFID tags, it has no computer chip. A scanner would be able to read thousands of ink codes at one time and store the information in a database with sales and tax history data. This information would allow the item to be tracked throughout the entire supply chain. The range though is much shorter than RFIDs. It must be scanned within 6 inches.

PMI did consider all the solutions available to the company, but is still having trouble deciding what solution is best for their company and will also satisfy the EU agreement.

What are the issues? What additional evidence or data do you recommend that they obtain?

The issues that concern PMI is whether it is possible for them to track every cigarette carton along its supply chain and what affects the new technologies will have on its business. The problem is that any new technology is going to cost the company millions of dollars. One of the proposed solutions involving RFID technology would cost the company $13 to $23 million dollars for a full rollout and over $2 billion dollars to purchase RFID tags and the cost of hardware that is needed for use of RFID tags. Another issue for PMI was the fact that tracking and tracing tests would slow down production a great deal which means less money for the company because they would be making less. Developing technology to solve the problem has not been a huge issue for the company, but the issue of finding a solution that would satisfy both the EU and PMI has been harder to deal with. PMI has complied with the terms of the settlement, but is having trouble accepting the solutions because of the effects it could have on the company.

The EU and PMI need to continue working together to come up with solutions that will solve the problems with the supply chain and not seriously damage PMI as a company. Right now the solutions that are available to PMI show that progress is being made, but a solution that will eliminate all problems is nowhere near ready yet.

Had PMI correctly identified the problem it faces? Has PMI identified the people, organization, and technology issues associated with the problem?

By agreeing to the 2004 settlement, PMI has acknowledged that it had a problem with its supply chain and that it must take decisive action in order to prevent illegal smuggling of its products. Unauthorized dealers such as Otamedia are recognized a major problem for PMI and its attempt to implement new technologies to help watch over its products along the supply chain shows that they recognize that their current technologies are not doing enough to prevent illicit activities involving its products.

What is the problem faced by the organizations in this case? What is the cause of the problem? What is its impact?

The problem that Phillip Morris must deal with is the lapses occurring in its supply chain. In 2004, agents from the U.S. Department of Justice’s Bureau of Alcohol, Tobacco, Firearms, and Explosives stopped a DHL express freight plane at JFK Airport because of what it had on board. 82,000 cartons of illicit cigarettes worth $1.1 million were found inside of the plane. The cigarettes were shipped by a Swiss tobacco company, Otamedia, to fill orders from American customers even though these types of transactions are illegal in the United States. Phillip Morris got in trouble when it was discovered that the shipment included large amounts of its Marlboro and Marlboro Lights Cigarettes. Reports show that Phillip Morris International (PMI), which is based in Switzerland, manufactured the cigarettes in Europe where it was then purchased by Otamedia. Otamedia was able to avoid taxes and import duties leading to savings in upwards of 40% for its American customers. PMI has categorized Otamedia as an unauthorized dealer, but the European Union has said that tobacco companies like PMI are responsible for what happens along the entire length of the supply chain.

4 years earlier, the European Union and 10 other member states filed a civil suit against 3 tobacco companies including PMI, accusing them of money laundering, smuggling, and illicit activity. After the seizure, PMI agreed to a major settlement in the case that included toughening procedures for selecting and monitoring customers. In addition, they were required to pay taxes and custom duties on any Phillip Morris items seized as smuggled goods I the European Union. Their parent company, Altria Group, was required to pay $1.25 billion to the European Union over 12 years.