The E-commerce Equation: Product Safety vs. the Need for Speed
By Kami Blake
Product safety and e-commerce—the two have not gone hand in hand. Rapidly escalating, high-volume sales and profits secured while the customer experience is wrapped in "getting it all and getting it now" has not been a recipe for safe and compliant products. As a math equation it might look like this:
(↑e-commerce sales + wildly expanding customer base) – responsible compliance ≠ product safety
The equation is weighted toward point-of-sale platforms (large, midsize, small, and emerging) with a vendor base that includes unregulated resellers and offshore entities. Most traditional brick-and-mortar (B&M) businesses now investing in online sales technologies have mature compliance programs that can be adapted to online sales. These corporate policies have evolved over the last half century to ensure worker, community, environmental, and consumer safety and the safe transport and disposal of products with regulated substances. National retailers have developed corporate social responsibility (CSR) policies aimed at responsible sourcing, reducing their ecological footprint, and most recently, initiatives to drive safer products with safer alternative ingredients.
Major e-commerce platforms had hoped to maintain clean hands by claiming, for several decades, that they’re merely a point-of-sale vehicle with zero responsibility for safety and compliance, while collecting commissions and billing service fees from unvetted, noncompliant vendors.
The playing field appears to be leveling, with product safety making the priority list of the top e-commerce platform. On October 5, 2018, Amazon issued its first-ever “Safer Chemicals Policy.” This multipronged initiative includes restrictions on dozens of toxic phthalates, parabens, formaldehyde releasers, nonylphenol ethoxylates (NPEs), triclosan, and toluene in its private-brand baby, household cleaning, personal care, and beauty products in the United States. This is certainly a significant step in the right direction, but a multitude of concerns still need to be addressed.
An evolving compliance framework should eventually extend to all U.S.-based point-of-sale platforms, the products offered on their sponsored sites, and the resellers that post products. Many industrious entrepreneurs buy in bulk primarily from unregulated suppliers on offshore global sites (from the comfort of their kitchen tables). There’s a high probability that no compliance data or documentation is offered, requested, or available. This ticking time bomb must be dealt with—the sooner, the better.
B2B (business-to-business) manufacturers and distributors are another significant contributor to e-commerce activity and revenue. Forward-looking organizations digitized their product catalogs and offered electronic ordering options long before Amazon and eBay became household names. However, the transition to fully digitizing the inbound sales process and experience is loaded with landmines and complexities not encountered by retailers and resellers. As the B2B buyer evolves (from boomer and Gen X to millennial), merchants are rushing to adjust their business models to include e-commerce. According to Frost & Sullivan, B2B e-commerce sales are predicted to reach over $6.6 trillion by 2020, surpassing B2C (business-to-consumer), valued at $3.2 trillion by 2020. The United States alone will generate more than $1.9 trillion in sales by that time.
B2B manufacturers have built and maintained traditional product safety and compliance that involve the scrutiny of ingredient-level compliance determinations and individual suppliers’ qualification policies. Each individual raw material in finished goods is analyzed separately, as is the full ingredient list of the finished good itself. Distributors, however, represent and offer products from dozens, hundreds, even thousands of companies and often push compliance inquiries to the product’s manufacturer. This “compliance is not my problem” approach is quickly shrinking due to regulations that demand responsibility through every link of the supply chain. Many of these regulations (some old and some emerging) have built-in provisions for products offered via e-commerce that include some hefty fines for noncompliance.
Two key considerations for safe products are traceability (where does it come from?) and composition disclosure (what’s in it?). Let’s address them separately.
Not all origins are equal. The first significant differentiator involves disparate global standards and laws. The federal, state/provincial, and municipal material regulations and product safety standards of North America (NA) and the European Union (EU) are not universally applicable across global commerce. Regionally and nationally, NA and the EU have built a sturdy, but not infallible, framework to ensure that imported goods (raw materials as well as industrial and consumer products) meet safety and compliance standards. However, most of this framework was designed for traditional commerce.
Before the mid-1990s, most imported products arrived in substantial volumes packed in containers shipped by seafaring vessels that landed in approved U.S. cargo ports of entry. Containers were often packed by category (type of product/materials) and classification (containing hazardous/nonhazardous substances or regulated materials). Each container was appropriately labeled and accompanied with documentation required for shipment clearance. This information, subject to routine screening, was used to determine compliance with a host of importation laws to include product, ingredient, and material safety.
Random inspections could include opening internal crates to ensure the shipping manifest matched container contents as well as random sample analysis and testing of regulated contents to ensure compliance with chemical and material regulations and associated safety standards. Risk-based inspections would more closely scrutinize containers that originated from “problem” regions or countries, many of which were repeat and willful violators not subject to the NA or EU compliance requirements in their country of record. Noncompliant shipments could wind up in quarantine for long periods and even returned to their shipping origin.
Today, products are drop-shipped from anywhere across the globe and arrive at millions of doorsteps with little or no safety and compliance screening. Country-specific compulsory testing for exports is inconsistent, when known, as is exact origin and specific composition.
If there’s ever been a hot-potato topic in product safety and compliance, this is it. The composition issue is less about determining the exact makeup of purchased goods and far more about mitigating the risks of not knowing versus managing the significant time and costs of finding out. Manufacturers take on the lion’s share of the responsibility, with distributors and retailers looking to indemnify themselves against liability—convenient for downstream distribution, but several issues emerge.
Raw materials used by manufacturers in the production of their products involve complex supply chains, many of which begin in global regions not subject to safety and ingredient disclosure requirements of midstream manufacturers. It might be easier for a camel to pass through the eye of a needle than to consistently obtain accurate and complete information that transitions through a multitiered international supply chain.
The difficulties of obtaining full ingredient, substance, and material disclosures include the following obstacles:
- Suppliers want to protect what they define as trade secret or confidential business information (CBI). Most feel if they disclose what’s in the “secret sauce,” it may either be sourced from a less expensive supplier or manufactured in-house by current customers.
- Suppliers don’t know exactly what’s in the items they sell because they haven’t been able to determine or obtain full disclosure for components and materials purchased from their supplier network. Customers that demand complete compositional transparency are asking suppliers to deploy resources they don’t have to collect information that’s not readily available.
- Distributors in many instances bypass composition disclosures and place priority on the collection and distribution of generic health and safety warnings solicited from their vendors. The assumption is that if they don’t know what’s in it, they’re likely absolved from any adverse exposure—a very dubious best practice.
Adding a layer of complexity to the second obstacle involves authoritarian governments and nations that have a revenue stake in companies (some state-sponsored/subsidized) that sell globally. Many such entities have yet to develop comprehensive, sustainable product safety frameworks, or they make concerted efforts to squelch the loud and influential voices of consumers and non-governmental organizations (NGOs). In countries where industries are run by the rigid arm of a state agency, citizens may not be at liberty to express adverse views and product safety concerns. In such regions, NGOs are, at best, unwelcome and, at worst, illegal. Information is controlled and filtered on most forms of media, leaving consumers at the mercy of their leaders, whose priorities may not include their health and safety. To respond to the compliance demands of the global market, these market players can misrepresent safety information with minimal repercussion.
With respect to the third obstacle, supplier indemnification might be an overvalued, dangerous crutch. For distributors, it sounds like a wonderful and cost-effective way to tap the “easy button” and pass all liability upstream. Though a handful of state and federal agencies may take the position of acceptable due diligence when suppliers are willing to provide such written consent, personal injury lawyers will likely not—nor will the media or the public. The deeper pockets may often lie to the national distributor, and the media will naturally seize on the biggest brand name.
The best approach may be an unwavering commitment cemented into the fabric of corporate policies. Priorities come and go as they move up and down some superficial list. Conversely, commitments are foundational and affect all organizational activities and operations. Building and maintaining such a corporate structure does not happen by accident or by cutting corners. The investment in planning (time), participation (resources, which may include third-party consultants), and budget (money) will often reveal an organization’s level of commitment.
Kami Blake is a senior solutions engineer at Verisk 3E, a Verisk (Nasdaq:VRSK) business.