In a recent post on e-Sourcing Forum, I alerted you to a recent press release from Kroll that summarized the results of their Global Fraud Report which found that in some sectors, fraud in the supply chain has increased five-fold in the last six years – and that’s something to be worried about because, if you think you’re trouble free, there’s a good chance you’re not!
In my last post, I described some of the red-flags that indicate your supply chain could be at risk, which included:
- Abnormal Vendor Selection
- Payments Outside the Normal Accounting System
- Unusual Payment Patterns
- Rates Out of Line with Your Company’s Standing in the Market
- Unexplained Lifestyle Improvement
- Complaints or Tips
But the following can also indicate fraud:
- automatic order triggers in a VMI system
a vendor can manipulate stock levels to indicate a re-order prematurely to increase their revenue
- more purchase orders than usual
although it looks like your team is doing a good job by getting more purchases through the system, this could represent collusion between your buyer and a seller to inflate either the sales person commission or the buyer’s bonus by submitting false orders that will just be cancelled or returned at a later date
- an unusual number of returns
your buyer could be colluding with an individual at a shipper’s facility to create orders for unwanted goods which will be filled incorrectly; the buyer will then demand a refund and the goods will get lost during the return process
- more defective returns than usual
your quality assurance personnel might be accepting inferior products for bribes
The reality is that the supply chain is ripe with opportunities for fraud. These include:
- Fixed Asset Fraud
Fixed assets might be used for purposes other than what they are designated for, or used more than they are supposed to be. This misuse can damage the asset or reduce its useful life-cycle.
- Inventory Fraud
Your employees help themselves to your inventory and falsify records so that you don’t notice the loss until weeks or months later. They might even falsify good receipts to indicate less was received than actually was.
- Manufacturing Fraud
Your supplier might send you a high quality product (from another supplier) during the evaluation process for testing, but then send you inferior products made from inferior materials after the contract is signed that look the exact same – and you don’t notice the problem until you get an extraordinary number of returns due to defects or inferior quality.
- Picking and Return Frauds
Your order pickers in your warehouse might be picking extra items during shipment preparation and pocketing them for private off-the-books sales.
- Distribution Fraud
One or more boxes of your shipment will not be loaded by the shipper who will falsify records and blame the third party carrier for the loss.
And this is just the tip of the iceberg. So, in a follow-up post later this week or early next week, I’ll address what you can do about it. Stay tuned!