Daily Archives: June 20, 2008

Stop Fraud Before It Stops You!

Hopefully after Tuesday’s post that asked does trouble-free mean fraud-free you realize that it doesn’t and that if you’re not watching, there’s a very good chance that fraud is occurring somewhere in your supply chain. It might not be in your four walls, but it still affects you – because every dollar lost by your supplier, or your supplier’s supplier, results in increased costs to you. However, knowing that, more often than not, a deep dive into a large corporation’s spend data by an expert will, at the very least, result in the identification of spend that violates policy, if not spend that is outright fraudulent, and knowing the statistics on just how many products have hit North America in recent years that violate safety requirements and pose serious health hazards, I’d be willing to bet that if you’re international, and you’re a mid-size business or larger, there’s fraud somewhere in your supply chain. Relatively speaking, it might not be on the scale where entire truckloads of product go missing or where fraudulent employees are siphoning millions of dollars out of your operations, but even minor frauds that result in a loss of only a few thousand dollars will add up.

So what can you do? How can you stop something you don’t know about – especially when you can’t monitor everyone in your supply chain every minute of every hour of every day? When you can’t afford to secure everything? When fraud is only one risk that you have to deal with on a daily basis?

The answer is simple – visibility and oversight. If you monitor your supply chain, it’s going to be a lot harder for fraud to occur without you knowing about it. And if you implement mechanisms that insure that the actions of each individual with authority are monitored and reviewed, they’ll know that if they commit fraud, they’ll likely be caught, the risk will outweigh the reward, and they’ll take their illicit schemes elsewhere. (Unless they’re really dumb, in which case you’ll catch them.)

So how do you get that visibility? The first step is to map out your supply chain. Steven Belli provided a good description of this process over on The Strategic Sourceror in his recent post that asked how much are you betting and what are the chances of losing. Once you have the map, the next step is to identify potential areas where fraud may be occurring. Start by identifying areas where:

  • there are pain points such as quality issues, frequent re-orders, serious delays, etc.
  • your proprietary technologies or expensive fixed assets are used
  • tasks that should probably be separate overlap
    such as the same individual or team being responsible for vendor selection and quality control

Then, and this is the key step, perform a supply chain audit. This starts by identifying what should be happening at each stage of the supply chain, how tasks should be separated, how much responsibility is required for each task, and who has ultimate responsibility for each task and hand-off. Then, audit your people, information, technology, and, most importantly, processes. Make sure that your people don’t have more authority or access to your systems or bank accounts than they need. Make sure your information is complete and accurate. Make sure your technology is doing what you need it to do. And make sure you have processes that are appropriate. They should insure visibility and accountability. If your processes don’t, then that’s fraud just waiting to happen.

If you’re wondering how to start, or wondering where you can get outside help on a fraud audit (and you should bring in an expert, and possibly someone with a Certified Fraud Examiner or equivalent designation, because you’re not likely to catch what you’re already overlooking – and consultants are cheap), one company you can look to is Katzscan and their Supply Chain Fraud services. (And, at the very least, check out the supply chain fraud site. It’s a good resource.)