Monthly Archives: June 2009

The True Costs of a Counterfeit Supply Chain

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I know this is Norman Katz‘s area of expertise, and while I thoroughly intend to allow him to lead most of the discussion on this topic in his new column here on Sourcing Innovation, ISM’s e-Side Supply Management recently ran a great article by Robin B. Gray Jr., the Executive Vice President of the National Electronics Distributors Association that had some great facts, and tips, I just couldn’t ignore. Here’s the jist:

  • Counterfeiting and IP piracy amounts to 250 Billion a year (FBI),
      resulting in lost sales totaling as much as 600 Billion (WCO).
  • Counterfeiting and piracy have resulted in the loss of 750,000 jobs in the US alone. (CBP)
  • Eliminating counterfeit parts could create 250,000 jobs in the automotive industry alone. (FTC)

According to the Office of Educational Technology (OET), 50% of counterfeit electronic components were bought from brokers (30%) and unauthorized distributors (20%). While you might be able to find genuine parts from unauthorized sources, can you afford to take a chance? Not only are you at risk for lawsuits if something goes wrong because of a counterfeit part, the damage to your brand and reputation is potentially huge!

So, before you buy a product, not only should you make sure the source is authorized (which is often as easy as checking a manufacturer’s web-site or picking up a phone), be sure to:

  • assess the seller’s reputation,
  • determine the seller’s financial stability,
  • practice quality control,
  • determine the product’s traceability,
  • assess (your) legal liability, and
  • ask for documentation.

Organizational Versus Occupational Fraud

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Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his new column in the archive.

When do you draw the line between a person (or persons) being guilty of fraud versus the entire organization? The latter seems pretty sweeping, implying that every employee was guilty of perpetrating fraud; this is not the case, however.

Operational fraud — such as frauds that happen in the internal/external supply chain operations — can be divided into two basic classifications of fraud: organizational versus occupational.

When a person or persons commit occupational fraud, they have used their positions or roles to facilitate the perpetration of the fraud. A cashier who takes money from the till, an accounting person who falsifies deposits and pockets some cash, a buyer who accepts gifts, brides, or kickbacks for steering business to one supplier versus another, etc., are all examples of occupational fraud. Contractors and service providers can be guilty of occupational fraud, such as the attorney or technology consultant who submits bills for hours not worked. There is an implied trusted relationship that the person breaches in their less-than-trustworthy conduct.

When, at the highest levels of an organization, senior management (typically officers, but sometimes members of the board of directors) are guilty of perpetrating fraud via the use of the enterprise itself, in whole or in part, this is organizational fraud. What’s so unfortunate about organizational fraud is that many times honest employees in specific occupations are often left to suffer, such as when the organization folds. (Examples include Arthur Andersen, WorldCom, and Enron.)

Senior management and directors bear the burden of responsibility in their positions to set the right examples for the organization’s code of conduct. This is part of good governance for public companies as outlined in the COSO Sarbanes-Oxley compliance framework, but it is certainly applicable to private companies and government agencies alike.

The Sentencing Reform Act of 1984 provides guidelines for the penalties assigned to both individuals and organizations guilty of crimes. In brief, the penalties are assessed as follows:

(1) The greatest of the following:
  (a) A base fine from an offense level table;
  (b) The monetary gain to the organization;
  (c) The loss suffered due to the intentional, knowingly reckless, behavior by the organization. (2) Application of a fine multiplier based on such factors as cooperation versus obstruction of justice, history of bad behavior, and whether the organization self-reported and accepted blame and responsibility.

In the tainted pet food scandal that hit the United States, melamine was added in China to the base ingredients to boost the tested protein levels and cover-up quality problems. A public official (an inspector) and an employee of the manufacturing company (a buyer, I believe) were both involved in the fraud: they used their occupations to perpetrate the fraud, which involved payoffs.

The pet food was then shipped from China to Canada where it was canned for distribution into the United States under various brand names. If, in the US or Canada, the corporate philosophy was to either not bother with quality assurance testing or not adequately fund quality assurance testingn (thus rendering it ineffective), in order to reduce cost-of-goods-sold and boost profits, this is, in my opinion, organizational fraud as perpetrated by the canning company in Canada and the US distributors.

Another good example is children’s toys in regards to the use of lead paint and design flaws which, even when manufactured to the specifications, represented a hazard.

The lesson here is very simple: You can outsource manufacturing, but you can’t outsource responsibility.

Norman Katz, Katzscan

Don’t Get Your Procurement Project Cut — Ask For Help From Your CFO

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A recent article on the Disciplinarians’ Dilemma in CFO Magazine noted that nearly all CFOs today have a mandate to conserve cash and that a recent McKinsey study found that 40% of companies surveyed are actively seeking to reduce research-and-development costs as well as the number of research-and-development projects they are funding. This is, of course, quite troubling because, as I have said over and over again (in my “dumb company” and “dead company” series), slashing research-and-development budgets in the near term will place companies in precarious competitive positions when the economy does turnaround. More specifically, they’ll struggle even more to maintain their existing client base while those companies that did innovate and develop more valuable solutions in the downturn will not only get most of the new customers, but lure some of their competition’s customers away.

However, as the article notes, instead of acting as the enemy of innovation, a CFO can play a critical role in fostering research-and-development. Given that the biggest weaknesses most companies have when it comes to innovation revolve around sticking to timelines, earmarking funds, and balancing the innovation portfolio, and that these are the strengths of the finance department, a CFO can play a critical role in the development of innovative new solutions by doing what she does best.

Furthermore, the same logic applies to procurement. While some less-than-visionary CFOs will look upon Procurement as a Cost Center, and try to freeze budgets, delay the acquisition of new technology, and freeze hiring even when you lose your staff due to attrition to more generous competitors, innovative CFOs will instead embrace the value, and substantial savings, Procurement can bring and help them balance their projects, funding, and available resources for maximum return to the company. And the best way to fall into the latter camp is to not only tell them what you can do, but let them know how they can help make your savings plans a reality and ask for their help. After all, which project are they likely to kill first — one they know nothing about or one in which they see, and are contributing to, the value?

Product Portfolio Management Mistakes in a Down Economy

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A recent article in Industry Week on portfolio management in a down economy did a great job of summarizing all the mistakes dumb companies make in a down economy in blind efforts to conserve cash. As I have said before, and as the author clearly notes, companies that cut research-and-development during a downturn “don’t have anything new in their product portfolio that is of interest to their customers” when better times eventually return. This means that if you think times are bad now, they’ll only get worse when the up-swing starts and your competitors, who didn’t cut R&D, are introducing new, in-demand, products while you’re trying to push the same old, same old from two, three, five years ago.

While it’s understandable that R&D funding might have to be (slightly) reduced, there are right ways and wrong ways to go about it. The right way is to key (in) on the projects that exhibit new technology, gain entry into new markets, or are of greater interest to your customers. Similarly, a great technology without a current market should also come under scrutiny. Maybe development should be delayed to when you have more spare dollars to throw at it (as all great technologies will eventually find a market). And avoid these common mistakes outlined in the article:

  • Failure to reconcile the portfolio with resources.

    Make sure you can support the key portfolio projects to the full extent they need to be supported.

  • Failure to look outside the four walls.

    There are broad external forces that will ultimately decide which products will sell when the market up-swings and which won’t.

  • Failure to innovate.

    Some companies get complacent with an existing portfolio and focus only on product extensions rather than disruptive innovations.

  • Failure to understand the customer.

    If you can’t satisfy your customer, someone else will.

  • Failure to utilize common business sense.

    Yesterday’s metrics and data don’t tell the whole story about today, and definitely don’t tell the whole story about tomorrow. Don’t overlook the knowledge and experience your sharp people will provide and blindly rely on an unproven tool. Tools optimize scenarios … they don’t create them.