Does Trouble-Free Mean Fraud-Free?

Of course not!

Sourcing Innovation has been informing you for years about how fraud can permeate a seemingly trouble-free supply chain and how the following, seemingly mundane, situations can hide serious fraud.

  • Abnormal Vendor Selection
    especially if the vendor has poor quality ratings or significantly higher costs compared to peers
  • Payments Outside the Normal Accounting System
    when it should be easy to ACH or wire the supplier a payment
  • Unusual Payment Patterns
    when most suppliers in the category get paid monthly and one supplier is getting paid bi-weekly
  • Rates Out of Line with Your Company’s Standing in the Market
    when you typically pay 5% less than market average but instead you are paying 5% more
  • Unexplained Lifestyle Improvement in an Employee or Manager
    who used to drive a beaat-up 10-year old Chevy Aveo but now drives a shiny beamer
  • Complaints or Tips
    from whistle-blowers who notice unusual activity beyond the norm

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 what do you do?