Category Archives: Finance

Worried About P2P Fraud? Here’s How to Prevent Even More of It!

In yesterday’s post we reviewed Accounts Payable News’ recent piece on “the top six ways to carry out P2P fraud” that every Supply Management professional should be aware of BEFORE implementing any P2P system. We did this because, as pointed out by Spend Matters UK “Procurement Related Fraud [is] On the Rise” (or at least more instances are being caught and prosecuted). The post chronicled four recent high-profile cases, of which two involved collusion between a buyer and a supplier (where the buyer purposely overpaid a supplier or helped them win a bid in exchange for cash kickbacks), one was a purely internal fraud conducted by a sole buyer (who set up dummy corporations that issued false invoices that were paid to a an account the buyer controlled), and one was an external fraud in which a criminal convinced accounts payable to change payment information for a genuine supplier to the criminals’ bank account.

In other words, we had a case of social engineering and supplier payment diversion by outsiders, a case of fictitious invoices for goods not actually delivered by an insider, a case of undermining of control by way of buyer-supplier collusion, and a case of tacit approval of unapproved “handling” costs to a supplier, who would pay a kick-back. All of the frauds Accounts Payable News warned us about have recently occurred in big organizations and ended up as high-profile cases before the courts. And at least three of these could have easily been prevented. Having a second party phone the supplier’s AR department to verify banking would have quickly revealed the social engineering fraud, verifying goods were received would have prevented payment of the fictitious invoices, and mandatory approvals for any costs above contract terms or market rates would have prevented the supplier overpayments. The undermining of control would be difficult to stop if it was a single party feeding a preferred supplier confidential information, but note that this is procurement-related fraud, and not pure P2P fraud.

In other words, as mentioned in yesterday’s post, if one solves two of three situations that are common among procurement frauds, fake data and lack of control to be precise, many frauds can be prevented. And while you can never solve the collusion issue, having to accept that the best you can do is discourage it, the reality is that you can minimize it. As pointed out by the Spend Matters UK,
Motive + Opportunity = Bad Things Happen,
and opportunity can certainly be minimized.

However, as implied by Spend Matters UK, what you really have to worry about is motive. The chance of fraud increases substantially when someone has a motive, and, as further pointed out by the post, motive increases greatly when there is:

  • Financial Need
    If someone is deeply in debt, has a gambling problem, or owes the mob money, that someone is going to be driven to get money anyway he can.
  • Psychologically Defective
    If someone has a pathological desire for thrills, and fraud is their fix, sooner or later, he’s going to try.
  • A sense of Entitlement
    This could take the form of greed, or of jealousy if the individual, who works hard, sees superiors getting big rewards for little effort while the individual gets little or no rewards for a lot of effort.

And while you can’t tell what a person is thinking, some people have easy tells that you can use to evaluate your chance of risk, and put additional controls in place if the chance of risk is high. For example, if a credit check shows the person is bordering on bankruptcy, that person could be more susceptible to opportunities for fraud, or at least to bribes. While it’s not necessarily the case, as some people would rather starve than steal a dollar, it should trigger extra precautions at least until you are sure the person is trustworthy.

In addition, basic psychological testing can often reveal a need to over-achieve or an undeserved sense of entitlement. These people could also pose financial risks to your firm and their financial control should be limited until their performance is adequately measured and your trust has been earned.

The simple fact is that people without a want or a need have no motive, and opportunity means very little to them. While it’s not as easy to weed out motive as it is to lock out a system, if millions are on the line, spend a few hundred on a background check, and if we’re talking an executive, a personality assessment wouldn’t hurt either.

The (Board) Gamer’s Guide to Supply Management Part V: Small World

I’m tickled technicolor to continue this one-of-a-kind summer series that will help you whether you are just interested in finding out about this new and exciting career opportunity, or ready to take your Supply Management career to the next level. Not only is it more fun than reading the latest study on the daily migration patterns of the three-toed sloth, but when you can grasp a lot of the basic concepts by playing the right mix of strategic (and sometimes tactical) board games with your friends, it’s three blasts and a half!

While we are still putting off the economic games (like Puerto Rico) that we are going to get to at some point, we’re going to make use of the fact that, thanks to unprecedented generosity of Wil Wheaton (@wilw) and Geek & Sundry, we have yet another fantastic TableTop episode where Wil Wheaton introduces us to the mechanics — and fun — of the game. Until we run out, we are going to take advantage of the priceless gifts that Mr. Wheaton has granted us with this spectacular educational series.

As with every other episode in the series, Wil Wheaton gives us a very succinct introduction to Small World in TableTop Episode 1, a classic victory-point game with near endless variations that give it exceptional replay value.


Small World combines the military strategy of risk with the delightful art and fantasy races of cosmic encounter. Whoever has the most points at the end of nine rounds wins the game. We earn points by conquering and ? territories. Empty territories cost two units to conquer. Every item in a territory costs one more unit to conquer. … At the beginning of every game, each player will choose a fantasy race, like Orcs, Elves, or Dwarves. Each race is combined with a unique special power like seafaring, flying, or heroic. These power and race combinations change every game, giving Small World tremendous replay value. No empire lasts forever, so don’t get too attached to your diplomatic skeletons. You will inevitably run out of units to conquer new territories. But don’t worry. When that happens, you simply put your active race into decline and choose a new one from the board and begin conquering all over again. It’s a very small world. And only one person can be the victor atop the bloody stinking heap of his vanquished opponents!

So what does this have to do to supply management? It introduces us to the intricacies of the markets that marketing and management expect us to indirectly support not only with products and services, but with market-entry advice (because, after all, we’re already sourcing from there so advising the organization on how to sell into there shouldn’t be that hard, right?). An alternate introduction to the game could be:

Small World combines the military strategy of risk with the marketing strategies of an MBA program. Whoever has the most money at the end of year wins. We earn money by conquering and maintaining market territories. Empty, blue ocean, territories cost two units to conquer. Every competitor or obstacle in a territory costs one more unit to conquer. At the beginning of every game, each player will choose a primary market strategy, like brute advertising force, niche marketing, or price-undercutting, and combine it with a perceived marketing advantage such as a big war chest, coveted partnership, or new manufacturing process that allows production costs to be drastically slashed. The primary market strategy and perceived marketing advantages change every game, giving Small World tremendous replay value. No market lead lasts forever, so don’t get too attached to your past successes. You will inevitably run out of units to conquer new market territories. But don’t worry. When that happens, you simply put your current market strategy into decline and choose a new one from the board and begin conquering all over again. It’s a very small world. And only one company can be the victor atop the looted corporate carcasses of its vanquished opponents.

And the great thing about Small World is that victory points are measured in victory coins, for which a player gets one victory coin for each region his race tokens occupy. Whereas some games, like 7 Wonders, give you half a dozen ways to score victory points, scoring victory coins in Small World is straight forward. It’s simply a function of how many regions you occupy, and how many extra bonus coins you get as a result of race or special ability. Plus, conquests can be first (it’s a blue ocean market and you are the first entrant, having only to conquer obstacles such as resistance to foreigners or geographic distance to your target market), takeovers (where you use overpowering force to take over a market from another player), or a hail-mary conquest where a player knows he does not have enough resources to take over any more regions with certainty, but chooses to make one last attempt, literally betting everything on luck (that boils down to the roll of a die). Finally, when all is said and done, a player may redeploy his resources among the various markets he controls in an effort to either maintain them in the next round or move into adjacent markets.

The game is brilliant, and should definitely be in your organization’s lunch room. Forget about those boring seminars and brown-bag lunches. If you really want to push your Supply Management brain cells into overdrive, this is the way to do it!


It’s a small world
But it’s the only one we’ve got
Huey Lewis

Sound, Conventional Financial Management is NOT Good for Supply Chains

And it’s not good from a cost of capital perspective either!

While skimming through Purchasing Insight’s recent white-paper on “Supply Chain Finance: A Procurement Strategy” (after stumbling upon their recent “Supply Chain Leakage” post that got them a Sourcing Innovation Thumbs Up, I stumbled on the following paragraph:


By extending payment terms to suppliers (paying them as late as possible) DPO is maximized and by being efficient at collecting from customers (getting the money in as soon as possible), DSO is minimized. This is sound, conventional financial management. It’s all about keeping hold of cash for as long as possible, minimizing the need to borrow and providing an opportunity to earn interest on cash deposits. Poor management of DPO and DSO increases the need to borrow and, in an economic environment where credit is scarcely available to some, borrowing can be very expensive indeed.

It may be sound conventional financial management, but, in reality, maximizing DPO is just another name for screwing your supplier, and all that does is increase your costs while decreasing the overall value you are able to extract from the relationship.

All I can say is that I’m glad the next section went on to say that:


For the procurement community, payment terms can be a double-edged sword. While it’s good to contribute to the reduced cost of working capital by extending payment terms, this doesn’t always support healthy supplier relationships and it can put an inordinate strain on the finances of the supplier, which is in the interests of neither party.

Finally, someone else who realizes that screwing suppliers is a bad thing! (I’ve lost count on how many times I’ve had to rant on this subject over the last six years.) Because, as the white paper goes on to state:


There is another, more compelling reason why the traditional approach to working capital management doesn’t make sense from a procurement point of view. It costs a fortune! The fact is that the traditional, siloed, adversarial approach adopted by most buying organizations toward their suppliers has a huge supply chain cost especially in the current economic climate.

Hear, hear! In order to extract a 0.1% return by holding on to your cash an extra 30 days, you’re risking a rise in costs of 1% to 3% as your supplier passes on their high cost of factoring to you!

However, when trying to improve your working capital practices in such a way that they benefit you and the supplier to take cost out of the entire supply chain, don’t limit yourself to early payment discounts as the sole tool at your disposal. It can be a great tool, as cash strapped suppliers get cash early and you get a better return, but it’s not the only tool. Another option could be to buy the raw materials or components on behalf of your supplier. You might have more leverage with a supplier that you are doing business with on another category and be able to get a better price. A third option, especially in this economy, could be to barter services for better prices. Maybe they need help with their back-office functions. Maybe you have a great relationship with a GPO that could help them and your weight could get them better pricing, or, your technical experts, who recently oversaw the implementation of good back-office accounting and P2P software in your firm could oversee the implementation of the same software in their firm in exchange for free value-added services from them. Be creative. There are many ways to win-win.

We Need More Corporate Ethics – Bring on the No-Maximum Mega Fines!

As noted in a recent article on Fine and Punishment, it has been a bumper summer for corporate fines and settlements. With firms in Britain and America agreeing to pay over 10 Billion in the past three months alone, there’s too much corporate wrong-doing these days. But the current fines are not enough. For example, a mere 5K for violating 10+2 is a CEO’s lunch money these days in most Global 3000’s. The only act close to defining a fine that will take a real chunk out of the corporate coffers of the guilty that the doctor knows of is the National Defense Authorization Act (NDAA) which allows 15 Million Dollar fines for first offenses and 30 Million Dollar fines for second offenses.

The reality is that a fine is only a deterrent if getting caught would mean a loss. Let’s say the fine for stock-fixing is 1 Million but an investor group could make 10 Million on the fix. Guess what’s going to happen? The stock is going to get fixed if the investor group has anything to do about it because, worst case, they only make 9 Million. The fine HAS to outweigh the reward, or corporate wrongdoing is going to continue to permeate both the financial sector, and the supply chain practices in industries where unlicensed knock-offs (especially in pharmaceuticals or electronics) can save a middle-man millions of dollars and push profits through the roof. As the Economist article stakes, given a risk-free opportunity to mis-sell a product, or form a cartel executives will grab it. To them, it’s all about the almighty dollar — and earning more than their peers to earn Wall Street’s favour and have something to boast about at the next charity dinner. (For a great Wall Street Perspective, you have to check out Randall Lane’s The Zeroes: My Misadventures in the Decade Wall Street Went Insane [now at a bargain price for the hardcover edition on Amazon.com — you can’t go wrong]. Audiobook also available).

Unless the potential fines are crippling, wrong-doing will persist*, and so will cheapening out. And this is the biggest problem. Right now, we need sustainability in supply management, but initial investment in sustainability always costs more, so not only are executives not going to green light sustainable efforts, but if the organization has to look green or socially responsible, they are going to fund the lowest-cost “accredited” third parties that they can find to be “socially responsible”, and, in particular, likely fund those that use shady practices and cut corners everywhere possible. Because when the dollar rules, as long as you can buy the image, why create the real thing?

But if we force ethics back into the corporate world, then maybe we can force sustainability in as well. And when the only choice for gains is again long-term strategy, which is precisely where the economics of sustainability really make sense, maybe we’ll see improvement in ethics and corporate responsibility across the board. Or maybe it’s a pipe-dream. Either way, heftier fines would be a great start!


After all, remember what Randall Lane discovered when he did a Trader Monthly survey in the zeroes:
  If you received an illegal insider tip, a sure thing, and had a 50% chance of getting busted, would you use it? Only 7% would. What about only a 10% chance of getting caught? The numbers spiked to 28%. And what if you had a 0% chance of getting discovered? Suddenly, the number surged to 58%! To the majority of our readers, cheating wasn’t an ethical issue, it was simply a matter of whether they’d get caught.

Finally, Someone Else Who Gets A Key Point of Working Capital Management!

Regular readers will know that SI has been ranting about all the hype-talk about Working Capital Management for years, including this post where the doctor got sick of all this working capital management talk. The simple fact of the matter is that most companies don’t understand what working capital management really is and mistake screwing suppliers (whether or not it is intentional) for lowering supply chain costs. The reality is that lowering your cost today is not good working capital management if it only raises your cost of acquisition tomorrow.

That’s why it was great to see this recent post over on Purchasing Insight on “Supply Chain Leakage – Stemming the Flow of Costs”. As per the article, when you calculate the scale of costs that leak from the supply chain, it reveals astonishing waste and it’s time that businesses — suppliers and their customers — took a closer look at collaborative techniques to take out these pointless costs.

As the article says, payment terms can be a double-edged sword. While it’s good to contribute to the reduced cost of working capital by extending payment terms, this doesn’t always support healthy supplier relationships and it can put an inordinate strain on the finances of the supplier, which is in the interests of neither party. If your cost of capital is 1%, and your supplier’s cost of capital is 10% or 20%, you’re just increasing your costs by 10% to 20% by paying late to save a paltry 1% or 2% cost on a short-term loan. The numbers just don’t add up.

True savings propagate through the supply chain. They are not limited to your organization.