As per our last post, fraud is permeating your supply chain and your current iZombie platform needs to take a lot of the blame as it lulls you into a false sense of security when it should be sounding all the warning bells and sirens at its disposal.

So what kind of platform do you need?

Simply put, a platform with good market intelligence, encoded expert intelligence, (hybrid) AI algorithms, and other modern features that can detect common types of fraud and stop it dead in its tracks. To give you a better idea of what these platforms look like, we’re going to address each type of fraud an organization may encounter and what a platform would need to detect it.

Unacceptable Cost Inflation via Metric Inflation

If the platform monitors all historical performance metrics and computes trends, it will be able to detect when a quality or reliability metric is out of whack.

If the platform also monitors market costs for the product or raw material according at different volume tiers, it will be able to detect when a cost is most likely more than percentage point above average.

If the platform uses smart algorithms, it will be able to compute a high probability of something being off when the two factors coincide on a category being sourced and alert a senior manager or executive to explore and verify the situation before a buy is made.

Double Fuel Surcharges

A good platform will also integrate with fuel price indices and transportation exchanges and know the average surcharge on fuel for any given region as well as the limits imposed by the organizational contract and immediately detect when a surcharge is out-of-whack, unjustified, or against the contract and prevent a buyer or AP professional from paying the invoice until it is corrected.

Duplicate Invoices

When an invoice comes in, a smart platform will not only insure there is a corresponding PO before it is accepted, but that the total sum of invoices against the PO doesn’t exceed the total value of the PO (and the total number of any unit invoiced doesn’t exceed the maximum authorized amount). Furthermore, it will not allow payment until the total sum of unpaid goods received at least equals the amount invoiced. This will not only make it easy for a human to identify duplicate invoices (where only the invoice number is changed) but duplicate billings, where similar invoices (for unshipped goods) are submitted with only minor changes.

T&E Fraud

You need a T&E system that can enforce spending limits, match establishments with blacklists, find duplicate charges for similar expenses on the same day, pull in expected airline fares in the proper bracket to identify policy violations, and other capabilities that can detect policy violation or over spend.

Distribution Theft

Now, if your organization is large enough, it’s pretty much a guarantee there is going to be theft somewhere along the chain. And if its external theft, that’s not something your system is going to be able to predict. But internal theft, that’s something it should be able to detect.

The fact of the matter is that if there is repeated internal theft, it will follow a patter. Similar types of inventory, coming from similar suppliers, on a small set of routes used by a smaller set of carriers — usually with a small set of common drivers involved. With enough data and data mining, a good platform can identify patterns indicative of inside jobs that can be investigated, identified, and stopped.

While platforms aren’t the entire answer, as they can’t detect, for example, true inside jobs by an employee cutting a camera feed or power feed (in a blind spot) on the way out, they are a very large part of the answer.

As per yesterday’s post, chances are that fraud is running rampant throughout your supply chain. It might not be all that significant in the grand scheme of things — a few points here, a few K there, a few items go missing from the stock room — and might be costing the organization less than an effort to stop the fraud would cost. Or, the organization might be losing 5% of its total revenue, which could be 5M annually if the organization does 100M annually, or 50M annually if the organization does 1B annually. And it’s very likely that you have no clue which end of the spectrum the fraud occupies.

You might be thinking that there’s no way we’re losing 50M a year — all of my categories over 5M are contracted, we monitor inventory and invoices, and all spend over 5K is tied to an invoice or a PO and the rest of the spend is so minuscule that the most we could be losing is 1M or 2M a year but, as we tried to point out yesterday, just because things look good, that doesn’t mean that they are.

For example, your buyer could be colluding with your primary supplier in your 100M category to inflate the quality and reliability metrics to the point that the overall weighting scheme chooses the supplier despite a 3% markup that is going 100% into the seller’s commission, with a 10% kickback to the less-than-honest buyer who inflated the scores. There’s 3M on one category. It’s a far cry from 50M, but let’s say that your organization also lost 20M this year from a “theft” on your main warehouse that was pinned on an organized crime ring. Was it an organized crime? Or an inside job where an employee cut the power on the way out for a big wad of cash and a local band of unorganized yahoos stole the goods? There’s 23M. Then you have carriers charging double fuel surcharges on 100M of freight and another 4M goes down the drain. Then you have the supplier of 20M worth of inventory that submits the same invoice twice with different invoice numbers 50% of the time, which the system doesn’t catch because it matches a PO and/or goods receipt and you overspend another 5M. There’s 28M. And then there’s the high-powered elite sales team that likes to charge “champagne” at the strip club for their “clients”; the marketing elite that thinks high-end dog kennels are “hotel” charges; and the C-Suite that only flies first class, against policy that flights under 4 hours must be business. And all of a sudden that’s another 2M of employee fraud that is slipping through the cracks and we’re at 30M. And we haven’t looked hard yet.

Get the point?

So why is your supply chain rampant with fraud? Simply put, because you don’t detect it.

Why not?

Platform iZombie.

Your platform blinds you to it. Your outdated, last decade platform that barely gets you through an average sourcing event that hasn’t kept up with the time, hasn’t made you smarter, and, in fact, takes you down the same old, beaten, dying path that you’ve been down before again and again.

So what do you do?

Get a better, more modern, platform.

What do you look for?

Stay tuned!

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?