Fraud, counterfeiting and the circulation of contaminated materials most likely arrived the moment humans first began trading and bartering, buying and selling. To quickly define our terms, let’s agree that:
- Fraud is wrongful or criminal deception intended to result in a financial or personal gain, whether by words or by concealment of what should have been disclosed. It is dishonesty calculated for advantage.
- Counterfeiting means to imitate something, and counterfeit products are produced with the intent to take advantage of the superior value of the imitated product.
- Contamination is the presence of a minor and unwanted constituent, contaminant or impurity in a material.
The problem is obvious. In the first two instances, the potential profit for the fraudster or counterfeiter is clear. In the third, the profit comes from cutting corners. There is money in all three if the perpetrators can get away with it.
2013, A Watershed Year
The first half of 2013 saw an increase of 38 percent in fraud cases over the same period in 2012. An article in Industry News of the Bureau Van Dijk * summarized shocking statistics and cases. The public, along with the business community, were stunned by the news of about £55 million worth of bomb detectors being sold to the Iraqi government, which turned out to be fake, resulting not only in financial damage but also “real damage …from human injury and suffering.”
… according to KPMG’s latest fraud barometer… one of the key drivers for this has been supply chain fraud, which jumped from a value of less than £1 million in 2012 to around £61 million (in 2013).UK forensic partner at KPMG Hitesh Patel commented: “This year has seen fraud cases turn a darker corner with professional criminals acting across borders for the purpose of defrauding largely governments and financial institutions.”
In addition, the food industry was rocked by the European horsemeat scandal. Chinese companies made their contribution with the export of contaminated baby milk.
“While procurement functions seek to do relevant due diligence checks on potential suppliers, fraudsters are increasingly getting smarter at circumventing traditional procurement processes and controls.”… it is, therefore, essential that organizations make full use of their data sources and overlay this with the information they gather on third parties.
Being able to connect the dots by using the most relevant information is a key tool in developing an informed picture that will prevent risks increasing to the extent where they cause serious harm to both enterprises and their customers.
Supply-chain Approaches to Fraud Today
CGMA Magazine (Chartered Global Management Accountants) recently featured an article by senior editor Sabine Vollmer “Identifying Fraud, Waste, and Abuse in the Supply Chain.”
Everyday supply-chain transactions pose some of the biggest fraud, waste, and abuse risks companies’ face. But few companies are equipped to monitor the risks or detect breaches with the help of analytics, according to a global survey conducted by Deloitte.
Of the 3,600 executives and managers polled, 47% did not know whether their company had experienced fraud, waste, or abuse in its supply chain during the past 12 months. Meanwhile, 50% said they did not know how often their company monitored its third-party suppliers, shippers, and vendors.
About 40% said their companies have detection and prevention programs in place.
One of the fraud investigators was surprised by the number of people surveyed who knew nothing about supply-chain fraud, although they were “in positions where they should have known.”
Even more troubling was the use (or rather, the lack) of analytics. Only 7.5% of the companies used advanced analytics to address fraud or other abuse. Some, 18% were in the processes of establishing such analytics programs, and 13% didn’t have the ability to exploit them. Another 22% used no analytics at all to manage these kinds of risks in their supply chain. A staggering 40% had no idea of whether their companies had a program at all.
Where Does a Manufacturing Company Spend Most of its Money?
If you said that most of the cost of sales for manufacturing firms flows into the supply chain, you would be right. It is obvious then, that addressing risks in this domain is critical. It can affect a company’s success, and possibly, its survival.
There are a number of questions the article suggests asking as a starting point for reducing these risks.
Below are the questions, annotated with our suggestion about tools a company may need to respond to the issues they bring up.
- Have all related parties been identified and factored into the risk-ranking of items to test?
This requires “supply chain visibility” or “supply chain transparency” for materials inbound to enterprise plants and for replacement parts shipped directly from suppliers. Mapping the links (and/or tiers) of the supply chain partners that contribute materials allows quick access to critical data. This tool allows you to pose an array of queries, including by material, and can (if configured this way) display geographic maps of supply chain locations.
- How co-operative and responsive is the vendor?
Answering this question requires score-carding of supply chain partners from a single over-arching, web-based system to which all partners contribute online. The activities evaluated include supplier qualification, specification sign-off, material validation before shipment, lab tests based on skip-lot rules at receiving. This allows for on-going supplier comparisons, as well as for timely rewards for consistent and reliable performance, which offsets the small inconvenience of using a standard interface instead of locally sourced, idiosyncratic reporting formats.
- Does the support provide validate the transaction?
This requires testing. The testing must be validated by the specifications of the end-customer. Each specification must be “re-interpreted” and applied specifically to each material. In addition, the same procedure must be done as it applies to each tier of the supply chain, and to supplier-specific tests performed within the supplier’s plant. Along with this workflow, and the Material Variability Management it reflects, all the required regulatory documentation and best-practice certifications that are submitted for approval further strengthen the partnership with supply chain partners. This means only system-defined supply chain partners can interact with the over-arching quality assurance system, and that eliminates rogue spending, and fly-by-night suppliers and distributors.
- Does the support provided in its entirety provide the ability to evaluate the “weight of the evidence” underlying the transaction?
This requires SPC (Statistical Process Control) of material QA characteristics. SPC identifies issues and trends, provides “problem condition” alerts. This allows your company to take action well before there is a quality-related market issue.
- Is there sufficient detail describing the item to justify it is being invoiced?
A complete answer to this question requires documentation in a reliable format, such as Certificates of Analysis, (COA), Certificates of Conformance, (COC), Certificates of the Country of Origin (COO) where the material’s specific lot is analyzed, measured, tested and validated against customer specifications. The kind and number of tests are dependent on the nature of the material and its risk in the supply chain.
- Are there any notations (handwritten or otherwise) that may provide useful information about the transaction?
This requires a well-organized flow of real-time information, which eliminates handwritten notes, telephone calls and independent e-mails as documentation sources. In a supply chain quality assurance system, statistical “history” of all transactions with each vendor shows document-submittal compliance performance. Also, material trend-lines of past performance (a scorecard or dashboard) provide a visual extrapolation of possible future performance.
- If the items invoiced do not have an associated pre-approved rate, is there precedent for the rate change?
This requires the ability to call up statistical information and draw comparisons with other vendors as well as the market as a whole.
What’s the Most Efficient, Cost Effective Approach?
One EMNS/GSQA customer (with very challenging customer requirements) seriously considered hiring fifty new Quality Assurance (QA) professionals to address a new volume of required QA activity and documentation. Instead of this cost-prohibitive approach, the company deployed GSQA in a focused, efficient way. They identified key areas of risk and targeted them for various components of GSQA. This approach has been very successful for 5+ years.
If your supply chain, and certain materials or components in it, are vulnerable to contamination, fraudulent adaptations, or outright counterfeit substitutes, then we invite you to seriously consider GSQA as an effective, efficient and affordable solution.