Unfortunately, fraud, counterfeiting and the circulation of contaminated materials most likely arrived the moment humans first began trading. A recent report published by Deloitte ** declares:
“Increased vigilance doesn’t translate into lower instances of fraudsters trying to perpetrate their schemes. Even the most advanced analytics users should work to constantly evolve their efforts to stem fraud, waste, and abuse in supply chains.”
To quickly define our terms, let’s agree that:
- Fraud: deception intended to result in financial or personal gain, whether by words or by concealment of what should have been disclosed.
- Counterfeiting: imitating something with the intent to take advantage of the superior value of the imitated product.
- Contamination: the presence of an 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.
Looking back a few years, we can see that fraud has been increasing. In 2013, there was an increase of 38 percent in fraud cases over 2012. The public, along with the business community, were stunned by the news that about £55 million worth of bomb detectors being sold to the Iraqi government that turned out to be fake, resulting not only in financial damage, but also human injury and suffering. In addition, the food industry was rocked by the horsemeat scandal.
Progress in the use of analytics to prevent fraud?
On Sept 3, 2014 we saw the following headline: Pratt & Whitney sues supplier of titanium used in F-35 engines. The company is the sole manufacturer of engines for the Lockheed F-35 Lightning II and found out it had used substandard titanium alloy that might have been illegally purchased from Russia. Pratt & Whitney halted delivery of F135 engines that contained the suspect titanium. All products were impounded “… until the suspect parts were removed and replaced with alternately-sourced parts or were validated through mechanical testing.” The cost of recovery activities was over $1 million, not counting the cost to its reputation.
A month later, in October of 2014, CGMA Magazine (Chartered Global Management Accountants) featured an article by senior editor Sabine Vollmer, “Identifying Fraud, Waste, and Abuse in the Supply Chain”. ** She describes the results of a poll conducted by the magazine:
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 interviewed 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.
On November 8, 2017, Deloitte published a report (mentioned above) entitled “Use of Supply Chain Fraud Analytics on the Rise.” As a background to highlighting a shift in company practices, the report states:
Between 2014 and 2017, an average of 30.8 percent of poll respondents reported at least one instance of fraud, waste and abuse in supply chains in the preceding year. However, some industries saw higher and lower rates of financial abuse.
For the third time in four years, consumer and industrial products professionals reported the highest level of supply chain abuse for the past 12 months (39.1 percent), a slight decline from 2016 (39.6 percent). Energy and resources (34.7 percent) respondents also reported a higher than average rate of financial abuse in 2017, dropping a bit from 2016 (35.9 percent). Life sciences and health care professionals noted a marked decline in 2017 (26.3 percent) from 2016 (36.9 percent).
At the same time, according to a poll conducted by Deloitte, “…during the past four years, use of analytics to mitigate third-party fraud, waste, and abuse risks in supply chains has jumped to 35 percent in 2017 from 25.2 percent in 2014.”
Evaluating your company’s approach to preventing fraud
What both of the research reports and headlines cited above show is that fraud, counterfeiting and contamination of material moving through the supply chain is not likely to disappear any time soon. The rewards appear to be great enough for those who get away with it that the only workable solution is the implementation of tools that stop it from flowing all the way through a supply chain. This clearly demands a capability of testing and verifying each lot as it passes through each link in the chain.
Given this continuing (and perhaps even expanding) problem of fraud in the global supply chain, it may be useful to assess or reassess your company’s ‘tool chest’ in the face of this threat. To support this effort, listed below are some questions that take into account the research produced by CGMA and Deloitte. They may help your company in evaluating your current approach and considering plans for dealing with fraud during the coming year.
- Have you identified every supplier in your supply chain? Have you ranked them, and the items they provide, by the level of risk they represent, and determined what needs to be tested?
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.
- Have you evaluated and ranked the suppliers based on how co-operative they are, and how accommodating to your needs and standards?
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 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.
- Do you have a reliable method for validating each 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 test 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.
- Does your approach make it possible for you to render a sound judgment, based on all the evidence available to you (both testing and other factors, such as responsiveness, history, level of risk, etc.)?
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 in the key documentation of each shipment to clear it for invoicing?
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 specification. The kind and number of tests are dependent on the nature of the material and its risk in the supply chain.
What’s the most efficient, cost effective approach?
One EMNS customer (with 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 our GSQA® supply chain QA solution in a focused, efficient way. They identified key areas of risk, and targeted them with various modules of GSQA®. This approach has been very successful for the company 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®, www.gsqa.com , as an effective, efficient and affordable solution.