Tough times increase supply chain fraud risks
Manufacturers can better protect goods by instituting more effective practices.
In summary:
| • | Economic woes lead more people into temptation. |
| • | Careful management of the supply chain, with an eye to security, is critical. |
| • | Software such as Microsoft Dynamics provides tools to assist efforts to identify and prevent fraud and theft. |
Crime has no season and no bounds. It happens all the time and in places you might not expect. For instance, a Tennessee factory worker was charged recently with stealing almost three tons of pure tin worth an estimated $57,000 from his employer. As companies have become "extended enterprises" through globalization, outsourcing, and the reengineering of their business processes, they've exposed themselves to infinitely more opportunities for supply chain fraud, such as bogus invoicing, product diversions, and plain old out-the-back-door theft, according to a recently released Global Fraud Report from Kroll, a risk consulting company owned by Marsh & McLennan.
According to experts like Mark Sullivan, head of loss prevention and managing director at Kroll, when economic times are tough, the risks of fraud and theft grow, leaving your whole supply chain, and even your own internal operations, vulnerable. Small and midsize businesses can be at even greater risk because they are typically built on trust between individuals—a trust that can be easily violated. "In an internal fraud situation, it is often the case of someone who has a great lifestyle but [is] leveraged to the hilt, and when their adjustable mortgage suddenly kicks in they may go looking for a short-term fix," says Sullivan.
Smaller companies may also be more vulnerable because they typically don't have a dedicated person to watch for thefts. They may also not have the resources for proper internal audit practices, and, if they are not public companies they are not subject to Sarbanes-Oxley requirements, which demand a high standard of internal auditing.
Sullivan says SMBs should be proactive in seeking to prevent fraud and theft. "The most important thing to know is who you are doing business with, internally and externally," he says. Thus, it is important to conduct thorough background checks on employees. "If you use a temporary agency, you need to make sure they are doing it for you," he says. "And you need to know your vendors and your vendor's vendors." That care and caution need to extend to suppliers of material, transportation carriers, and third-party logistics companies—anyone who will have possession of your materials at a given time.
Leveraging software solutions
A number of software products are available to help you to maintain the security of your supply chain. For instance, Microsoft Dynamics solutions can provide you with the tools to plan and coordinate product delivery while keeping a watchful eye on the process. Specific features available through Microsoft Dynamics products include:
| • | Alerts to prevent employees from issuing invalid purchase orders. |
| • | Process control to provide purchasing cost variance tracking and to track receiving/invoicing against multiple purchase orders. |
| • | Automated routing of purchase orders that exceed designated team-member purchasing limits for approval, before the items are processed or shipped. |
| • | Complete tracking of open or historical purchase order and receiving documents by order number, item number, or date. |
| • | Set-up for a "middle site" in an inventory transfer process for better in-transit tracking. |
| • | Audit control for cancelled-item tracking, line-item ordering and status information, document revision tracking, and customized landed cost definition. |
| • | Analysis of purchase activity with purchase order status, invoice cost variance, and posting reports. |
Let employees know they’re being watched
Indeed, the additional oversight provided by such tools can be critical. "Perception is very important. If people think you are watching and that they have a good chance of getting caught, they are less likely to do something," says Bill McBeath, managing director for Supply Chain Risk Intelligence at Marsh & McLennan. "When you are running a small business, this is the last thing you want to have to think about; you want to be able to trust. But it is critical to give it your attention."
Ultimately, says Sullivan, it is up to top management to set the tone, provide guidance, and ensure a system is in place to control physical access. HR should vet employees, and sourcing and procurement professionals should vet suppliers. And IT needs to be proactive in determining where there might be vulnerabilities in processes and in access, both online and in terms of physical access.
 | Alan R. Earls is a contributing writer for Momentum, the Microsoft Midsize Business Center newsletter. |
