Supply chains are extremely complex systems, particularly today, where automation technologies and digital monitoring are involved alongside the human workforce. With complexity comes more risk of fraud and theft, unfortunately, but it also supports more extensive measures for detecting and preventing fraud.
Why Supply Chain Fraud Happens
Generally speaking, an individual may commit fraud for one of three reasons: motive, opportunity, or rationalization. The average shrink, or loss, percentage in the industry is 2%, according to the 2016 National Security Survey. This equates to over $49 billion in annual losses for retail businesses altogether.
Companies can help reduce fraud in their supply chains that happens due to motive and rationalization by having strong policies (with adequate enforcement) for their employees. But the most effective way for companies to combat opportunity-based fraud is to make sure that their internal controls are sufficient and strong, and that they have adequate risk monitoring and evaluation.
[Related: Best Practices for Optimizing Supply Chain Management]
How to Detect Fraud in the Supply Chain
According to the Association of Certified Fraud Examiners (ACFE), the most effective way to detect fraud in the supply chain is to solicit and encourage tips, and then investigate them. Last year’s “Report to the Nations” noted that tips are the most used method for initial detection of fraud in the supply chain.
Another commonly recommended way to identify where fraud may be happening in your supply chain is to conduct surprise audits and inventory checks, of both your vendors and your workforce. Since employees know how to work around routine audits, it’s important to vary the audit procedures or conduct unscheduled audits to keep results accurate and improve your chances of identifying any fraudulent activity.
Monica Eaton-Cardone, co-founder and COO of Chargebacks911, says that the most important thing about identifying theft and fraud in your supply chain is understanding where the risks are.
“Start by regularly conducting evaluations and risk assessments to analyze potential factors that can negatively affect the company… analyze the workplace and look for any uncertainties, events, and hazards to determine what could go wrong (i.e., use a risk-profiling questionnaire),” she said.
Once you have an idea of the risks your company is exposed to, you should outline these risks for your team and give them directives to reduce liability with continued tracking and prioritization of the ones that impact your workplace the most.
How to Prevent Supply Chain Fraud & Theft
According to Mark Struss, practice director of manufacturing operations at Patina Solutions, “The key to preventing losses in the supply chain is communication, enforcing basics, logical policies, and leveraging technology.” Struss outlined how these four areas help minimize supply chain fraud:
- Communication: It’s important to communicate to the organization through the mission statement, handbook, or other means that integrity is a non-negotiable value.
- Enforcing Basics: Rigorous adherence to GAAP — such as enforcing the three-way split between the requestor, the receiver, and accounts payable — is important, as is the three-way match of PO, invoice, and verified bill of lading.
- Logical Policies: Create logical policies that limit opportunity and reinforce integrity values. Ideas such as using only clear trash bags and, depending on the size and value of the components, lunch box inspections at clock-out may make sense.
- Leveraging Technology: Cameras in key places, barcodes to help in transactions and accuracy, and monitors in the common areas that scroll the mission and values all reinforce the basic outline. Do not rely on technology to create the system or to stand alone. It could backfire by being turned against you to make a small incident more extensive.
For Calloway Cook, founder of Illuminate Labs, “the best way to negate fraud and theft in your supply chain is to choose a fulfillment partner with an inventory management system that counts each individual SKU.” Most fulfillment companies will just use an estimate that is based on pallet count. While maintaining exact numbers of SKUs is time-consuming, the company is left with incomplete information if individual SKUs aren’t monitored. “I actually had a shipment arrive 8% short once, and was able to negotiate a refund with my supplier. This would have not been possible without a fulfillment partner which counts each SKU,” Cook explains.
CJ Xia, VP of Marketing & Sales at Boster Biological Technology, adds that supply chains should “use barcode and asset tracking software to improve inventory control. In case of fraud or theft investigation it becomes possible to track where an item is, how it got there, and who had access to it last,” he said. Monica Eaton-Cardona from Chargebacks911 agrees: “You should have sourcing visibility by using barcode technology to track your inventory and make sure your inventory is regularly updated.”
Xia also says that “divide and rule” is the key to prevent employee theft in the supply chain. It’s a mistake to “give control of the whole process, e.g., ‘purchase department’ to one person. For example, you should separate the functions of payment, receipt, and preparation of purchase so that no single person has the power to oversee an entire transaction,” he said.
Stacey Kane is the business development lead at Easy Merchant, where, to help prevent fraud and theft, they “keep a detailed database of all [their] products and stock levels, which helps [them] know exactly how much [they] have and if anything goes missing.” Kane explains further, “Regular stock checks and audits are also done at the warehouse so we can ensure everything matches across the board and that our website stock levels correctly match what our database says.”