As many individuals and organisations are finding out, today’s supply chains are incredibly long and complex. Goods can cross many borders, often several times, to complete a final product. Most of the time, as consumers, we don’t know or care about such issues. However, the coronavirus crisis and concerns around food supplies and other essentials have brought this sharply to our attention. And this creates conditions ripe for supply chain fraud.
Disruption and shortage of products
Consumers have been panic buying some key essentials and even stockpiling certain items. This has caused a rapid increase in demand, placing a strain on the supply chain. It has become an emergency issue within certain supply chains, for example, those involved in the manufacture of ventilators to treat COVID-19 patients and protective equipment for hospital workers.
Organisations that thought they had robust supply chains in place are finding that they were relying on a single supplier, country or distribution capability. This has led to significant disruption in the goods many of us take for granted and could lead to shortages of certain products, some potentially lifesaving. And the issue even extends to some nonessential items. Apple has already announced issues with the manufacture and delivery of the popular iPhone and falling revenues.
Complexity masks reality
The sheer amount of data and complex relationships are not easily understood within procurement departments and can mask a number of underlying problems and opportunities. For example, organisations need to consider a number of issues:
- Does the range of suppliers support strategic purchasing aims for diversity, robustness and value? What you think are independent trading companies may be owned by a single parent company.
- Are you leveraging purchasing power by amalgamating purchases at the parent organisation level? Instead of negotiating with each separate organisation over five contracts of £1 million each, use the full £5 million as the basis for negotiation.
- Can you be sure that you're only paying for goods and services properly invoiced and received? Suppliers may send multiple invoices. Or even send invoices for products you did not order, hoping that a busy department will simply pay the invoice.
- Do the goods meet the specification that was ordered? For example, you should question and look into a supplier delivering lower specified IT equipment than ordered.
- Are you dealing with networks of companies where senior employees recommend organisations where they have an existing connection or relationship? We’ve seen examples where directors sit on the boards of each other’s companies with the potential for a conflict of interest.
The sheer amount of data and complex relationships are not easily understood within procurement departments and can mask a number of underlying problems and opportunities.
Real-life examples
One example of supply chain fraud from the construction industry is where firms collude with competitors to inflate building contracts. This is known as "cover pricing." In this situation, bidders submit artificially high bids to give the impression of competition. Then the “losers” in the bid will often get compensation payments for their part in the deception. The Office of Fair Trading (OFT) imposed fines totalling £129 million on 103 construction firms in England.
In an example of price fixing, the NHS saw a sharp rise in the price of generic drugs, which are usually cheaper than the equivalent drug under patent. No criminal charges were brought, but three of the seven companies involved settled out of court without admitting liability. In a subsequent case, a pharmaceutical company admitted anti-competitive practices and paid £8 million in fines for fixing the price of a hormone imbalance drug.
Deep understanding is key
Today's long, complex supply chains generate huge amounts of data and increase the opportunities for supply chain fraud. The importance of understanding them and gauging how resilient they are has been brought into sharp focus by the COVID-19 pandemic.
Having this greater understanding can also protect against fraud. Analytics helps organisations to make sense of this data and make sure organisations fully understand what is happening. Understanding your data means you can detect supply chain fraud and get the best value for your money.
SAS has been working with many organisations on continuous compliance and simplifying the complex layers of supply chains, consisting of tens of thousands of suppliers and millions of payments and purchase orders. Find out more about how SAS can help you to improve continuous monitoring to guard against supply chain fraud.
