Supply chain fraud is on the rise – here’s how to combat it

The tough economic climate is helping criminals to flourish in the supply chain, but there are key measures that businesses can – and should – take to safeguard themselves and their customers

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When the US suffered a serious shortage of baby formula last year, fraudsters treated it as a lucrative business opportunity. In one notable case, a gang in Florida used a fake company to buy thousands of cartons of formula from several manufacturers, securing deep discounts on the basis that these would be shipped to Suriname to fulfil a government contract. It then created fake export records and sold the product in the US instead, at grossly inflated prices. 

The fraud is estimated to have cheated the manufacturers out of at least $100m (£82m). Although three gang members were caught and jailed, supply chain fraudsters are becoming increasingly successful on both sides of the Atlantic. 

A British company, for instance, seems to be behind an ongoing scandal in the airline industry, where the use of bogus documentation has enabled an influx of counterfeit engine parts. Research published by consultancy Accuracy this August has even revealed that the number of reported procurement fraud cases in the UK had increased by 13% year on year. 

“Supply chain fraud has been around for a long time, but it is quite rampant and it’s moving into new industries,” reports Atanu Chaudhuri, professor in technology and operations management at Durham University Business School. 

How supply chains become vulnerable to fraud

What factors could be fuelling this trend? A lot of companies rely on complex and often fragile supply chains, while facing near-constant pressure to reduce their expenditure on procurement as the cost-of-doing-business crisis grinds on. 

It’s important to keep making old-school random visits to suppliers

Supply chains, many of which haven’t recovered fully from the disruption they incurred during the Covid crisis, are increasingly managed by remote workers. This can make it harder for firms to ensure that the crucial processes of due diligence concerning supplier selection and bidding are being completed properly. 

Supply chain fraud has long been a problem in industries such as pharma and food, where counterfeiters can easily profit from adulterating high-value goods with cheap ingredients, for instance. But fraudsters are increasingly targeting component manufacturers and other industrial manufacturers, according to Chaudhuri. 

“It can be very difficult to address that sort of fraud, because most buyers in these sectors don’t have much of a view of third- and fourth-tier suppliers,” he notes. 

Why prevention is better than cure on supply chain fraud

When it comes to countering supply chain fraud, the best place for most firms to start is to minimise their exposure, Chaudhuri advises. This means consistently applying best-practice due diligence in procurement. Once a supplier is secured, for instance, its performance should be monitored over the lifetime of the contract, which means engaging with it regularly and asking probing questions. 

A company should also map out its supply chain to identify particularly vulnerable links and how such risks can be mitigated. 

“Mapping is easier said than done, but you need to know all the things that go into your product,” says Chaudhuri, who adds that you must ascertain the answers to questions such as: “What are the raw materials and where do they go next? Who processes what – and where? Most large companies still can’t answer those sorts of questions.” 

This sort of mapping and risk analysis has been a source of comfort to Jason Lowry in his capacity as director of procurement at Yodel. He reports that the practice has enabled the logistics giant to “have a comprehensive awareness of the risks and put robust measures in place so that it doesn’t fall foul of fraudsters”.

That means enforcing company-wide procurement policies to a meticulously high standard and conducting regular audits of the supply chain. 

“We’ve also deployed a risk register that scores the entire supply chain against the ISO 31000 risk management framework,” Lowry says. “And we’re rolling out an e-procurement platform that will monitor, measure and evaluate our supply chain, providing a single view of it and giving us greater control.”

Can technology eliminate counterfeiting?

He believes that companies could, in due course, be using technologies such as generative AI and blockchain to monitor buying behaviour and identify anomalies that might indicate fraudulent activity. 

But, while such tech could potentially help to stop the fraudsters in their tracks, Chaudhuri stresses that it’s early days yet. 

Mapping is easier said than done, but you need to know all the things that go into your product

“It’s a long way from being something you buy off the shelf,” he says. “In the meantime, it’s important to keep making old-school random visits to suppliers, maintaining face-to-face contact with them.” 

Firms that can’t easily map their whole supply chains should stay alert for telltale signs that something might be amiss, advises Akash Bedi, chief strategy and operations manager at H&H Global, a health and nutrition company. 

“If a supplier came to us saying that it could lower its price, for instance, we wouldn’t just jump on that,” he says. “Any proposed change to a product specification or a supplier would first have to go through change control, a process involving our operations and commercial teams as well as the procurement department.”

How to make supply chains more transparent

While it’s tempting to take any opportunity to reduce your costs, putting suppliers under pressure to lower their prices can be counterproductive, Bedi adds. If you’re constantly doing that, “your suppliers will either go out of business or start cutting corners”.

He reports that the most common type of fraud he sees in H&H Global’s sector is the sale of goods in markets they weren’t made for. For this reason, the firm is investing in technology designed to improve the visibility of second- and third-tier suppliers globally. 

“The supply chain for 80% of our raw materials is fully visible to us. In the case of baby nutrition, that figure is 100%,” Bedi says. “Any time a new ingredient comes in, we go through a full validation process covering the supplier, the specification and the certificate of authenticity.” 

That level of transparency and due diligence should go a long way towards keeping fraudsters out of any supply chain. It’s the kind of formula that might have saved certain US baby-food producers a lot of costly trouble.