Supply Chain Solutions No.32 – Supplier Deception
When a supplier lies about who they are, have cash flow challenges temporarily disrupting supply or impending bankrupcy crippling the supply chain, the business effects can also be devastating due to loss of sales and customer reputation.
Through the evaluation process, due diligence needs to be completed to ensure the vendor is who they say they are, and the lawful owners are who they say they are, know the facts and don’t take them at face value. Ask for a copy of the business license and tax registration, check the physical address is the same as the business location evaluated, who are the business owners on the business certificates and or the legal business representative, does the information match what you were told and business cards received?
Once confirmed to go ahead with the vendor, do check the business bank account details, does the bank account name match the business license? It is preferable that payment is only made to a bank account where the business name matches the bank account and business license reducing the risk of fraud.
Further due diligence can be conducted with third party services like Dun & Bradstreet http://www.dnb.com, who are an organisation that can offer different levels of credit risk evaluation.
Through my sourcing history, I have faced two major challenges, all at the beginning of 2000, where suppliers committed fraud in the initial assessment process. Both these challenges were caused by staff members taking bribes from vendors to influence the approval process and to get a personal financial benefit. Below is a summary of the two cases;
Case Study 1 – Bankruptcy
A company merchandiser introduced a potential vendor; we went to the garment vendor’s facility arriving at about 6 pm, there were no visible workers, and the overall manufacturing installations and evaluations were positive.
After first trialling had been successful, bulk production contracts were placed with the vendor. Through the development process, it became increasingly difficult to contact the key person. Re-visiting the facility, it was visually sighted that the company signs were different, and the business contracted no longer owned the facility.
Discussions with the local tax department revealed that this company was in bankruptcy. Chance happened that a trading company contacted us asking why we had used their name to order fabric. Visiting the fabric mill we learned that it was the bankrupt company that had booked the fabric under the trading companies name and had paid a 30% deposit. As there was still no contact with the bankrupt company, another garment factory was contracted to make the goods ultimately making it possible to achieve delivery to the customer by airfreight which was covered by the deposit paid by the bankrupt vendors to the fabric mill.
After production was delivered to the customer the bankrupt vendor reappeared looking for the funds given to the fabric mill as a deposit; refund was refused, and it was explained that the funds were used to pay for the airfreight. Disgruntled by the idea, two henchmen were employed to follow me and disrupt business; local police relationships were used to make the henchmen vanish after three days of persistence.
It was concluded by tax authorities some weeks later that the bankrupt company had paid RMB20,000 to the merchandiser who introduced the vendor who was stated in the vendor’s accounting records.
Case Study 2 – False Identity
Faced with an opportunity to supply a large UK retailer with substantial garment business, a sourcing need arose for an SEDEX qualified vendor that could meet product manufacturing standards. The business development manager introduced a supplier that met all necessary criteria from a CSR, price, product manufacturing and quality perspective.
Likewise, as Case 1, trial orders went well, and further bulk orders were placed with this vendor. Deliveries were on time, but the quality was unacceptable, discussions with the quality manager revealed that the production was not in the factory contracted, and the goods had been contracted to several subcontract factories, different sizes and colours to different small factories.
Revisiting the vendor, I learnt the General Manger previously met was the GM of the washing factory and not the GM of the overall facility which I had previously been told. The GM met had organised for the product to be subcontracted to smaller factories and was taking a commission that meant the main vendor was making a negative margin.
Learning from the owner of the factory, this scheme had occurred across multiple customers, and the vendor had lost a significant amount of money. The person alleging to be the GM at this point had gone into hiding with the police in pursuit; he was later arrested and prosecuted.
The order was repaired by the contracted vendor, and all initial drops were airfreighted to ensure delivery was maintained. The business development manager and the quality manager were terminated due to collusion with the fraudulent individual posing as the GM.
Both Case 1 & 2 could have been averted if a Dun & Bradstreet evaluation was conducted as it would have been concluded that for Case 1 the company was bankrupt or at the time of the audit near bankrupt and for Case 2 the individual posing as the GM was not the legal representative.
More general within vendors is cash flow mismanagement due to procedural challenges, blatant neglect and misappropriation of funds. Case 3 details a combination of all three which finally affected the supply chain.
Case Study 3 – Cash flow neglect
The fabric team advised that a nominated fabric supplier was owed a considerable amount of money by a contracted soft goods manufacturer. Initial investigation revealed that the whole statement and the due amount were two different things, but there was still a sizable sum of money outstanding.
What was surprising being the amount on the entire statement which didn’t match the current finished goods orders. The investigation revealed the vendor had purchased all fabric for forward orders on receipt of contract irrespective of the lead time for material and finished goods production. Bottom-line the vendor had purchased all fabric for eight months of forward orders, knowing the manufacturer was going through an expansion process it was evident cash flow difficulties would ensue.
The situation was resolved by changing payment terms from 60 days to 15 days, and settlement of all current accounts to ensure the nominated fabric supplier received payment and as to not disrupt supply to other suppliers. It was later learned, that payment to the fabric vendor was made in part only, and had given the vendor a payment plan.
I was then informed that the finished goods vendor had purchased a new Porsche. Payment challenges then persisted for several months after that while the situation was corrected.
Summary, it is very common to hear about vendors that have misappropriated funds for payment of salaries and downstream suppliers. I don’t know how many potential employees in South China I have interviewed and asked why are you looking for a new employer, to learn the owner of the company spent half his life in KTV and or gambling in Macao.
While this is potentially challenging to your business, if you are contracting this business for manufacturing or a service, the owner’s erroneous habits may affect your supply chain.
Understanding and managing your supply chain, and the entire chain of custody across downstream vendors will help ensure success in delivering customer and brand expectations. Managing suppliers are about relationships, mutual understanding and due diligence to ensure both parties are on the same path of understanding and goal achievement.
Are you getting what you ordered from your vendor? Regardless of your current vendor evaluation process, are you getting a compliant, fit for the market product at a value price?
ID Global Concepts are experts in supply chain management. We add value to your supply chain through consultancy or management contract to ensure the business has the best practice systems that are the right fit for your business, customer and meet your value expectations.