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What’s in the Wheelbarrow? Theft and the Supply Chain

Posted by lowellyarusso on August 5, 2010

What’s in the Wheelbarrow? : Employee Theft and the Supply Chain
A worker walked out of the construction site each day with a wheelbarrow full of dirt. Each day the guards at the entrance stopped him to sift through the dirt for stolen items belonging to the construction company. Finding nothing but dirt each time they sent him on his way.  Yet neither guard could shake the feeling that he was pulling a fast one on them. After several weeks, one of the guards said, “We give up. We don’t know what you’re getting away with. But, we’ll forget all about it if you’ll just tell us what you stealing.” How do you think he responded?

In some of my previous posts (Were You Ready For Eyjafjallajökull?, Do You Have a Uniform Problem In Your Supply Chain? Google, Coke, China and Katrina, etc.) I commented on risks in the supply base and larger business environment. Today, I want to look at a risk (employee theft) that is a) inherent in your internal supply chain, and b) rising at alarming rate.
First, consider some of the numbers:
• Total Reported Annual Theft by employees $40 billion+
• Average time to catch a fraud scheme 18 months
• % of corporate bankruptcies caused by 30%
Employee theft
• % of crimes that go undetected 75% (That make the total theft $150
Billion+)
• % of total revenues lost to internal fraud 7%
That should be sufficient to demonstrate that employee theft is a significant issue for your company. Given that most of these statistics are based on pre-crash data, it shouldn’t take a lot of effort to come to the realization that the last 12 months and the next 12 months (hopefully no longer) are likely to be even worse.
How does it apply to the supply chain? Well, a good deal of the theft occurs in two places, the receiving dock and the warehouse. Before going on, let me explain that I am thinking of both of those in a very general sense. A lot of theft occurs when goods (and sometimes services) are ordered but never actually received. More occurs when goods that are actually within your organization are pilfered. Here are a couple of examples that I have observed.
In one case, an individual was ordering substantial quantities of goods for which he had purchase authority. So far so good. Except that they were delivered to his home, not to the company. He had a thriving business out of his home office selling parts on the side. That was theft at the boundary. In another, similar case, an individual at a distribution center was double shipping to customers, taking the returns and diverting them to fill other orders and pocketing the payments. That was theft from within the boundaries.
Given that employee theft is likely to become more significant in the future and the startling statistic above about the relationship between financial performance and theft (30% of bankruptcies attributable to theft), this is not an insignificant issue for any company. And, it is an issue that, at least for the two examples cited above, must be addressed within the Supply Chain organization. So, what should Supply and Sourcing Professionals do?
First, take a critical look at your policies and procedures. There are two key issues:
• Does the organization have adequate controls
• Do the people understand and implement the controls
To the first issue, let me first say that I have frequently been amazed at the number of organizations in which I have found that the most rudimentary controls are lacking. Purchase orders are not reviewed. Invoices are not reconciled with purchase orders. Deliveries are not matched with invoices or orders. Usage is not tracked. Breakdowns are not verified. And so on. In many other organizations, some of these controls are rock solid but others are weak or non-existent. The amount of theft that goes on confirms the suspicion that in most organizations there are glaring weaknesses at some point in the Supply Chain.
What should be done? First, make establishment of controls a priority and think like the thief. The first is easy. For some of us, the latter is a challenge. As the software industry has discovered, determined people with larceny in their hearts can find a way around almost any security system. That should not stop you from trying. And, the more difficult the controls make it, the fewer who will bother to make the effort.
Second, don’t trust the computers to do the work for you. Many companies let their policies grow stale because they assumed no one could beat the purchasing module in their ERP system. I have never known a system that functioned to be that secure. Work arounds are always possible and, indeed, most systems have built them in to handle emergencies and unexpected demands. And, the message that is sent when there is no organizational effort to address the issues can be devastating.
Finally, periodically audit what is actually happening and do it randomly and without notice. Again, this seems to many to be overkill. It’s not. And, it does not have to send a message of distrust. It can, and should, be presented as an effort to test the system, not catch the employees.
The problem in most organizations is the accumulation of small losses. In one company with which I worked, their annual cost for MRO was cut by two-thirds when they put a lock on the tool room and required workers to fill out a form before drawing supplies. When we looked into it in detail, part of the savings came about because workers did not automatically toss anything with the slightest blemish. A much larger part came from an apparent reduction in the number of things that “walked out by themselves”.
With regard to the second issue, people must understand the controls system, why it is necessary, and their role in preserving the value in the business. That means that controls should be explained in detail. That means both what is required and why it is important. One major challenge is ensuring that employees see that the effort at controlling the supply chain applies to the entire organization. It is hard to convince someone on the shop floor that this is important when they see their boss mis-using the company’s resources. In one case, employees said they were encouraged to be less than fully watchful since their manager, whose spouse had a home business, routinely took packaging materials, boxes, and other goods from the company with the explanation, “Big order. Don’t have time to get to Office Depot.” That kind of example from the top fuels a total disregard for the whole concept of maintaining control over the company’s assets.

The guy’s response? “Wheelbarrows, of course!” My last caution is that, quite frequently, the issue is in such plain view that no one sees it.

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One Response to “What’s in the Wheelbarrow? Theft and the Supply Chain”

  1. Anne Kohler said

    Lowell, Great post!!! I would be interested in seeing the statistics on employees stealing time which can be just as costly! I am thinking of texting, web surfing and IMing during business hours which I believe is fairly prevalent these days. Perhaps an idea for a future post . . . .

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