Fundamentals of Supply Chain Management: An Essential Guide for 21st Century Managers
This book excerpt chronicles the history of supply chain fraud from the Trojan Horse (which the authors cite as an object lesson in the need for inbound inspection) to the shenanigans of two middle managers who circumvent a security program that the TSA would envy to divert truckloads of high-tech equipment into so-called "alternative channels."
Art van Bodegraven was, among other roles, chief design officer for the DES Leadership Academy. He passed away on June 18, 2017. He will be greatly missed.
In their new book, Fundamentals of Supply Chain Management: An Essential Guide for 21st Century Managers, authors Kenneth B. Ackerman and Art Van Bodegraven offer a tour of the supply chain universe in the best "Star Trek" tradition. After they cover the basics (warehousing, transportation, material handling, and so on), the authors boldly go where few have gone before, exploring the strange new worlds of "lean" supply chains, supply chain migration, and the "green" movement. In other chapters, they return to the more familiar worlds of finance and accounting, human resources, and litigation, though always approaching the subject from a unique supply chain perspective.
This excerpt chronicles the history of supply chain fraud from the Trojan Horse (which the authors cite as an object lesson in the need for inbound inspection) to the shenanigans of two middle managers who circumvent a security program that the TSA would envy to divert truckloads of high-tech equipment into so-called "alternative channels." ("Think Tony Soprano. With better paperwork.") After tracing supply chain fraud through the ages, the discussion takes a more serious turn, concluding with an outline of a five-step anti-fraud program.
Our friend Whitney Massengill has observed, "A gang armed with guns can easily steal thousands. A gang armed with pens can just as easily steal millions—and the prison terms are shorter." Enron may have provided the ultimate proof of concept, but the supply chain world has been plagued by fraud and deceit since long before supply chains were known as supply chains. The manifestations, while often physical, are also found in the cooked books.
Not so long ago, it was stunningly easy to put an extra case or pallet on a truck for the driver to sell, splitting the take with the inside man. Today's information systems may make detection quicker, but collusion theft has hardly gone away. And in the meantime, modern forms of fraud have emerged, many of them complex—even elegant—in their design and execution.
The Classics of a Golden Age
It seems that fraud, in its infinite variety, has been around about as long as the human race. Some would cite Homer's Trojan Horse as an early example of logistics fraud, illustrating the need for inbound inspection. Maybe the good ol' days weren't so good after all.
The Teapot Dome scandal that engulfed the Harding administration involved shady doings around oil reserves.
Product adulteration or dilution has been practiced since the earliest times; it is not a modern phenomenon limited to the narcotics trade. Back in the day, it might involve such commodities as sugar, coffee, flour, and liquor.
Outright theft, of course, remains a staple occupation in some locales within our globalized supply chains. Some shippers deliberately send extra truckloads of product into known high-theft areas, knowing that they can expect to lose a predictable percentage of the cargo to hijackers.
An interesting variant of the extra-case scam involves unscrupulous suppliers who would ingeniously stack pallets with a case or a bag missing from the inside of the stack. The omission is not visible until or unless the pallet is broken down. But by then the goods have typically been paid for, and the missing case has disappeared into someone's personal supply chain.
Truth is, some of the more spectacular frauds in business history have had a supply chain management flavor.
In More Recent Times
In the annals of corporate misdeeds, the recent Enron scandal has overshadowed all others, and, of course, it had nothing to do with the supply chain. But what about McKesson & Robbins? In 1938, the giant wholesale distributor got caught up in a case of accounting fraud that involved a non-existent $10 million worth of inventory in Canadian warehouses that also didn't exist. The sum of $10 million was more than pocket change during the Great Depression. While considered at the time to be accounting fraud, the case might be more accurately described as a conspiracy between physical supply chain operations and accounting to perpetuate fraud. In the '80s, a large public accounting firm was brought down foreshadowing Arthur Andersen's collapse when entire manufacturing and storage facilities were belatedly discovered not to exist.
The '60s saw plenty of scandals as well. Billy Sol Estes, politically connected with Lyndon Johnson, managed a double whammy in the first half of the decade. First came the improper purchase of cotton allotments, aided by payoffs to Agricultural Adjustment Administration minions and complicated by the suicide of a principal antagonist. Then in a notorious exit from the public arena, Billy Sol was found to have extracted enough money to fund the illegal allotment transfers by using phantom fertilizer tanks as collateral. He was released from prison in 1983.
In 1963, in news largely overshadowed by the Kennedy assassination, Tino De Angelis, principally financed through loans guaranteed by American Express, was found to have storage tanks full of water. That wouldn't have been a crime, except that the tanks were supposed to be full of salad oil. AmEx was not pleased. Nor were Manufacturers Hanover Bank (among about four dozen banks), Bunge Corporation, Williston and Beane, and Ira Haupt Brokerage Company, all of whom got taken. Foreshadowing events that would unfold nearly four decades later, a major public accounting firm was ultimately accused of negligence.
It seems that De Angelis couldn't help himself. Earlier in his career, he had gotten away with selling bad shortening to post-war Europe and spoiled meat to U.S. school lunch programs. Encouraged by his apparent success, he then put together an ultimately failed plan to corner the world market in soybean oil.
Tino, only momentarily the pride of the Bronx, himself got taken, but to the pokey, for several years. Upon release, he attempted to recover his lost fortune with a Ponzi scheme,* which required more credibility to pull off than Tino possessed. The price tag of this oil escapade was a trifling $175 million, which would approach $2 billion in today's money.
Where Were the Auditors?
Uncovering fraud is not an arena in which the mild-mannered certified public accountant (CPA) has typically excelled. It's not that CPAs are naïve or feeble-minded, but that these aren't really the things they've been trained to run to ground. The auditing firms have been generally more concerned with matters that have material impact on the balance sheet or income statement—known material impact, that is.
Furthermore, because CPAs most often were not operations people, they didn't always know what to look for when physical inventories were involved. In one celebrated case, the fraud was so extensive that the company in question loaded bricks of approximately the right weight into sealed cartons ostensibly containing technological equipment. The physical inventory disclosed the right number of cases, and it never occurred to anyone that something else might be inside.
In another major event, the headquarters inventory was fine. But no one deemed the relatively tiny store inventories worth examining. Regrettably, fictitious transactions had moved mountains of non-existent product into phantom local stocks, creating enormous but false sales volumes.
Prevention
Over the years, companies seeking to prevent fraud have tried solutions as high tech as biometric screening and as low tech as intuition with approximately equal results. We vividly remember the very large international technology distributor that invested a lot of money in screening devices through which each and every employee, visitor, vendor, contractor, and consultant was required to pass. No one could enter or leave the DC at any time or for any purpose the start or end of a shift, in and out for lunch, or in and out for breaks without undergoing screening. The distributor's concerns were well-grounded because its products were both valuable and highly desirable in the consumer market.
While the working associates were queuing up to pass through a "security" process that would have made a TSA screener proud, however, two mid-managers were successfully conspiring until they were caught to move and sell truckloads of high-value product out of the distribution center and into what might be called alternative channels. Think Tony Soprano.With better paperwork.
So many times, it seems that thievery is discovered only after huge losses have been incurred over a long period of time. In another case we encountered, a chemical manufacturer for the automotive aftermarket became suspicious that product might be "leaking" out of its factory DC. In the end, its suspicions proved to be well founded. It turned out that thieves were taking a truckload of merchandise a day out of the DC and off the books through a scheme involving phony paperwork for phantom customers. But it took months of surreptitious observation and digging through paper and electronic files to come up with conclusive evidence and nail the individuals involved.
In another situation, no one in a catalog retailer's senior management ranks had even the remotest suspicion that a traffic manager of some 20 years' standing might be on the take. But a routine fact-finding analysis, with no agenda other than assessing potential improvements, found carrier selections that made no sense. The manager was allowed to quietly resign and keep the money, though it seemed that the offense called for a pistol-whipping at the very least.
An Organized Approach
In recent years, the impact of the Sarbanes-Oxley Act has been felt in the supply chain management arena, quietly requiring companies to put controls in place to prevent, identify, and detect fraud. PricewaterhouseCoopers (PwC), the public accounting and services giant, has published a white paper devoted to fraud schemes in the transportation and logistics sector. That white paper addresses not only the risks associated with financial reporting, but also the risks to a company's reputation and the legal and strategic implications of fraud. Ken Evans, the firm's U.S. transportation and logistics leader, has asserted that 45 percent of all companies have been victims of economic crime. (In the interest of full disclosure and in the spirit of Sarbanes-Oxley, we confess to being PwC alumni, having a predecessor firm as our consulting alma mater.)
PwC's five-step anti-fraud program is the usual straightforward, even dull, recitation, with the devil as well as the excitement and the effectiveness in the details. Its recommendations are as follows:
Establish a baseline, preferably with a multi-disciplinary team, that includes the development of remediation plans;
Conduct a risk assessment that is not only an inventory but also a weighting of likelihood and seriousness;
Evaluate controls design and effectiveness, with major roles and responsibilities for operating management;
Assess residual financial reporting risks, which link fraud risks to internal audit weakness and ineffectiveness;
Standardize incident investigation and remediation processes that recognize that fraud will occur in the real world, and demand that the gaps be filled on a continuous basis.
In PwC's assessment, fraud and misconduct schemes can be classified into the following six categories:
Financial statement manipulation, which can be sub-divided into improper revenue recognition and the over- or understatement of assets and liabilities. This is really the mother lode, encompassing such things as manipulation of estimates, over-accrual of rebates and receivables, understatement of liabilities, overstatement of receivables, sham transactions with related parties, overstating revenue, fictitious transactions, premature revenue recognition, revenue leakage, backdated and side agreements, and "round-tripping," transactions with no net economic benefit that can inflate earnings.
Asset misappropriation, including cargo theft, fraudulent disbursements, cash skimming, industrial espionage, and "lapping" or theft of customer payments.
Unauthorized receipts and expenditures, including bribery, tax evasion, improper labor practices, and fraud against employees (e.g., failure to fund pensions or pay insurance premiums).
Aiding, abetting, or helping a third party commit fraudulent acts.
Senior management fraud, including, in addition to involvement in all of the above, conflicts of interest and insider trading.
Disclosure fraud, including the intentional omission or misstatement of such items as channel stuffing, even if they conform to Generally Accepted Accounting Principles (GAAP), the usual gold standard for what practices are allowable.
We salute PwC for its work in this area. Its efforts could go a long way toward restoring accountants' reputation and credibility.
New Disciplines
We have reached a point of understanding the nature, variety, and scope of supply chain fraud, and the linkages between its physical and financial components. It's time for a couple of forces to join together in fighting these crimes.
Forensic Accounting has been around for a long time, certainly since the days when Al Capone was jailed for tax evasion instead of murder. We see a need for a newer specialty that could be called Forensic Logistics and would entail the analysis of operations for evidence of and potential for bad behavior.
Putting these two together might put real teeth in efforts to thwart supply chain fraud.
*NOTE: PONZI SCHEMES ARE INVESTMENT SCAMS HAVING SOME SIMILARI- TIES TO PYRAMID SCHEMES. THEY ARE NAMED FOR CHARLES PONZI, WHO PROSPERED ILLICITLY IN THE EARLY 1900S.
Nearly one-third of American consumers have increased their secondhand purchases in the past year, revealing a jump in “recommerce” according to a buyer survey from ShipStation, a provider of web-based shipping and order fulfillment solutions.
The number comes from a survey of 500 U.S. consumers showing that nearly one in four (23%) Americans lack confidence in making purchases over $200 in the next six months. Due to economic uncertainty, savvy shoppers are looking for ways to save money without sacrificing quality or style, the research found.
Younger shoppers are leading the charge in that trend, with 59% of Gen Z and 48% of Millennials buying pre-owned items weekly or monthly. That rate makes Gen Z nearly twice as likely to buy second hand compared to older generations.
The primary reason that shoppers say they have increased their recommerce habits is lower prices (74%), followed by the thrill of finding unique or rare items (38%) and getting higher quality for a lower price (28%). Only 14% of Americans cite environmental concerns as a primary reason they shop second-hand.
Despite the challenge of adjusting to the new pattern, recommerce represents a strategic opportunity for businesses to capture today’s budget-minded shoppers and foster long-term loyalty, Austin, Texas-based ShipStation said.
For example, retailers don’t have to sell used goods to capitalize on the secondhand boom. Instead, they can offer trade-in programs swapping discounts or store credit for shoppers’ old items. And they can improve product discoverability to help customers—particularly older generations—find what they’re looking for.
Other ways for retailers to connect with recommerce shoppers are to improve shipping practices. According to ShipStation:
70% of shoppers won’t return to a brand if shipping is too expensive.
51% of consumers are turned off by late deliveries
40% of shoppers won’t return to a retailer again if the packaging is bad.
The “CMA CGM Startup Awards”—created in collaboration with BFM Business and La Tribune—will identify the best innovations to accelerate its transformation, the French company said.
Specifically, the company will select the best startup among the applicants, with clear industry transformation objectives focused on environmental performance, competitiveness, and quality of life at work in each of the three areas:
Shipping: Enabling safer, more efficient, and sustainable navigation through innovative technological solutions.
Logistics: Reinventing the global supply chain with smart and sustainable logistics solutions.
Media: Transform content creation, and customer engagement with innovative media technologies and strategies.
Three winners will be selected during a final event organized on November 15 at the Orange Vélodrome Stadium in Marseille, during the 2nd Artificial Intelligence Marseille (AIM) forum organized by La Tribune and BFM Business. The selection will be made by a jury chaired by Rodolphe Saadé, Chairman and CEO of the Group, and including members of the executive committee representing the various sectors of CMA CGM.
The global air cargo market’s hot summer of double-digit demand growth continued in August with average spot rates showing their largest year-on-year jump with a 24% increase, according to the latest weekly analysis by Xeneta.
Xeneta cited two reasons to explain the increase. First, Global average air cargo spot rates reached $2.68 per kg in August due to continuing supply and demand imbalance. That came as August's global cargo supply grew at its slowest ratio in 2024 to-date at 2% year-on-year, while global cargo demand continued its double-digit growth, rising +11%.
The second reason for higher rates was an ocean-to-air shift in freight volumes due to Red Sea disruptions and e-commerce demand.
Those factors could soon be amplified as e-commerce shows continued strong growth approaching the hotly anticipated winter peak season. E-commerce and low-value goods exports from China in the first seven months of 2024 increased 30% year-on-year, including shipments to Europe and the US rising 38% and 30% growth respectively, Xeneta said.
“Typically, air cargo market performance in August tends to follow the July trend. But another month of double-digit demand growth and the strongest rate growths of the year means there was definitely no summer slack season in 2024,” Niall van de Wouw, Xeneta’s chief airfreight officer, said in a release.
“Rates we saw bottoming out in late July started picking up again in mid-August. This is too short a period to call a season. This has been a busy summer, and now we’re at the threshold of Q4, it will be interesting to see what will happen and if all the anticipation of a red-hot peak season materializes,” van de Wouw said.
The report cites data showing that there are approximately 1.7 million workers missing from the post-pandemic workforce and that 38% of small firms are unable to fill open positions. At the same time, the “skills gap” in the workforce is accelerating as automation and AI create significant shifts in how work is performed.
That information comes from the “2024 Labor Day Report” released by Littler’s Workplace Policy Institute (WPI), the firm’s government relations and public policy arm.
“We continue to see a labor shortage and an urgent need to upskill the current workforce to adapt to the new world of work,” said Michael Lotito, Littler shareholder and co-chair of WPI. “As corporate executives and business leaders look to the future, they are focused on realizing the many benefits of AI to streamline operations and guide strategic decision-making, while cultivating a talent pipeline that can support this growth.”
But while the need is clear, solutions may be complicated by public policy changes such as the upcoming U.S. general election and the proliferation of employment-related legislation at the state and local levels amid Congressional gridlock.
“We are heading into a contentious election that has already proven to be unpredictable and is poised to create even more uncertainty for employers, no matter the outcome,” Shannon Meade, WPI’s executive director, said in a release. “At the same time, the growing patchwork of state and local requirements across the U.S. is exacerbating compliance challenges for companies. That, coupled with looming changes following several Supreme Court decisions that have the potential to upend rulemaking, gives C-suite executives much to contend with in planning their workforce-related strategies.”
Stax Engineering, the venture-backed startup that provides smokestack emissions reduction services for maritime ships, will service all vessels from Toyota Motor North America Inc. visiting the Toyota Berth at the Port of Long Beach, according to a new five-year deal announced today.
Beginning in 2025 to coincide with new California Air Resources Board (CARB) standards, STAX will become the first and only emissions control provider to service roll-on/roll-off (ro-ros) vessels in the state of California, the company said.
Stax has rapidly grown since its launch in the first quarter of this year, supported in part by a $40 million funding round from investors, announced in July. It now holds exclusive service agreements at California ports including Los Angeles, Long Beach, Hueneme, Benicia, Richmond, and Oakland. The firm has also partnered with individual companies like NYK Line, Hyundai GLOVIS, Equilon Enterprises LLC d/b/a Shell Oil Products US (Shell), and now Toyota.
Stax says it offers an alternative to shore power with land- and barge-based, mobile emissions capture and control technology for shipping terminal and fleet operators without the need for retrofits.
In the case of this latest deal, the Toyota Long Beach Vehicle Distribution Center imports about 200,000 vehicles each year on ro-ro vessels. Stax will keep those ships green with its flexible exhaust capture system, which attaches to all vessel classes without modification to remove 99% of emitted particulate matter (PM) and 95% of emitted oxides of nitrogen (NOx). Over the lifetime of this new agreement with Toyota, Stax estimated the service will account for approximately 3,700 hours and more than 47 tons of emissions controlled.
“We set out to provide an emissions capture and control solution that was reliable, easily accessible, and cost-effective. As we begin to service Toyota, we’re confident that we can meet the needs of the full breadth of the maritime industry, furthering our impact on the local air quality, public health, and environment,” Mike Walker, CEO of Stax, said in a release. “Continuing to establish strong partnerships will help build momentum for and trust in our technology as we expand beyond the state of California.”