Following the news that Trafigura Group was the alleged victim of a half-a-billion fraud dollar involving TMT, OCI’s CEO - which firmly rejected business from TMT - outlines ways to spot red flags in the supply chain.
It was the credit terms and the high-interest rate terms that made us wary of working with TMT, but sometimes you have to have your nose to the ground. In this particular example, spotting the red flags was hardly rocket science. We were asked to extend 180 days credit terms at a high interest rate: to us, it just didn’t add up.
But there are many ways a supply chain can go wrong, and they don’t always involve fraud; sometimes problems emerge even when all the players have the best of intentions. It remains to be seen what exactly transpired between the two aforementioned companies, but in the interest of being cautious – here’s our tips for identifying potential red flags.
Auditing the supply chain
There is a step that needs to be taken before we get the binoculars out, searching for red flags on the digital high seas. And that step involves the supply chain audit. The supply chain crisis of recent years has brought home the importance of a detailed understanding of the supply chain, its intricacies, and its unique challenges.
The supply chain audit must survey the entire supply chain, not just an organisation’s direct suppliers, but suppliers to suppliers and so on, from the start of a product’s journey to the end. And the supply chain also requires regular updating.
Armed with the information a supply chain audit yields, dodgy dealings can come into sight.
Spotting red flags
1. Due diligence on the organisations in the supply chain using published data
The first step is the most obvious but important nonetheless. The supply chain audit must consider the financial health of the organisations in the supply chain, considering balance sheets and profit and loss. The due diligence can make note of an organisation’s net asset values, the ratio of current assets to both total and current liabilities, and debt.
Aside from the more apparent red flags shown by an organisation’s accounts, we also consider this information in the context of the size of a supply chain deal. For example, we once turned down a deal because an organisation wishing to trade with a partner looked at supplying goods whose total value represented the bulk of its turnover.
Credit rating reports can also show potential red flags in conjunction with the above.
2. Looking beyond the minutia of the supply chain
So far – and not especially surprisingly – the supply chain audit needs to look much deeper. It needs to consider social media posts and comments relating to each organisation in the supply chain, including commentary from former employees. Local news coverage is important too.
Utilising these resources, it’s possible to build a fairly clear picture of an organisation. Some red flags that may emerge as a result are obvious, but also consider how local and social media coverage differs from what each organisation says about itself on its website.
3. The holistic view
Not all dangers are down to fraudulent practice; some red flags may come into view despite individual organisations working in good faith. An example of such a red flag revealed by the supply chain audit could be that a supply chain relies on too few producers or specific regions. The supply chain must be robust and resilient; red flags may point to issues in these areas.
4. Being awake
But maybe there is one more important method for spotting red flags in the supply chain, and that is through listening and communicating. Organisations need an almost intimate understanding of their supply chain; that means communicating with suppliers and customers, registering rumours and not ignoring gossip.
In short, you need your nose close to the ground, but that only comes through working closely with suppliers, sharing information, gaining trust, and, more generally, proactively engaging with the supply chain community.
Commenting on its partnership with TMT, a Trafigura spokesperson told Food Manufacture:
“This was a systematic fraud perpetrated after a long and legitimate business relationship dating back to 2015 that involved misrepresentation and widespread falsification of primary and supporting documentation. A number of red flags were identified that resulted in this investigation. Any fraud is an opportunity to review and tighten systems and procedures and a thorough review is underway.”