Why the Supply Chain Is So Vulnerable

Supply chain success and, conversely, the prevalence of fraud, have to do with control, or, in this case, 21st century enterprises' lack of control due to the expansive and complicated nature of global supplier networks and volatile ebbs and flows in demand.

"Cross-border investment, wider information networks, more focused marketplace strategies and tighter vendor relationships have all changed management's hold on business, by reshaping supply chains and logistical processes," notes the Kroll report. "The benefits, in terms of greater flexibility and efficiency in sales and production, have been great. But the costs, in terms of fraud, theft and other losses, are also sizeable."

In other words, the more complexity in the supply chain, the greater the risks. "Fraud thrives on complexity," notes the report. "Modern complexities make companies vulnerable to frauds committed many links back in the chain and beyond the scope of most internal controls."

As an example, the Kroll report notes the famous 2006 case when two Chinese companies added toxic melamine to their pet food material. "After purchase and sale by legitimate brokers and manufacturers," states the report, "the feed poisoned animals across North America, forcing the recall of hundreds of pet food brands."

The result of situations such as that one can range from PR headache to corporate catastrophe. "All of the sudden, they're pulling that off the shelves, and nobody's buying your product," says Mark Sullivan, head of loss prevention and managing director in Kroll's Chicago office. "You have a huge business interruption problem, a product problem, and you now have a brand problem." (See "Supply Chain Lessons from ConAgra's Recalls" for best practices on using supply chain data during product recalls.)

In addition, because supply chains are global, those nefarious individuals seeking to commit fraud can operate in locales where they feel safest. "Even with well-disposed local authorities," the report notes, "legal action in unfamiliar jurisdiction can be difficult."

For example, the Kroll report addresses the increased intellectual property theft risks inherent with supply chain operations that are based in China. Those risks include increased information and physical security costs to prevent Chinese suppliers from "going to school" on your technology or products, and using that knowledge to create competing products and services.

Where IT Can Help Your Supply Chain

Sullivan says it's essential that companies know exactly who their suppliers are; he refers to it as the "vendor integrity" issue. "You have to hold them to the same standards and internal controls that you hold your own company to," Sullivan says. In addition, he says, it's critical that companies make their best effort to continue to vet their vendors after the partnership begins, "to hold them to a standard, make them certify those standards and then audit those standards."