Friday, March 1, 2019

Conflicting Role Assignments in Materials Function

In one of the earlier posts, conflicting role assignments in the context of finance function were captured.  Today we will cover assigning of conflicting roles to individual users in materials team. 
 
In each case, the cardinal principle of assigning independent roles to different persons as "maker, checker, approval " are getting compromised. This can lead to risks of committing of fraud in case any of the following persons collude amongst each other with malice intensions.
  • buyer
  • store person
  • finance person
  • quality inspector
  • vendors  

Potential unethical or fraud prone and suboptimal activities
  1. Creating purchase orders(PO) on vendors and making changes in purchase orders rates or terms and thereafter approving/releasing PO to vendor without seeking approval from senior hierarchy in purchase (vis a vis approved authority norms) and subsequent vetting by finance
  2. Approving PO and making GRN (Good Receipt Note) without receipt of material and thereafter passing vendor bill
  3. Making changes in PO rates and thereafter crediting vendor with revised higher rate (vis a vis approved authority norms) without seeking approval from senior hierarchy in purchase and subsequent vetting by finance
  4. Making changes in PO quantity and thereafter raising GRN for higher quantities without seeking approval (vis a vis approved authority norms) from senior hierarchy in purchase
  5. Counting the incoming material him- self mentioning the quantity as complete,(not withstanding shortage or damage) and clearing GRN for full quantity.
  6. Making GRN and thereafter clearing GRN by same person, even in case of rejection of material received and crediting vendor
  7. Making GRN and thereafter issuing material directly to manufacturing/cost centres without routing through quality control 
  8. Making GRN and thereafter posting quantities of ok/good material to scrap yard for sale of ok material as scrap 
  9. Issuing materials to job- worker/processor; thereafter raising GRN for semi-processed material (while mentioning it as fully processed) or even without physical receipt of material and crediting full payment to job-worker/processor.
  10. Requisitioning material despatch (raw or semi or finished) outside company as free of cost/non- returnable and him -self signing the outgoing material gate pass.
  11. Weighing the scrap quantity being sold (in the sale truck/vehicle) and him-self short mentioning the measured quantity in the weighment slip or scrap sale or despatch document  

Materials team professionals can visualise similar scenarios in their respective industries and take counter measures to prevent such occurrences.

Saturday, February 16, 2019

Outsourcing Manufacturing

At times, companies may not have in house capacity to meet 100% of demand of certain aggregates or complete end products of specific model or in specific market segment or geographical location. 
Decision to outsource is governed by many considerations such as:-
1.  In-house capacity constraints
2.  Financial constraints to invest in capacity expansion 
3.  High Cost of shipping & transportation
4.  Product contributions being low in case produced in house
5.  Inability to consistently produce  inhouse high quality products
6.  Better know how & design options available  outside
7.  Economical advantage 

Once decision has been taken to outsource aggregates or complete end product either under company know how or outsourced manufacturer- vendor is to be  identified, technically evaluated, price negotiated and order placed for commencing supplies from out sourced manufacturing facility.

Potential unethical or fraud prone &  suboptimal activities 

1.  Performing Improper evaluation for make inhouse or out source decision vis a vis cost benefit analysis, merit of quality, economies of production, existing  capacity at company end, and recommend out sourcing by suppressing important /material information considering personal interests of inhouse team 
2.  Colluding and making compromise in evaluating target  vendor  vis a vis alternate options w.r.t. following key parameters
a.  manufacturing technology (vis a vis company design & drawings for end product-chosen models) 
b.  bill of materials  
c.  manufacturing capability
d.  quality assurance systems
e.  IT infrastructure 
f.   financial strength 
g.   competency assessment of work men & supervisory team 



3.  Colluding and negotiating  rates with outsourced vendor not at arms length ie neither  at competitive rates wrt other bids nor in cost comparison to similar inhouse  products costs. 
4.  Making non-comprehensive quality assurance agreement (so important for company's brand image) with outsourced manufacturer- vendor, besides commercial term 
5.  Colluding and granting periodic price increases / amendments to out sourced vendor towards his input costs / overheads / fixed costs without detailed costing analysis & supportings
6.  Colluding and making compromises during  quality audits by the company QC team  at various stages of manufacturing at out outsourced  vendor.
7.  Receiving and accepting end product  at  company or company’s warehouse and accepting deviations or at channel partner end directly without conducting inspection.
8.   Delaying timely communication of quality issues, design changes to outsourced manufacturer - vendor vis a vis similar changes at company’s end in case same product is manufactured at company end.
9.  Demanding favours at time of bill passing and payment releases towards end product supplied to company by the  out sourced vendor .