This is the second in a series of eight real world examples of how western companies became aware that their ‘man’ in China was on the take.
In this series of “Eight Signs,” I suggest that you keep an eye out for behaviors and circumstances that could indicate that something is amiss in your organization.
Please treat these items as caution lights of potential trouble, not proof of wrongdoing. If you notice several signs adding up, you should begin to be even more cautious and vigilant, giving everything a second look.
So. Here’s another item to add to your checklist. Again, a positive indication here doesn’t prove fraud but means that you might have something worth investigating…and this is related to the first sign mentioned previously, distributors. This time, it’s suppliers.
All for one and one for all
If all or many of your suppliers have been identified and qualified by a single person in your organization, that’s a red flag. If they are all managed by the same person, even worse — exclusively handled, negotiated with, and renewed year after year by the same person, look out – that’s a big red flag.
This all sounds pretty paranoid and ominous, I know, but I have been surprised at the number of companies, especially smaller operations in China, that neglect this area and fail to have any kind of system for guarding against and/or detecting fraud in a function known to invite it.
The bigger companies seem to do this as a matter of policy, devolving responsibility to several positions, requiring approvals at different levels, employing a formalized system for managing vendors, and even so, because the potential for individual plunder is so great, even the biggies regularly get caught up in scams that surface.
Far more often, I suspect that the siphoning goes completely undetected, with commissions and other forms of payoff being made so discreetly that no crime is ever uncovered.
A Splendid Fiefdom
I was involved in one case where the general manager was at startup in China and had been there for nearly 10 years. Procurement of equipment, raw materials, component parts, tooling, consumables, had fallen to him in the beginning and naturally become part of his responsibilities. Even after he had created a procurement department, he held on to final vendor contract negotiation and approvals. This seemed absolutely normal to everyone at the company. After all, who else was going to handle this sensitive responsibility?
Every year, the company purchased between US$ 30-40 million and the GM signed off on it all. No approvals, no extraordinary documentation, no muss, no fuss. Except the GM had negotiated his own 5% commission on the purchases. Nice. Let me see – 5% of US$ 30-40 million, uummmm, that’s US$ 1.5-2.0 million a year – tax-free, scrutiny-free. Wheee!!! No wonder he didn’t waste his time negotiating a raise!
Hey, wait a minute
I suggested to the global president, with whom I had been working for some time, that this might be the reason the GM had never requested a raise in over 5 years – and that triggered an investigation that revealed the GM’s misdeeds. There was more to it than that, frankly.
My team and I had placed a Procurement Director in the company, at the behest of the president, and the new procurement director had been warned by the GM not to interfere in the negotiations with vendors, just to rubber stamp his decisions. Pretty obvious, huh?
There’s a lot more gore and grief to this story but the short version is that the GM was removed from his post, and control of the joint venture company was successfully wrested from him after a yearlong battle that threatened to bankrupt the mother company.
Winning the company back took a year and required a large out of court payment because the local court could not be trusted to deliver a sensible judgment….but that’s another yarn for another time.
The happy ending to this story is that virtually all the vendors professed relief and offered an immediate 5% discount on their pricing, saving the company an immediate US$ 1.5-2.0 million annually in procurement. New rules, competition and cut in the number of vendors netted the company even more gains. In my calculations, that immediate discount from all the vendors was the smoking gun, the tipoff that pointed to exactly what their deal was with the former GM.
Precautions you can take
Companies can and should ensure that conditions that spring to life in the startup phase get changed as the operation matures. Best practices include an enforced division of labor and responsibilities in procurement, a clear code of ethics, training against corrupt activity, constant monitoring, special care in recruitment and vetting of procurement personal, as well as formal mechanisms that physically and administratively separate activities, vendors, decision makers, and the items procured. This is the single most active area in China for collusive funny business, so if you get hosed, it will only be because you let yourself be.
So. Who’s appointed all your vendors? Who manages them day-to-day? What safeguards do you have in place? When was the last time you conducted any form of due diligence in this area? Is everyone on your procurement team above reproach? How do you know? Does anything about your procurement/supply chain system strike you as not quite right? If so, tick the box and let’s move on to the next item….