Unveiling the Hidden Challenges of Supply Chain Management in the Chemical Industry

India's chemical industry has been a substantial contributor to the nation's economic growth for many decades, and it is one of the most diverse sectors in the country, with more than 80,000 commercial products that cater to a wide range of applications (as per IBEF). The industry is broadly classified into Bulk chemicals, Specialty chemicals, Agrochemicals, Petrochemicals, Polymers, and Fertilizers. Due to India's close proximity to the Middle East, which is the primary source of petrochemical feedstock worldwide, the industry benefits from significant economies of scale, rendering it highly competitive on the global stage.

Recently, we received a call from the CFO of a listed client in the chemical sector, who was concerned about some shortages amounting to INR 80 million that were noted during a physical verification of a regular raw material used in the production of chemicals for industrial purposes. Additionally, the average cost of consumption for the last three years had increased by 2.5 times as compared to the average cost of consumption for the seven years prior. Despite regular calibration of flow meters installed at the storage area and production area, anomalies in the flow transmitted from one place to another were also noted. 

Therefore, we shifted our focus to supply chain management, and we adopted the below Investigation approach to identify the weaknesses in the supply chain management process and production, we conducted a detailed process walkthrough. We then performed an eDiscovery exercise by imaging and reviewing the Electronically Stored Information (ESI). Next, we analyzed various patterns pertaining to ordering and consumption of the raw materials and performed a detailed transaction testing for sample transactions to identify any anomalies. We also conducted covert operations to identify any leakages or loopholes in the supply chain management process and storage procedures. Finally, we performed admission-seeking interviews with the custodians.

We began our investigation by conducting a process walkthrough to understand the entire process of supply chain management and production. We traced the raw materials from their source to the storage locations, the weighment process, quality check procedures, transmission to factory units, monitoring of flow meters and consumption recording in SAP.

We chose the employees responsible for the different processes and performed an imaging of their company-provided electronic devices. We framed keywords, keyword strings, approaches for one-to-one and one-to-many communications, personal folder search, triage folder outlay, etc.

•  Data Analysis

We analyzed the requisitions, ordering, receiving, quality testing, system access controls, change logs of SAP masters and consumption-related datasets to understand any anomalies in the data. We noted several anomalies during the data analysis stage.

We selected 20 major transactions for the last 36 months to perform a detailed transaction testing. We identified the following anomalies during this stage:

• The masters relating to economic order quantity were altered multiple times in the material planning module of SAP without approvals being available for 30 out of 34 alterations. 
• Alterations were noted in the consumption formulae defined in the SAP ERP, wherein the consumption rate was increased due to lower output from the raw material. The lower quality was not comparable to quality as calculated by the quality testing team. No justifications for the same were available with the company. 
• Analysis of SAP records entailed that the purchase orders were broken into order of such values that they bypassed the system approval limits.

During transaction testing, we noted that there was a sudden change in the quantities that were released from the dock vis-à-vis the quantity that was received at the storage locations, i.e.,

1. The weight of the raw material increased in the range of 3% to 5% when the shipment left from the dock to the storage area, despite a normal loss of 3% in the weight of the material during transportation.
2. On the other hand, the weight of the finished goods that were being shipped out from the warehouse was consistently lower by around 2% to 4% as compared to the recorded weight at the time of receipt.

Through the admission-seeking interviews with the custodians, we identified that the drivers were working in collusion with certain employees of the company who were involved in the supply chain management process. These employees were found to be altering the masters in the SAP ERP system to bypass approval limits and make purchases without proper authorization. They were also responsible for altering the consumption formulae, resulting in an increase in the consumption rate of the raw materials.