Eliminating corruption: Introducing modern IT systems

Monitors purchase of extra raw material, ends malpractices.


Saquib Saeed July 05, 2015
Monitors purchase of extra raw material, ends malpractices. PHOTO: FILE

KARACHI: Pakistan is known for manufacturing simple products.

Not debating the reasons for taking this simpler and somewhat lazier route; manufacturing simple products does come with its own vulnerabilities such as low margins, intense competition and greater vulnerability to corruption.

Products such as sugar, cement, glass, knitted and woven fabrics, towels, dairy and chicken feed industries all of them fall into this category of manufacturing.

These industries rely on one or two major raw material inputs which arrive in a continuous stream of trucks from suppliers.

About 200 to 300 tons per day of silica sand and cullet (broken glass) is a typical day’s input into an average sized glass furnace. That’s 20 to 30 truckloads every day.

A typical large weaver or a knitter could receive up to 100 tons of yarn per day. That’s more than 2,200 yarn bags of 100 lbs., each.

The dairy or chicken feed manufacturers take in dozens of truckloads of corn, soya meal, fish and oil-seed meals, amounting to thousands of bags arriving every day.

The cost of raw materials can consume up to 60 to 70% of commodity manufacturer’s sales revenues, unlike the value added product manufacturers who remain below 35%.

For the former, there’s a fundamental lesson here: control your raw materials because that’s where the money can be made or lost.

A meagre 3% efficiency in raw material cost can boost the former’s profitability by more than 20%.

It further means that a very responsible person ought to perform at least two critical tasks in raw material procurement. Firstly, he must continuously discover better sources of raw materials and bargain hard to get the least price, secondly, he must ensure that payments against raw material deliveries are based on actual quantity delivered.

None of these lessons have been lost to Pakistani manufacturers. All of them are acutely aware of this and perform the first procurement task themselves. They rarely delegate it to anyone. And when they do, it’s always their own trusted family member.

For the second critical task, our owner manufacturers can’t possibly record the weight of raw materials delivered. For this, they rely on staff.

Ideally, they wish to do it themselves but practically, they cannot. This incapacity exposes cracks and leakages in their system making them extremely vulnerable.

The usual culprits later on, turn out to be their own staff; acting in connivance with raw material suppliers.

Since the unit price of raw materials is already negotiated and fixed by the owners themselves and with no room for ambiguity, short delivery becomes the preferred method of embezzlement.

That’s how the ruse typically works – suppliers deliver short quantity while the accompanying delivery documents record it as full. The receiving staff knowingly accepts this delivery with its bogus claim. These documents along with supplier invoice end up in the accounts department for payment processing.

Not having recorded the materials delivery themselves, the accountants have no reason to suspect the documents. Besides, the accountants usually sit at head offices that are miles away from factories. They dutifully record payables against suppliers and process their payments, prepare the cheques and present them for owners’ signatures.

The owners are in no better position to detect malpractices any more than the accountants are. The suppliers get paid more than what they’d delivered. They share this booty with owner’s conniving staff. The ruse is perfect.

This practise would have continued and remained undetected, if it was not for the advent of technology - the digital weighing scale, the barcode printer and modern Enterprise Resource Planning (ERP) system that connects the two.

One knitwear manufacturer, located in Chandora, a village 45 km north of Dhaka in the Gazipur district of Bangladesh, took a leap of faith with technology and acquired six electronic weighing scales and plugged them with PCs, barcode printers and his ERP software.

A steady flow of 2,000 yarn bags per day was his factory’s lifeline.

In 2012, his annual yarn procurement bill was more than $60 million, with an annual sales turnover of $80 million. A graduate of IBA Dhaka himself, (a lost sibling of IBA Karachi), he needed no sales pitch for automating yarn supplier payment systems.

His stance was clear. “Why test the integrity of my staff? Why not eliminate the situations that create the tests?”

After months of tweaking and perfecting the solution, the system started delivering results. Each of his 2,200 yarn bags was put on the weighing scale. The digital weight was directly sent via the PC to the ERP server. The operators had no rights to edit the bag weight.

In the server, the ERP software retrieved the agreed unit price recorded already at the time of purchase, and multiplied it with the actual weight of each bag. The barcode printer generated a unique barcode at that very instant. This was pasted on the bag. It identified the bag, the supplier, its weight, its contents and its value. The uniqueness of each barcode ensured that there were no instances of double counting of bags.

From the moment the raw material was put on the weighing scale till the supplier payment was processed, there was zero human intervention. This eliminated any scope of corruption.

A typical technology implementation for materials management for a mid-sized manufacturer could cost $100,000, inclusive of all hardware. With its huge potential to plug the leakages, the full cost of investment can be recovered within a few months.

Pakistani owner-manufacturers are acutely aware of the importance of fighting malpractices. By now, several local manufacturers have started controlling their raw materials and their supplier payments by connecting weighing scales and/or weighing bridges with their ERPs.

Pakistanis, sometimes, might resist change, but adopting technology should still be the way forward.

The writer is an entrepreneur who has worked in Bangladesh’s garment sector

 

Published in The Express Tribune, July 6th,  2015.

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