In a recent regroup of DJ-Innovation (DJI), a drone manufacturer based in Shenzhen, the unexpected happened. Severe corruption on procurement and quality control personnels were spotted, and minor corruption was seen on other departments such as taking rebate in sales, administration, and aftersales employees.
According to reports published by DJI, in 2018, the average purchase prices of DJI were on average 20% higher than that the reasonable levels, with the expensive materials cost 20%-50% more than the market average prices, and the low-priced materials cost 2 – 3 times more than regular prices.
All these were caused by supply chain corruption. DJI announced that such violations cost more than one billion yuan (about 150 million dollars) for the company.
Even manufacturer giants such DJI can’t rid themselves off of possible corruptions, not to mention some other smaller manufacturers in the field. And the daunting amount of money been “stolen” just indicated how urgent such situations require close attention from business managers.
So in this post, we’ll get to the bottom of such situations and see what we can do to make a difference:
- Why such corruption problems occur,
- What can be done to prevent corruption from happening, and
- How can we help
1. Why such corruption problems occur?
Usually, small companies with chaotic management structures and imperfect management systems are more likely to breed corruption. But as the authority the company has gained in its field, its employees will automatically gain higher authority in the business as well. To gain more personal benefits, corrupt behaviors are also growing.
In this part, we’ll give you a brief introduction of the common corruption methods in business. Then, we’ll focus on possible problems in the supply chain.
1.1 Common corruption methods
- The company employee may ask the supplier to quote a reserve price. Then they provide the company with a higher price. After the deal, both the employee and the supplier receive commissions at certain percentages.
- Employees may use their authority to kick out a normal supplier based on reasons such as the technology is not up to standard. They will also bet on a short list of suppliers who can give a certain percentage of rebates, and they take back kicks for a long time.
- Some company staff may deliberately use price cuts as an excuse to phase out all normal suppliers and allow suppliers who can give rebates to enter the short list in order to reach an exclusive monopoly.
- Employees use internal information to introduce suppliers without good qualifications. Meanwhile, they collude with suppliers to bribe R&D personnel, so that they can be sure that their materials with unqualified quality will not be verified.
- Employees sometimes will set up a shell company and use their power to take orders for the shell company. Then they would hand over the orders to other factories, who would finally earn the difference in the middle.
1.2 Possible problems in the supply chain
The supply chain management is essentially a business process reengineering based on the value chain. It organizes the node enterprises around the business process and obtains the comprehensive economic effects of the process via the overall control and coordination of the process.
Despite the benefits a sound and stable supply chain can bring to the businesses on the chain, different enterprises in the supply chain are independent economic entities in the market, and there are still potential conflicts of interest and information asymmetry between them.
In this unstable supply chain system, each node enterprise realizes coordination through incomplete contract mode. This coordination is sometimes based on loose and rarely honest cooperation. This is why supply chain management is inevitable.
2. What can be done to prevent corruptions from happening?
Corruption is a huge stumbling block for the development of any enterprise, which will not only damage the company financial wellbeing, but also dampen the enthusiasm of employees. Therefore, corruption must be stopped. Here are 2 of the most common methods for your reference.
2.1 Internal control of the company
A. Optimize the internal control environment
First of all, we need to understand what control objectives are and optimize the internal control environment.
The internal control system is focused on accounting and accounting supervision. In general, a sound internal control system should be effective in preventing mistakes and fraud. Even if mistakes happen, it’s easy to detect and correct in time.
B. Improve the quality of accounting personnel
The quality of accounting personnel is the key to strengthening internal control.
Enterprises should improve the overall quality of accounting personnel through scientific and reasonable employment, training, rotation, assessment, reward, promotion, and elimination.
C. Strengthen internal supervision
Internal control of an enterprise is a process that is achieved through the inclusion of management systems and activities.
Therefore, to ensure that the internal control system is implemented tangibly and that the implementation is effective, it must be supervised.
D. Implement budget control
Implement a comprehensive budget, and do a good job of pre-forecasting, in-process control, and post-event analysis of various business matters.
It’s important to transform the business objectives of the company into specific behavioral goals of each production plant, departments, positions, and individuals.
2.2 Third-party surveillance
The economy is constantly evolving, and the importance of third-party surveillance platforms has also received more and more attention.
As an important channel for providing information to the outside world, the third-party platform is an important reference for investment decisions made by external investors.
At the same time, external supervision can optimize the internal control of the enterprise. Therefore, it is very important for external auditors to provide reliable and fair information to the outside world.
The soul of external supervision is independence. Since most of the internal auditors are from within the enterprise, the internal audit work of the enterprise may be interfered by the management, and the financial information provided to the outside world is not true and accurate.
The external institution should be highly independent and work in accordance with the guidelines, which maks their final results more independent.
There is no interest dispute between the external personnel and the business managers or suppliers of the enterprise. Therefore, third-party personnel is usually not interfered by business managers, which leads to objectiveness of the information provided to the outside world.
That said, in order to prevent corporate corruptions, the third-party surveillance platform like Insight Solutions Global or external auditor is your best choice.
3. How can we help?
Whether you’re investing a solar home system business in Africa, or acquiring a testing automation company in China, our experts have the expertise and experience to help you make better decisions.
In order to prevent suppliers from providing inferior products, we will review supplier operations and financial status to ensure that your partners are honest and reliable.
In addition, if you want to prevent your company’s internal personnel from obtaining supplier rebates, we will review the company’s procurement application plan and supervise the contract signing process.
We will also work with contract manufacturers and key suppliers on all identified material issues to ensure production schedules are met and productivity is increased.
At the same time, we will also establish reports and summaries on a regular (weekly/daily) basis to ensure that you can track manufacturing conditions even when you are overseas.
We run a systematic and deep investigation of business to verify its technical capabilities, value, risk behind. For more details about our services, please refer to Supplier Management on our website.
That’s all about the revelation of the DJI’s corruption incident on the supply chain. We hope it’d be helpful! Feel free to contact us through our website or leave your comments below if you have any queries.
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