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Cost Reductions

Cost Reductions
The Problem
Through normal financial reviews, management discovered that the material cost component of production costs were substantially higher in the current year over the past year. It appeared that variances were due to both increased raw material costs, and a much higher level of defective finished products returned. Further, from information that was available, this problem seemed to be specific to the company in that known competitors were not facing similar cost increases.

The Investigative Solution
Through interviews with management, security reviews and analysis It was discovered that the purchasing manager had made significant changes in his lifestyle over the last 8-12 months. A life style analysis was performed by one of our fraud investigators and it was determined, among other factors that the purchasing manger had recently purchased a more expensive home, a new car driven by his wife and that he now had 2 children attending university. The analysis revealed that increases in the purchasing managers salary alone could not account for the increase cash flow required to support these activities and acquisitions.
Surveillance was established on the purchasing manger. During the course of the surveillance, the purchasing manager was observed after hours meeting with the sales person from one of the raw material suppliers. A transfer of documents was documented on video. Numerous other meetings were observed and when enough evidence had been collected, the purchasing manger was interviewed by experienced interviewers at The Investigators Group. The purchasing manager confessed that he had been receiving secret commissions from a sales representative from the raw material supplier, initially just to make favorable purchasing decisions, later when pressured; the purchasing manger was forced to accept lower quality raw materials at higher prices. Both of which contributed to higher material costs and reduced direct margins.

The Result
The Purchasing Manager's resignation was accepted, the supplier was replaced, and material costs returned to normal. The client chose not to proceed criminally.


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