HOW TO IDENTIFY A POTENTIAL PROCUREMENT SCAM

HOW TO IDENTIFY A POTENTIAL PROCUREMENT SCAM

4 October 2018

ABSTRACT

Procurement fraud is a growing concern for businesses around the globe and is on the increase in South Africa. This article is aimed at increasing awareness of some common or less sophisticated procurement scams and is aimed at a wide audience ranging from Business executives, Suly Chain-, Procurement & Finance professionals, to Business Owners and SMEs / SMMEs. 

Estimated reading time: 15 min

Background photo credit: RawPixel on UnSplash.com

Introduction

The 2018 edition of PwC's Global Economic Crime and Fraud Survey found that economic crime continues to disrupt business globally, but specifically here in South Africa. The 2018 results showed an increase in reported economic crime, with 77% of South African organisations saying that they have experienced economic crime in the past two years - the highest rate in the world out of all countries participating in this survey. 

On the bright side (if there is one) it is worth noting that this figure is reported economic crime - which by implication should mean South African businesses are more pro-active in detecting and reporting crime.

Understanding Economic Crime - what it is?

The Global Economic Crime and Fraud Survey examines over 7,200 respondents from 123 countries, of which 282 were from South Africa.

PWC's research indicates that economic crime can broadly be broken down into the following categories:

Figure 1 - PWC 2018 Research - types of economic crime, South Africa compared to the World

The top 5 causes per the PWC research are as follows:

• Asset misappropriation 
• Consumer Fraud
• Procurement Fraud
• Bribery and Corruption
• Business conduct/misconduct

Sitting at 77%, South Africa’s rate of reported economic crime remains significantly higher than the global average rate of 49%.

Shockingly, PwC reported that it is alarming to note that 6% of executives in South Africa (Africa 5% and Global 7%) simply did not know whether their respective organisations were being affected by economic crime or not. Chances are, they probably have been affected in some way or another.

Examples of common Procurement scams

It is nearly impossible to provide a full and comprehensive list of all of the possible ways in which procurement fraud can be conducted. The size and level of complexity/sophistication will vary - larger organisations are more likely to have financial and other controls in place to detect or prevent many of these. However, as technology progresses, so do the new methods or opportunities. For this reason, we invite you to comment below, or even contact us if you wish to share experiences at your company or organisation. 

Example 1

Some of the most common scams are likely to arrive on your desk via email, innocently disguised as a procurement opportunity. This could be one of those days that you and your team are furious paddling when things get so busy you don’t know what to pick up and what to drop. Deadlines, phones ringing, month-end. Things get hectic in Finance and Procurement. And lots and lots of paperwork. For smaller companies, one-man shows or SMMEs, the opposite can be true – depressingly quiet. Your business is listed all over the internet, but still, nobody buys anything.

One day an email arrives completely out of the blue (or a fax, if your company is still stuck in 1987) – it could be directed to a director, or an employee in Sales or anybody in the company, for that matter.

According to the email, the COE of the biggest Mining Company or the Minister of Finance hereby invites you to participate in a Tender or RFQ. “Finally!” your sales persons thinks, “Our hard works is paying off! / The Facebook ad campaign works! / The new marketing campaign works!”.

Figure 2 - Innocuous looking Request for Quote

Variation 1 

The RFQ / tender invite somehow looks a bit different, possibly slightly odd. 

The product requested is for a:

•  “Bronze Cast Iron Sewage Pump B-7692-075 (Originals only)” or 
•  “DTS42K CUTTING DISC” or 
• “TXV 387 UNDERSEA TENSIONERS” or 
• <INSERT DESCRIPTION HERE> - i.e. it could be anything. 

The turn-around time to meet the deadline is short. Very short.

Big business should walk away at this point. For smaller firms and SMMEs, it might still be tempting, specifically if there is money to be made. Even if this invite is not even remotely similar (ie. different to) to the line of products and services of the business.

But don’t worry, they even suggested a supplier. “Man, these guys think about everything,” the sales rep thinks. So he/she copies and pastes the product code into Google. It takes them straight to the only company in the country that carries that exact item. The cost price is not exactly cheap. And this tender is for XXX units.

Fortunately, the RFQ also indicated a suggested selling price range which could be as in the thousands or even hundreds of thousands.  After some head scratching the budget is re-prioritized to find money… somebody sells a kidney … takes a 3^rd mortgage on the house… 

The sole supplier is very helpful and confirms that they happen to have XXX units in stock, but you need to hurry as they are selling out, fast. Only 50% deposit required (% may vary).  You compile and submit the tender or quote in record time. 

Within 2 or 3 days you are formally informed that you won the tender or your quote was selected. You receive an order number via email - Bob’s your uncle! Now to pay the deposit, and the supplier generously offers to deliver straight to the buyer’s warehouse.

Days and weeks go by with no contact and payment from the buyer. You phone, leave messages, but the procurement official’s cell phone stays dead. No replies on your emails either.  

Eventually, you google and phone the buyer’s Head Office:

• No, They never heard of <Name goes here>. 
• Your call is transferred you to Finance department – no, they did not get your invoice. Never heard of your company either. 
• Transfer you to Procurement - No, they did not receive your consignment of Bronze Cast Iron Sewage Pumps. Didn’t order it either. 

The supplier’s phone lines coincidentally also went dead at the same time.

Variation 2 

The goods being procured via the fake tender process are high in value and could range from common consumer electronics such as laptops or parts to more specialised types of equipment. Or it could be lower value commodities. 

You are again acting as middleman for whatever excuse they have given to justify it. The supplier is legit and the goods procured are legit (i.e. actual existing items).

When you deliver, however:

• The delivery location is either not an official site of the “client”, or
• The “client’s staff” or “officials” receive your consignment and take delivery of the goods outside the gates (i.e. not on the premises) of the real company or organisation’s official warehouse or depot.

And you never see your goods or your money again.

Variation 3

Very similar to Variation 2, but the order is actually for something your company supplies in the ordinary course of business:

• High-value stock, something readily trade-able or convertible to cash, such as luxury items or laptops,
• Everyday consumer products  

Variation 4

You are asked to make non-refundable deposits or transfer money:

• Prior to getting access to the tender document,
• As a security deposit,
• Prior to being registered on the supplier database,
• To help secure / facilitate “lucrative government contracts”

Where you are asked to pay a deposit or make a payment, the account holder details provided is different from the company name – e.g. into a personal account.

Variation 5

You have delivered the goods and everything checks out. The “procurement official” or somebody from “Finance department” at the “client” contacts you telephonically to inform you that they paid by EFT. However, there is a problem - They overpaid you by a couple of thousand. Silly clerical mistake.

You check your bank account and it reflects payment as promised. The payment received exceeds the invoice value by the exact number they mentioned. They kindly ask if you could please refund the difference as soon as possible, this is urgent. It was a mistake and somebody will get fired. Please Pay via EFT into the account details they provide.

Being the good corporate citizen you are, you immediately process the EFT refund. You do not take extra precautions to validate the bank account first. A day or 3 later your bank account balance is suddenly lower again – the payment you received has disappeared. Turns out you were paid with a stolen cheque that bounced.

Net effect: “the overpayment” which you so kindly refunded, was paid from your own funds.

Fig 3 - Be on the lookout for these warning signs

WATCH OUT FOR THESE 20 POTENTIAL RED FLAGS WHEN RECEIVING TENDER OR QUOTE EMAILS IN YOUR INBOX

Before jumping at the opportunity waiting in your inbox, spare a minute or 5 to look at and think about the following:

1. Was this tender actually advertised in the newspapers?

Visit the official government or company website, search the newspapers and tender bulletins to confirm this is legitimate tender. If you find it, then confirm the details between your invite and the actual advertisement:

•          Is the tender number exactly the same?
•          Is the tender details exactly the same?
•          Is the closing date exactly the same?

2. Is this request or invitation received out of the blue?

Think – Is there any prior history with the organization / business inviting you to quote?

• Have you ever contacted this business or have they contacted you before?
• Have you done any previous business with this company or government department?
• Are you registered on their supplier database?
• Are they even in your Town or Province?

3. Is the request broadly line with the nature of your business?

If e.g. your company specialises in detergent manufacturing, long-distance cargo carrying, or you have a beauty salon or dentist’s office, or you supply office stationery, you have to think twice when receiving a request that is not in line with the ordinary course of business.

Why would anybody invite you to supply:

• Bronze Cast Iron Sewage Pump B-7692-075?
• DTS42k cutting discs?
• TXV 387 undersea tensioners?
• Bullet-proof helmets for Riot police?

If the tender or quote request is for a product that actually is within the range of products you sell, proceed with all the other steps.

4. Is this a known scam or a legit tender?

Do 3 separate Google searches - Copy and paste:

• the email heading e.g. “Bronze Cast Iron Sewage Pump B-7692-075 SUPPLY TENDER INVITE!!!   “
• product name or model serial number / 
• tender reference number 

into Google (respectively), followed by “scam”. For example, if the tender invite is to provide “TXV 387 undersea tensioners”, copy and paste that into Google followed by the word “Scam”. The full search query now shows “TXV 387 undersea tensioners Scam”.

Figure 3 - Google Search Results

  

If this scam was previously reported on a bulletin board somewhere, it should appear in the Google results. You may have to scroll through the first couple of search results though. On the other hand, if this request is not a scam you might be able to pick up discussions from other people on the same topic.

If it is a legit tender reference number then look up the tender documentation. Confirm the submission deadline and whether or not there is a compulsory tender briefing to ensure you were not given a legitimate but outdated tender after the deadline had closed.

5. Is the tender or RFQ document professionally designed and complete?

The fake invitation to tender or RFQ is usually rather short – frequently only one page. There may or may not be “technical specifications” on a second page.

• The RFQ / Tender document could be based on a legitimate letterhead, but the form section of the document frequently looks like it was designed using Microsoft Word. On face value, the document does not appear as refined or professionally designed as pre-printed official stationery would be.
• It might come pre-populated with your company details, or might be a completely blank form that has to be filled in.
• The form may also reflect an organisation logo/Government coat of arms as a slightly blurry watermark to make it more official looking.
• The forms frequently request a “company stamp here”, or is stamped with a stamp to make it look official.
• Scam Forms often contain technical looking serial numbers, approval numbers, codes, treasury or other financial reference or approval numbers in an attempt to make it look legit. Writing could be ALL CAPS

Figure 4 - Fake Order document

6. Look at the legal terms 

•   For legitimate tenders specifically, there will be multiple pages of legal terms and conditions, forms to complete and draft contracts. For legitimate RFQs the legalese is often at least a couple of paragraphs. 
• Legitimate Tenders are typically advertised in national newspapers, whereas RFQs are more likely to be an invitation basis.

With fake procurement documents, expected legal terminology is notably absent, or limited to a basic sentence or two – e.g. “This quote does not constitute an order”.

7. Is the grammar correct and writing style appropriate?

Legitimate tenders and any tender invites will tend to be slightly formal in style, grammar and language use. Spelling and grammar errors will be very limited if any. Companies will generally not send out documents with:

• Obviously Spelling mistakes e.g. Coca-Colla 
• Grammatical errors

The wording and writing style on scam invites and documents is often more informal: e.g. “Bronze Cast Iron Sewage Pump B-7692-075 SUPPLY TENDER INVITE!!! “

8. Is the time period unusually short?

Time pressure - The deadline to submit might be significantly shorter than industry standard, even as short as 2-3 days. Note that a longer time period does not automatically make this a legit transaction. 

Similarly, if you are informed of that you submitted the winning tender within only a day or 2 after submitting, something could be amiss. Specifically, Public sector tenders can take weeks to months to finalise, as they may have to go through various rounds of internal approval leading up to award stage. More often than not, there will be negotiations and contracts to be signed. Therefore any request to perform services or deliver goods within a day or 2 after submitting the tender or quotation is potentially highly suspect.

9. Is there a suggested selling price in the RFQ or tender?

If this is not an existing client that previously bought the exact same item from you and therefore knows the selling price, it would be very unusual. And it makes no sense either - the very purpose of procurement is to achieve cost savings by obtaining the best pricing under competitive conditions. What prices would they have recommended to other "bidders"? 

It usually not in the best interest of the buyer to disclose budget or affordability. Very few government procurement transactions publish any degree of affordability. 

10. Is there a suggested Supplier in the RFQ or tender?

Why invite somebody to act as a middleman that simply pushes up the price and adds no other value to the product or procurement process? The buyer can simply go straight to the source and buy the exact same item directly from them for cheaper. 

11. Is there a sole supplier situation?

While searching on Google for the product and potential suppliers, make sure to confirm how many suppliers exist for the product requested - specifically for technical type products. Commodity type products can usually be procured from various sources. Bona fide sole supplier situations for non-technical / commodity type products are scarce. Even technical products might have substitute products. 

If the tender or RFQ indicated a sole supplier or specified a specific supplier without substantiation, approach with caution. Inquire about substitutes. Even for OEM suppliers, some products could be generic and procured from other suppliers - e.g. different brake manufacturers produce vehicle brakes which comply with Toyota specifications for any specific Toyota model. 

Again, why invite somebody to act as middleman in a procurement process? The buyer could have simply gone straight to the source and bought the exact same item directly from them.

12. Did you get phone calls?

With legitimate tender processes, there is typically very limited personal contact between buyers and sellers. If it is a closed tender / by invitation only, they would have obtained your details from the supplier database and do not need to phone you to confirm it. Therefore, receiving phone calls to confirm your company contact details is unusual, but not impossible.

You might also receive a follow-up phone call from an authoritative sounding “procurement official” to: 

• emphasise the urgency, or 
• tell you something along the lines of “With your excellent credentials, there is a pretty good chance you could get the contract", or 
• to inform you that your company is the only 1 in the running, 
• to berate you for missing the deadline, or 
• to ask if you need an extension.

Legitimate buyers usually approach various companies for pricing at the same time, not just one. They typically won't chase after any specific supplier or agree to special arrangements or extensions for one supplier only. 

13. Were you asked to pay money in order to qualify for this opportunity?

Companies and specifically government won’t ask money to register you on their supplier database. 

Official tenders for very large projects might occasionally require the purchase of procurement documents, but in such a case the tender is likely to be advertised publicly in national or regional newspapers and on official tender bulletins. The banking details would be printed on the tender advert, and it would be a corporate account. 

Figure 4 - Example of request for money

Where the tender invite is for a closed tender or quotation, then you should have knowledge of already having registered your company on the buyer's supplier database. 

Where tenders require financial guarantees to be provided at tender submission or at the appointment stage, the requirements for these are usually contained in the publicized advert as well as in the tender documents. Actual cash payments or EFT deposits to the Buyer are NOT the way things are done in such cases.

14. What do you have to submit exactly?

Tenders and sometimes even large or complex quotes are often not evaluated on price alone. Any large value tender or quotation in your inbox which solely requires you to submit price and no type of "technical proposal" or other sections usually associated with tenders or quotations, requires further investigation.

This is not suspect by default, but very unusual. Secifically in case where your company is not listed on the supplier database already.

15. Name, surname & job title of the sender

Scam Tender invites either use:

• typical everyday names, or 
• names of famous people, big business executives or politicians, or 
• important job titles or in the name of name of a high ranking company position such as the name of a board member, Chief Executive, Chief Financial Officer, Chief Procurement Officer or even the Company Secretary to give legitimacy to the invite. 

These names are a reasonable cultural fit in your area. The name might even sound familiar and legit to confuse people – a CEO of a listed company or a Government Minister is a name you might have heard over the radio or read about in the newspaper. Remember:

• CEOs or Gov Ministers will not be working in a Procurement department, 
• They are equally unlikely to extend personal invitations to participate in tenders,   
• Furthermore, it’s extremely unlikely that they would be listing themselves as the contact person with their own actual contact details.

16. Check the sender’s email address

Companies generally use the same email format for all email addresses. 

Occasionally firms do use a generic tender email such as Procurement@ or RFP@ . You can use Google or Linked to confirm the format of the email address for that organisation on their official website. If it is an official and legitimate email address you should be able to confirm it. 

Example - Any variation in the domain name should be treated with suspicion. 

• Where the sender is name@company.net, or even name.surname@yahoo.com or tender@company.biz, but all the other listed emails are name.surname@company.co.za, treat this as a red flag. 

• If somebody legitimately works for a big international company or organisation, they are very unlikely to use a name@yahoo.com, name@webmail.co.za or similar type email address for business correspondence where the email address does not contain the exact same official domain. 

• Email addresses could also look legit on face value, but actually be something completely different. In Microsoft Outlook, hover your mouse cursor over the address to see if the display name is the same as the actual address.

Confirm the contact person name on LinkedIn or search by posting the email address in Google or Linkedin. Look for spelling mistakes in the company name or the format of the email address. If LinkedIn shows only 1 Joe.Soap@CocaColla.biz then chances are pretty good that it is not the real thing (see what I did there? )

Examples of fake email addresses used in previous scams include:

• name@angloamericanplatinium.com <- note spelling of Platinum
• @eskomholdingssupplychain.co.za, @eskomfinance.co.za, @eskomprocurement.co.za, @eskomgroup.co.za , @eskomsa.co.za, @eskomenterprise.co.za, @eskomdistribution.co.za, @eskomrotek.co.za
• tenders@doh.za.org, doh@treasury-gov.org.zaghd@gautenghealth-gov.org.za, health@mphumalang-gov.org.za, NDOH@nationalhealthgov.org, @heaths-gov.org.za, @dh.gov.co.za 
• supplychain@barloworldlimited.com, info@barloworldlimited.com, procurement@barloworldlimited.com, finance@barloworldlimited.com 
• @transnetsa.net, @transnetfreightrails.net, @transnet-jhb.net, 
• @yahoo.com, @aol.com, @gmail.com, @webmail.co.za or any other internet domain than the company’s official domain

17.  Check the sender’s contact details 

Always ensure that you have full contact details of an actual person, specifically once you are notified the tender or RFQ has been awarded to you and before procuring or paying for anything.Insist on a real office extension, a land-line number which has to be the same prefix as the main land-line switchboard number.

    18.  Confirm that the Company's Billing details are correct?

Compare the contact details contained in the email you received and per the correspondence to this entity’s official contact details – use Google and visit the official website.

Are the company contact details (telephone, street address) the same or completely different to the contact details on the official site? If in doubt, phone the official switchboard number as per the official website, and ask if sender works there and to confirm the department and contact details. 

19.  Confirm that the Company's Delivery details are correct?

Confirm that the delivery address is an actual currently used company site. 


Instruct drivers to not deliver anywhere that is not inside the actual official company premises – i.e. deliveries strictly inside the actual warehouse or depot yard or premises. That means no delivery just outside the gate, or somewhere along the route, or last-minute changes to delivery details.

20. Have you met the Contact person from the Buyer in person?

Due to procurement procedures for quotations, it is seldom possible to meet the person responsible for the administration of the transaction before the award of the tender. For tenders where a briefing session takes place, this briefing is typically held at the premises of the buyer and serves to confirm the validity of the transaction.

On award of the transaction, however, this is likely to change. For tenders specifically, there could be tender negotiations and contract signature before the service provider is actually appointed or expected to perform.

Unless you are 100% certain of who you are dealing with, try to meet the buyer. Specifically in cases where there are no prior relationships with this buyer/organisation, or supplier, and you have not yet formally met the contact person inside at their premises. 

Take precautionary steps prior to any handing over goods or making any payments in the case of an order.

Conclusion

As mentioned at the outset, it is near impossible to make a comprehensive list of all procurement fraud possibilities. There are simply too many permutations. Furthermore, changes in technology sometimes have unintended consequences, which then require new or additional controls to be developed and monitored

If you liked this blog post, please share or tweet or repost this article to others who may also be interested in these topics.

If you wish to discuss your busines or procurement challenges in confidence with us, please feel free to contact us at your soonest convenience. Where you have personally experienced other examples of procurement fraud, please leave a comment below.

Also why not subscribe? Simply scroll up and enter your email on the top right for notifications. We publish approx 1-2 posts per month on business-related topics. 

© Cogniplex (Pty) Ltd - 2018  - Visit us on www.cogniplex.co.za

(Part 3 - 2018) 30 Different Ways to Build a 1 Billion Business

Part 3 - 30 Different Ways to Build a Billion Business 

15 Jan 2018

Abstract

If you have not yet read the 1st and 2nd post - we highly recommend that you do for context. You can find it here:

• 30 different ways to build a 1 billion business (Part 1), and follow with
• Article 2 -30 Different ways to build a  billion business (Part 2).

In these blog posts, some well-known international and potentially lesser known examples from South Africa or neighbouring countries are included. These blog articles are aimed at business readers, ranging from corporate executives to entrepreneurs and founders searching for strategies to increases revenue. It is equally suitable for interested parties who wish improve their general knowledge around strategies and growth.

Estimated reading time: 6.5 min or less

This post is the 3rd part in series of blog posts focussing on various approaches to increase company revenue/turnover. Each approach is discussed in brief with examples.

The full series will contain 4 articles. 

===========

0. Background

In Part 1 and Part 2 of this blog, we looked at the roles of the following factors in achieving revenue target:

          1. Product & Market Mix

          2. Price  

          3. Volume

          4. Demand

In this blog, we continue the discussion on demand and also look at the role of innovation.

            4.3.5   Satisfy more of the demand - Integrate vertically or horizontally

Most businesses form part of a supply value chain of sorts. There are usually at least four phases of the typical product supply chain:

Commodities -> manufacturing -> distribution -> retail.

E.g. A forestry company grows trees in their plantation -> trees are cut and send to a lumber mill to saw into planks -> a wholesale wood merchant resells the planks -> a furniture factory buys the wood to make furniture -> shop sells the final product to an end-consumer.

At each step of the process, different activities can take place and (usually) more value is added, typically by different role players. When 2 or more stages are combined within 1 business (or family of businesses) vertical integration is taking place.

• Backward Vertical Integration is when a company downstream in the value-chain takes on activities which normally happen higher up – e.g. when a supermarket buys a farm to grow its own vegetables for resale.
• Forward Vertical Integration is when a company higher up in the stream takes on activities which normally happen lower down – e.g. when a mine commences with beneficiation of its own minerals. 
• Horisontal Integration is when a company takes over the activities of other role players at the same level in the value chain – e.g. buying out competitors and merging them into itself.

There are various benefits to integration (horizontal or vertical):

• Integrated firms have competitive advantage in that they can compete at more competitive or lower rates, and or are able to extract higher profits to bigger cost savings from integration,

• Due to controlling their own suppliers (in the case of vertical integration) such business are less prone to external supply chain disruptions,

• Integration allows benefits of scale – both in the case of vertical and horizontal integration. Integrated firms can buy in bulk and achieve higher cost savings per unit,

• Integrating with suppliers, retailers or competitors can give access to new markets, technologies, competencies, scale

• Integrated firms can respond faster to competitors or new products.

Examples of integration (horizontal or vertical):

DEBSWANA

• In the case of Forward Vertical Integration, Debswana, a mining company based in Botswana, is a good example. Debswana is a joint venture between De Beers and the Botswana Government. 

• Prior to 2013, Debswana would mine raw diamonds and then typically send these overseas for processing. In 2013 they opened a diamond beneficiation plant (DBGSS) in Gaborone to take responsibility for sorting and valuing of rough diamonds, cutting and polishing, and also got involved in the manufacturing of diamond jewelry. All of which are high value-adding activities, and all of these activities would previously have happened off-shore – in this case mostly in and around London, UK. 

Fig 1.1 Jwaneng mine, Courtesy of Debswana

• The benefits of local beneficiation to the economy have been significant. Thousands of direct and indirect jobs were created, even in un-related industries like tourism. In 2014, DBGSS completed its first full year of operation in Botswana and directly contributed US$380 million to the GDP, contributing more than the entire agricultural sector in the same period.

STEINHOFF

• Steinhoff is another example of vertical integration, albeit a controversial inclusion on this list. The group has been in the news for all the wrong reasons lately: top management resignations, allegations of mismanagement and accounting scandals ... so I had some debate with myself whether or not to include them here. 
• While we agree that they might not be a good example of accounting excellence per se, they remain a good example of an integrated retailer that manufactures, sources and retails furniture, household goods and general merchandise around the world. In specific markets, they control substantial portions of the supply chain from manufacturer to retailer. Before the near catastrophic drop in market value late in 2017, Steinhoff ranked as the world’s second-biggest furniture retailer after IKEA. 

COMAIR

• Comair is the local operator for British Airways and Kulula (a South African discount-airline similar to the UK's Ryan Air). They were frustrated by delays and the quality of food from outsourced vendors, and opened their own air catering company called Food Directions (forward vertical integration). The use of their own in-house food services saved them R 30 million per year, in addition to generating revenue from providing similar catering services to other airlines.

FAMOUS BRANDS

• Famous Brands, the owner of various large restaurant and fast chains including Steers, Debonairs Pizza, Wimpy, Mugg & Bean, and Tashas, had 2 614 outlets across the country by mid-2016. It is interesting to note the extent to which Famous Brands embraced vertical and horisontal integration. 

• Not only do they own their own logistics business with 8 logistic centers of excellence across the country, they manufacture food ingredients too. This has been achieved by acquiring one of SA’s biggest producers of French fries and other potato-based products, also a tomato paste factory expected to reach R 100 mil turnover, taking over Coega Cheese Company and rebranding as Famous Brands Fine Cheese Company, and buying or setting up various other companies to supply bread from its own bakeries, coffee, juice, meat, spices, ice cream, even right down to serviettes from its own serviette factory. 

Fig 1.2 - Steers, one of many brands in the Famous Brands stable

• No wonder then that Famous Brands reported an increase of 33% to R5.7 Billion in Revenue and operating profit Up 18% to R938 Million for 2017

AB InBev

• One of the biggest horisontal integrations (mergers) in recent times that hogged the headlines for months during 2015-2016, also with strong South African roots - The more than $100 billion merger between Anheuser-Busch InBev (AB InBev) and SABMiller. This merged the world number 1 producer and 2nd largest producer in the world. This was the 3rd largest acquisition in history and the largest ever in Britain. The post-merger firm would be the world biggest beer producer, and the 5th biggest Consumer Goods Company in the world, controlling up to 33% of the world beer market from the word go.

Fig 1.3 - Some of the combined labels and brands in the new company

• Through this acquisition, InBev gained access to new markets in China, South America and importantly, to the African growth market, where SABMiller previously had the local market pretty much stitched up with an extensive logistical footprint and manufacturing capacity. Africa is seen as a key growth market for beer, with anticipated growth to 2025 of 44%, which is almost 3x the global growth rate. Similarly, SABMiller would gain access to the South American market, controlled by Inbev.
• This merger is anticipated to unlock pre-tax synergies in the region of $ 1 billion p.a. over areas of procurement, engineering, brewery and distribution, regional head offices and best practices. 

PIONEER FOODS

• In 2015 Pioneer Food Group (Pioneer), the leading breakfast cereal producer in South Africa, announced that it was planning to enter into a joint venture (JV) with Future Life Health Products (Future Life). Pioneer makes popular breakfast cereal brands such as ProNutro, Weet-Bix and Bokomo Limited, while Future Life focusses on scientifically formulated nutrient-dense functional food products. This merger gave Pioneer access to expertise as well as entrance to the health food market, as well as access to different geographical markets.

4.4 Innovate

Do not underestimate the importance and revenue increasing possibilities that innovation can bring to the table. PWC interviewed board-level executives from 1 757 companies, across more than 25 countries and 30 sectors and published a report called “Breakthrough innovation and growth” in 2013.

Amongst various other findings, they found that:

• 79% of the most innovative companies in the study had well-defined innovation strategies, compared with only 47% of the least innovative companies.

• The most innovative are planning a wider range of innovative operating models – e.g. the top 20% were 2x as likely to consider corporate venturing as a means to drive growth.

• Innovation is a growth multiplier. They tracked the performance of the top 20% most innovative companies out of a sample of 1 757 companies, over a period of 3 years, based on publicly available information. Their findings: the most innovative 20% had grown at a rate 16% higher than the least innovative. This equated, on average, to each of the most innovative companies delivering $0.25bn of additional revenue over the last three years, compared with the least innovative.

4.4.1 Develop new products or services and find new markets

The principle of Blue Ocean Strategy applies here – find, or create new markets to compete in with new products or services for which there is not yet any competition.

Take coffee as example: According to legend, somewhere in the 11th century, an Ethiopian goat herder called Kaldi noticed something peculiar: when his goats ate berries from a specific tree they became very energetic. Kaldi went to report his discovery to the abbot of a local monastery. The rest, as they say, is history. So the coffee market is not exactly new. Enter Nespresso stage left, an autonomous part of the Nestle group. Around 1986 they had a simple idea: enable anyone to create the perfect cup of coffee, just like having a skilled barista at home, or at the office. They launched into B2C and B2C sectors, launched an e-Commerce website in 1998, then launched their first stand-alone boutique store in 2000. 

Fig 1.4 - Nespresso

Nespresso developed a hybrid business model, partly integrated and partly outsourced, disrupting the typical coffee business model and supply chain. The perfect coffee machine was designed jointly with external design partners and specialists to perfect taste, temperature and water pressure – 1 700 patent applications were filed in this process. To this day

Nespresso’s revenue is based on the following logic:

• High-quality coffee machines are sold for a reasonable price through licensing partners. Nespresso does not profit from coffee machines
• Income primarily comes from Nespresso capsule sales. Gross margins are estimated around 85%, compared with 40% - 50% for traditional competitors.
• Secondary income comes from cross-selling of coffee accessories.

Fast forward to 2015, by which time Nespresso had grown its presence to 64 countries worldwide, more than 12,000 employees and 450 Boutiques selling coffee, machines and accessories. By 2015 they had 10 million registered customers and over 320,000 customers visiting the company’s e-commerce platforms daily. Nespresso was the worldwide leader of the “portioned coffee” industry, with estimated annual sales of over CHF 4bn.

How did they do it? Nespresso’s key growth drivers focussed on:

• Market segmentation, Unique value proposition and business model innovation;
• Consistently highest quality products and services;
• Creating long-lasting relationships with customers and suppliers, including the coffee supply chain;
• Effective sales and marketing as well as sustainability of the business.

Summary (Part 3)

In previous posts, we looked the role of product mix, price, volume, and experimenting with demand. In Part 2 of this series of blog posts we looked at other examples of diversification, integration, as well as innovation - all of which can play a very significant role in achieving target Revenue. Please note there is at least 1 more blog post to follow in this short series dealing with ways to increase turnover.  

If you liked this blog post, please share or tweet or repost this article to others who may also be interested in these topics.

Did you gain any new insights regarding diversification, integration or innovation? Which other strategies specific to volume and demand have you used to increase revenue?

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© Cogniplex (Pty) Ltd - 2018  - Visit us on www.cogniplex.co.za

Tesla disruptive Semi Truck 5 Real-world business implications

How Tesla's new Semi Truck will disrupt the Cargo & Freight Logistics Industries

17 November 2017

Introduction

On 16 November 2017 Tesla, and its founder Elon Musk, may just have pulled the carpet out under other truck and Semi manufacturers around the world. Competing manufacturers and fleet owners might have sleepless nights over the Tesla Semi Truck

Elon Musk launches the new Tesla Semi Truck. Photo Credit: Elon Musk / Twitter

In a highly anticipated press release, choreographed more like a pop concert, the founder of Tesla threw down the gauntlet at other manufacturers as he arrived at the event in a new futuristic proto-type Semi Truck. The very imposing Semi Truck drove in and parked in a huge hangar where the launch event took place. 

A visibly excited and wise-cracking Musk jumped out and immediately starting sharing key performance stats with the audience:

Tesla Semi Truck Factsheet 

The vehicle is in every way as innovative and disruptive as it looks. Data below as presented at the launch:

• Claimed Speed

o   0-60 mph (96.6km/h) in 5 secs unloaded

o   0-60 mph (96.6km/h) in 20 secs loaded at 80  000 pounds (36.2 ton)  gross max vehicle weight

o   Tesla can reach 65 mph (104.6 km/h) up a 5% incline compared to traditional diesel 45mph (at max gross weight)

• Claimed Range

o   500 mile (804.6 km) range on a full charge at full weight at highway speed

o   Vehicle can charge sufficiently for 400-mile range in 30 min

o   Recharging through a planned solar-powered Tesla mega-charger network which could mean lower electrical costs compared to current Utility rates

Elon Musk at the launch of the Tesla Semi Truck 

•  Claimed technical specs

o   4 independent computer-controlled electrical motors

o   Effectively 1 continuous gear

o   Built-in computer system that can potentially integrate with 3rd party fleet IT systems

o   Drivetrain guarantee 1 million miles

o   Quasi-infinite brake life

o   No transmission, emission scrubbers or differentials

o   Thermo-nuclear explosion proof windscreen glass

o   Remote diagnostics – connected to Tesla Mobile Service

o   Predictive maintenance

o   Location tracking built-in

o   Built-in communication with Dispatch

• Claimed Aerodynamics

o   Drag coefficient  0.36 vs traditional trucks 0.60-0.70

• Safety

o   Enhanced auto-pilot

o   Automatic Emergency braking

o   Automatic lane Keeping

o   Forward collision warning

o   Built-in protection against jack-knifing via independently controlled electrical motors on wheels

o   IT communications connected to Emergency services

You can watch the launch here (redirect to Tesla's site) or below

Video material courtesy Market Reaction's Youtube Channel & Tesla

Overview 

The Tesla Semi Truck leapfrogs the traditional heavy vehicle / semi-truck segment, and not only in the way it looks. It threatens to make many other traditional competitors’ vehicles redundant.  

This Semi truck rewrites many of the rules associated with large vehicles. It has 4 independent computer-controlled motors. Tesla claims it is guaranteed that it will not break down next to the side of the road. So convinced are they that they offer a 1 million mile (1 609 km) drive train breakdown guarantee. This claim is based on the fact that the vehicle can continue to be driven even if 2 of the electrical motors fail simultaneously.

Tesla Interior - Driver's view - Pic Credit: Tesla / Business Insider

The cabin has been redesigned with the driver seated in the middle, surrounded by screens and huge windows. The screens update the driver continuously with relevant information, and presumably also display rear-facing cameras. 

The windows specifically are made of thermonuclear explosion-proof glass. This means the windscreen is less likely to crack from typical industrial or on-the-road type accidents or require replacement. Fewer replacements and maintenance requirements mean more time on the road generating revenue.

Tesla Semi Truck Interior - Cabin view. Pic Credit Tesla / Business Insider 

The brakes are regenerative, meaning every time you step on the brake that energy goes back to recharging the batteries. According to Mr Musk, theoretically, the brakes can last forever without needing replacement. At projected fuel rates of $2.5 / US gallon for diesel (1 US gallon = 3.78 liters metric), it is anticipated that a fully-loaded diesel fuelled truck will be at least 20% more expensive per mile than a new Tesla Semi.

The Tesla range also comes with convoy technology, allowing vehicles to operate as a road train in convoy (safely following one another). In the convoy scenario, a group of Diesel trucks is claimed to be 2x as expensive per mile to operate than a group of Tesla Semi trucks. This means the Tesla Semi even becomes serious competition for Rail freight in certain markets.

5 Real-world business implications of the Tesla Semi Truck

While the information available is limited and in some cases projected at this stage, sufficient information is available to conclude that this vehicle will be a game changer. Some of the real-world business implications might include:

• Speed of business

The speed at which business can be conducted has just increased significantly. Leaving the impact of conventional traffic flow out of the argument, for now, trucks can arguably reach their destinations faster and more reliably (less roadside breakdowns). This means current capacity constraints are shifting, theoretically resulting in higher freight load capacity throughput. Whether or not this will be limited to marginal capacity increases, or not, remains to be seen.

The knock-on effect of higher capacity is that warehouses, docking areas, and loading bays will be under more pressure to turn-around vehicles. This, in turn, may necessitate the handling, racking/packing or dispatching of more SKUs per operating hour. Scheduled delivery windows will be impacted. Various aspects of business efficiency will be affected, also in downstream logistic clients such as the retail industry.

• Income and Operating Costs including maintenance

Final market retail pricing is yet to be announced and the vehicles have to be tested and driven under less than ideal fleet and operational conditions. If however the trucks are priced not too disparate from traditional diesel trucks, this could translate to higher tonnage turned around per vehicle per day, and theoretically higher ROI.  

If the claimed costs materialize as low as promised, this means a huge shift in operating costs. Electrical engines have completely different maintenance profiles compared to fossil fuel combustion engines. Whether Tesla will allow owners to service their own vehicles in the same manner that some current truck manufacturers do, is unknown at this stage. This has a huge potential impact on current in-house workshops, stock keeping of spare parts, and stock levels, staffing and tooling requirements at in-house workshops. Also very significant implications for the spare parts and aftermarket value chain.

Driver training and the required skill set to qualify as a driver will be impacted as drivers may have to be more technically savvy than the traditional driver.

The whole efficient frontier shifts. Lower operating costs translates to either higher operating profits and or potentially putting old-school competitors out of business.

• Fuelling and operating range

The vehicles are designed to have operating ranges sufficient to address typical US standards - 500 miles (804.6 km) range on a full charge at full weight at highway speed. How this pans out in e.g. places like Australia or North Africa where huge distances between towns are an issue, remains to be seen. 

The impact on the fossil fuel industry will be substantial. Truck stops may have to either join the Tesla network (if that is even possible) or convert infrastructure to switch over to electrical charging. The demand for solar technology and solar parks will increase substantially. 

At this stage it is not known if there will be alternatives to stopping at a designated recharging station - a workaround may be required either in the way of extra batteries to extend the range for remote regions, or local charging ability e.g. via solar panels.

• Environmental considerations

City ordinances and environmental approval requirements that apply to approved locations for the traditional type filling stations or truck stops, may have to be changed. The current risk associated with fuel/gas storage or spillage or toxic contamination of water resources by oil, is either eliminated or materially reduced when using electrical vehicles.

In the long-run, emissions will be substantially reduced, so it is more environmentally friendly.

• Big Data and Data Analytics

The vehicles are effectively permanently online and generating data – both technical data (e.g. typical operation data such as vehicle speed, battery charge level, and range) but also logistical information (GPS tracking location, distance remaining, time to destination remaining) – all real-time data feeding into logistical systems. 

The volume of data in real-time will increase exponentially. This means in some locations technical IT and telecoms infrastructure may need to be increased to provide the necessary capacity. More data storage will be required. Analytics capacity will have to be able to cope effectively with real-time data and a huge increase in data volume.

Overall the quality of Management Information Systems (MIS) may have to improve. This means Business Intelligence will improve, allowing management to make faster decisions on the fly.  This means reskilling and training in the back office at the head office too, and also at clients.

Conclusion

If Tesla’s final product holds up to the promises made, it will disrupt the heavy vehicle industry as well as the logistics industry. The knock-on effect of potential efficiency gains will be felt in all industries dependent on semi trucks. 

Tesla may very well have a product here that makes many competing products redundant … that is if competitors do not innovate and play catch-up FAST. In a speculative future scenario, fuel-driven vehicles may be banished to 3^rd world countries, or only retained for very specific applications or deliveries to areas without the electrical and technical infrastructure required to support the Tesla Semi.

Production is targeted to commence in 2019, with delivery from 2021 onwards. Pre-orders are already open with a pre-payment of $ 5 000 per #Tesla Semi.  

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