Best Buy Gets Taken for a Reverse Auction Ride

Reverse auctions are usually an opportunity for companies to extract price concessions from suppliers. But when there’s fraud involved, they can actually become a tool that can drive up costs when it comes time to implement results. Such is the case with Best Buy, which was recently taken for a $31 million ride by one of its suppliers and a company insider. I previously wrote about this story here, but more details emerged this morning in a Chicago Tribune article. Relying on information contained in the “search-warrant affidavits federal investigators filed in Chicago and Minneapolis and in the case against a Minnesota man who pleaded guilty last month to related federal charges,” the reporters took a close look at what actually transpired.

According to the story, the couple who allegedly bid in Best Buy reverse auctions reported “about $15.5 million on their income taxes from 2003 to 2007” of which $14.2 million was “derived from fraud.” They used this money, for among other things, to purchase a $850,000 lot, build a $1.9 million house and to buy a “Ferrari coupe, Lamborghini convertible and a collection of nine other luxury and high-performance vehicles.” Their company, Chip Factory, “submitted winning low bids to supply Best Buy with computer parts, but later fraudulently charged the company a much higher price ... In one example outlined in the documents, Chip Factory won a bid for 20 computer parts at $42 per part, while the next lowest bid was $72. Chip Factory later charged Best Buy $571 per part.”

Given that Best Buy is one of the more advanced retailers when it comes to a procurement technology adoption standpoint (they are a long-time SAP and Ariba customer, among other providers) what went wrong? Is this a failure of technology -- or Ariba or SAP specifically? It would appear not, though clearly there was a breakdown between the sourcing, contract management, requisitioning and invoice matching process that an insider was able to exploit. A few weeks back, “Former Best Buy employee Robert Paul Bossany ... [who] managed the purchase of parts from outside vendors ... pleaded guilty to charges of conspiracy to commit mail fraud and money laundering ... [it is] estimated that Bossany took $100,000 in cash and gifts from” Chip Factory's owners.

Case closed? I'm not so sure. Despite the inside job angle, I can't help but wonder if there could have been better safeguards embedded in the technology. For example, why didn't Best Buy directly populate its contracts and/or catalog environment with the pricing directly from a reverse auction and then require a matching approach downstream during the requisitioning/payment process? Perhaps we'll learn more if the case goes to court. I suspect this case will eventually prove that even the best sourcing and P2P implementations can let a company down when an organization fails to implement the right safeguards and workflows to guard against fraud.

Jason Busch