How Machine Learning Prevents Manufacturing Fraud

Summary

Manufacturing is a critical industry. It relies on efficiency and productivity to meet global demand. Even with careful controls, problems can still slip through the cracks.
 
In 2022 alone, the manufacturing industry saw a median loss of $177,000 due to fraud. As fraud schemes grow more complex, technology leaders develop advanced solutions. Machine learning (ML) offers industries a solution to these challenges.
 
ML analyzes large datasets to find patterns and predict potential risks. With ML’s help, manufacturers can enjoy real time insights and early predictions that prevent fraud.

Common types of manufacturing fraud

While fraud can come from anywhere, it’s common in these manufacturing areas:

• Asset theft: Manufacturing sees lots of raw materials and other inventory. Individuals might take and sell these materials on the side. With so many products coming in and going out, it can be hard to spot missing inventory.
• Overcharging: Employees might work with vendors to overcharge the manufacturer on certain orders. The employee makes a profit on the overcharge.
• Warranty claims: Warranty fraud comes in the form of intentional damage or false claims. Customers might damage products or make unnecessary claims to get warranty payouts.
• Material quality changes: Low-quality materials might replace the intended product. This form of fraud involves charging the original price for cheaper materials. The fraudster pockets the difference while the customer receives a low-quality product.

How machine learning prevents fraud

With careful analysis and proactive work, ML supports better fraud detection. Since ML can analyze large data amounts, it excels at catching fraud with these methods:

1. Anomaly detection: ML is great for detecting fraud in inventory management and supply chain tracking. It looks for abnormal spikes in material orders and unusual transitions. When it finds something that doesn’t fit the historical data, it flags it for review.
2. Predictive analytics: ML also uses past invoice data to predict future behavior. It might find repeat orders from suspicious suppliers or inflated pricing. ML will detect these potential fraud actions and let management know to review their orders.
3. Adaptive detection: ML can even adapt to change. ML can detect when products or materials are swapped from cheaper alternatives by comparing yield performance and material quality data. The system will continually learn from data, refining its detection methods to catch new forms of fraud.
4. Warranty monitoring: Warranty fraud is another challenge in manufacturing. Customers might submit false claims for reimbursement or for getting additional products or money. ML can automate warranty claims review and find patterns. It might see customers filing frequent claims or a spike in a specific area. The ML then alerts manufacturers so they can investigate the issue.

Training models for fraud prevention

While ML can improve fraud detection, it needs training to work effectively. Training machine learning models for fraud prevention can work with two approaches. Understanding supervised and unsupervised models helps manufacturers create strong fraud support.

Supervised
Supervised models involve training with labeled datasets. The model sees examples of fraud and non-fraud with clear definitions. Through this technique, the model learns to recognize patterns in fraudulent behavior based on the labeled examples.
 
This approach works well in places with established fraud types, like supplier or invoice fraud. While manufacturing is still working on incorporating artificial intelligence (AI) and ML, the financial industry has seen success with these tools. With these detection methods, financial organizations using AI and ML are seeing decreases in fraud rates.

Unsupervised
Unsupervised models do not use labeled data in their training. Instead, they find anomalies by finding outliers in data. If something starts to stand out, the model flags it for human review.
 
This method works well when dealing with new fraud types. Since the model might not have examples of new fraud, it’s helpful to have unsupervised models ready to flag unusual data points.
 
Manufacturing companies should combine these learning methods to build comprehensive fraud detection measures. ML can detect known and unknown fraud methods, reducing fraud across the board.
 

Boost manufacturing quality with machine learning

ML gives the manufacturing industry the tools it needs to combat fraud. With ML’s predictive and analytic capabilities, manufacturers can stay ahead of changing threats. Look to ML and AI advancements for effective fraud prevention without sacrificing productivity.