What are the supply chain audit procedures?
“An audit can provide an aerial view of a supply chain, allowing a company to evaluate systems and processes and identify areas of growth that they could not see before — ultimately driving brand health and success.”
A well-managed supply chain can allow a business to gain a competitive advantage and dynamically respond to a fluctuating economy. In many ways a supply chain acts as the spinal column of a company. Consider a supply chain as you might consider the human spine; the human spinal column is built of stacked vertebrae and acts as a support for your entire body, allowing you to stand but also allowing for functional movement. Perhaps most importantly, the spinal column encloses and protects the vulnerable spinal cord. A supply chain, like the spinal column, is the foundational support of any good business. It is an organisational structure or core network that allows a business to function efficiently and deliver a satisfactory end product or service to the customer.
Like the spinal column, the supply chain mitigates risk and when managed effectively, can serve to protect the vulnerable core of a business — its values and reputation.
Why is a supply chain audit necessary?
In a time of global uncertainty, many businesses find themselves revisiting their core competencies. In any crisis there exists an opportune moment to review and evaluate how things are being done and identify new areas for potential growth. This is a time where a supply chain audit can help a company to identify potential risks, existing bottlenecks and challenges. An audit can also bring issues of human rights, labour rights, working conditions, environmental impacts and overall sustainability to light. An audit empowers a company to proactively manage risks and make changes that will create resiliency in the supply chain and ultimately drive performance.
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
– Warren Buffett
Supply chain management audit procedures
A successful supply chain audit will evaluate a set of integrated systems and operations, ensuring that they are in compliance with a company’s standards. An audit is a nuanced process that aims to enhance both standards and quality through transparency, communication, and innovation.
Each individual supply chain audit should be tailored to the specific needs and structure of an organisation, but there are some fundamental procedures and key areas of focus that are applicable to any audit.
The basic framework will include:
- Audit planning — internal auditors should have a plan in place for each audit.
- Examining and evaluating information — auditors should document information and have a set criterion to support audit results.
- Communicating results — auditors should have a clear system for reporting the results of their audit work.
- Following up — auditors should follow up in a timely manner to ensure that appropriate action is taken on the reported findings.
Here are five important supply chain management audit procedures:
An audit will consider strategy in order to understand if a company has a clear vision that is aligned to its business goals. The strategy should be inclusive of the people, process and systems involved in the supply chain, in order to meet customer service requirements. While profitability should be a central factor in strategy, there also must be a core intention for how products and services will be provided.
A good strategy will acknowledge challenges and will have a holistic, cross-enterprise focus. Transparency must be implemented at the strategic level, enabling better communication that can enhance standards and quality throughout the entire supply chain. Furthermore, a good strategy will examine social responsibility, quality, sustainable environment and responsible sourcing.
2. Supply chain structure
An auditor can analyse the supply chain to determine if an effective organisational structure is in place. A suitable structure is one that has clear accountabilities outlined and suitable resources available to facilitate a company and its partners in meeting their goals. An effective structure will also ensure that the workforce has suitable training and that the workplace culture supports continual improvement.
The structure of an organisation has flow-on effects to the operating methods and subsequent performance. A good structure can enable a company to better its operation, reduce costs and increase profitability.
3. Supply processes
Following on from strategy and organisational function, an auditor will take an in-depth look at the processes in place across the entire chain. In order to analyse the supply processes, an auditor may consider: inventory management, technology tools or software, procurement, cataloguing, purchasing and customer demand.
Once all of these factors are considered and communicated, it is then beneficial to seek active involvement from directors, shareholders, investors and suppliers in the ongoing management and governance of the supply chain management process. Transparency around supply processes will stimulate better organisational communication, which will in turn enhance quality.
4. Vendor management
Where there is a high dependence on third parties and vendors, it is best practice to have a cohesive vendor management process. An audit will ensure that vendors are complying with relevant regulations and identify instances of non-compliance by vendors and potential red flags. In addition to this, the audit acts as a way to ensure compliance with legislation and contract clauses.
Vendor management will also confirm that the work offered by vendors is of a high standard and offered at a competitive price. Undertaking vendor audits can assist with the future selection of third parties and on-boarding of vendors, as well as offer a framework when renewing contracts. This procedure will demonstrate that a company values compliant behaviour — making it highly beneficial to brand reputation.
5. Risk Management
While a good management program can mitigate risk, there is no way to eliminate risk entirely. It is impossible to predict the number of factors that might contribute to the breakdown of a supply chain, but an internal audit can offer a great deal of assurance by monitoring and understanding risks. An auditor can assess geopolitical conflicts that might impact trade routes and tariffs, the likelihood of environmental or manmade disasters, or potential internal risks related to responsible sourcing or corporate social responsibility.
Through a monitoring program, an audit can prioritise the most critical risks and tailor effective strategies for that specific company. This structured and analytic approach allows an organisation to be agile and respond quickly to any risk that is likely to provide financial, brand, or reputational damage.
High-functioning supply chains are imperative to creating greater shareholder value, customer loyalty, and overall brand performance. As a medical health check identifies potential problems and offers proactive solutions, an audit of your supply chain will ultimately be a preventive measure to ensure the ongoing health of a business.