A supply chain audit, also called a supply chain inspection, is a detailed understanding of your supply chain. With this audit, you'd be able to identify risks in your supply chain to protect your revenue and reputation and stop fraud and system errors. Some of the benefits of performing supply chain audits include:
- Improving supply chain performance
- Create and demonstrate greater reliability and credibility
- Gradually improve supplier compliance with standards
- Driving change in areas such as safety health environment sustainability working conditions anti-corruption and more
- Build better business relationships with suppliers
A supply chain audit usually includes the following services:
- Implement better hardware and software
- Mitigating risk sources
- Inspect and cross-check data
- Examine changes in data logs
- Measuring supplier performance
Each supply chain audit may include some or all of these processes. It's critical to start adding them to your program to practice and improve them.
Implement better hardware and software
Your first step should be to upgrade your software and hardware to make it easier to capture the data needed for the next steps. IYou will complete audits faster and more frequently:
- Use only digital documents for all business transactions
- Store all the latest supply chain transaction data in a single company-wide ERP (Enterprise Resource Planning) package
- Capture data from product movement using radio frequency identification (RFID) or barcode systems
- Convert transaction documents into shareable electronic language using Electronic Data Interchange (EDI) technology
These technologies allow you to capture and share data about your supply chain activities more accurately and quickly reducing data entry errors and improving data visibility for auditors. Suppliers should be trained to properly use technology to provide accurate data.
Auditing supplers helps to mitigate risk sources
A major reason is to monitor sources of risk that could harm your organization. Auditors can also organize their activities around the investigation and mitigation of each risk source. Risk factors include:
- Brand Reputation
Consumers are quick to condemn any questionable practice in the supply chain that could reduce an organization's revenue. - Price Fluctuations
When the market price of a material changes the organization's expenses may increase or the organization may miss out on the price reduction advantage due to contract prices. - Cybersecurity
Software attacks on supply chains are increasing and costly. Review your cybersecurity procedures and roster of people who can access the data. - Global Politics
Changes in tariffs and trade agreements in international conflict could raise prices. You may need to find alternative suppliers before the change occurs. - Inventory Management
Inventory must be properly transported and stored to ensure that you always have inventory that is undamaged and ready to use. - Contract Management
It must be clear which department owns the contract and monitors the supplier's performance. - Quality Control
Even in seemingly insignificant areas poor quality can disrupt important business processes. Hold you and your suppliers to high industry quality standards. - Scheduled Delivery Times
Smart scheduling is essential to avoid delays in the delivery of physical or electronic goods. Delays can even include severe weather that can slow a truck or ship. - Contractual Legality
Even without your knowledge you can be harmed by a supplier engaging in illegal conduct. Write contracts to protect you from these activities and train suppliers to avoid breaches.
Mitigating supply chain risks can include the following strategies:
- Better training of vendors and employees
- Updating vendor contracts
- Switching to new vendors
- Adopt a new approach to supply chain management
- Implementing better quality standards
- Writing new delivery procedures
Inspect and cross-check data
Searching for errors and discrepancies by cross-checking data in different documents related to the same transaction is important during a supply chain audit process. For example, auditors can compare the following data:
- Goods Receipts and Purchase Orders: Make sure that what is delivered matches what was ordered.
- Receipt and Shipment Advice: Match shipments with shipments.
- Receipt and Quality Assurance Report: Test the quality of the delivered goods against the contractual quality standards on the receipt.
- Invoices and Quality Assurance Reports: Identify any issues with delivered goods before invoices are paid. Avoid paying for unsatisfactory items.
- Shipping Notices and Purchase Orders: Make sure that the goods to be shipped match the quantities and other specifications on the purchase order.
When auditors find discrepancies in data they should first investigate whether this is due to honesty error. Supplier training or program changes can reduce repetitive errors.
If the error is more than just a mistake auditors can search for fraud. They act almost like journalists and should be skeptical about following clues and finding data sources for hidden activities. Auditors are not allowed to live near suppliers which could undermine their judgment.
Examine changes in supply chain data logs
You can set up your electronic data system to record any data changes including the following information:
- Who is changing data
- The exact way that the data was changed
- The location of the changes
Some types of fraud that a vendor might commit involves simple data manipulation. For example suppliers can:
- Increase the price of items in your ERP software
- Create a purchase order with a higher price
- Send the purchase order to you
- Lower the price to its original level
Using supply chain data logs auditors can find records of such changes. They can also check that values match in the latest version of documents such as purchase orders recorded in your ERP and EDI systems. In fact some systems can perform these checks automatically.
You can also implement supply chain auditing blockchain technology which creates a tamper-proof data log of electronic activity across all suppliers.
Improve supplier performance through audits
Data collected through regular audits can also be used to objectively measure supplier performance. You can set up multiple key performance indicators (KPIs) for each supplier assign grades to different performance levels and then provide consistent feedback to suppliers. Constantly seeing their grades can Incentivize suppliers to improve.
Common KPIs include:
- Accuracy of fulfillment
- Accuracy of invoices
- Product quality
- Rate of accepting purchase orders
- Timeliness of invoicing
- Timeliness and Accuracy of Advance Shipping Notices
Less common KPIs may include:
- Transaction timing
- Pallet configuration
- Correct labeling
- Product presentation
The level of performance required for each grade may vary for different KPIs. You can assign tighter desired percentages to the most important KPIs. E.g:
- Regarding the accuracy of the implementation a grade A may require a 97.5% success rate while a B grade may require a 95% success rate.
- Regarding the timeliness of sending invoices A grade may only require 90% of invoices to be sent within two weeks of shipment.
Supplier's overall score for each KPI shall be based on the average of all measured months. Auditors should investigate suppliers with very low scores. But they should also warn about performance levels that are too good to be true which are sometimes the result of falsified data.
Building a better supply chain
You can use our audit activities and tips to create a supply chain management checklist. Then break down the list into small tasks and transfer them into the organizational calendar. Neither your employees nor your suppliers should wonder what a supply chain audit is? Seeing these scheduled tasks will Define audit and reinforce its importance.
When your organization performs these tasks on a regular basis your fraud and error rates are likely to drop and the performance of your suppliers and your entire supply chain will improve.
Much internal audit work focuses on financial transactions and controls. Many auditors are now adding supply chain audits to their responsibilities. What's behind this shift? One driver is rising supply chain costs for many organizations often because they offer more products and sell channel. Equally important many supply chains can have a strategic impact on an organization's performance. For example operational disruptions at key suppliers could hurt the performance of some companies.
Supply chain inspections provide an opportunity for internal audit teams to look at supply chain organizations and ensure they are taking steps to control costs and reduce risk factors.
The first step is to identify supply chain risks. We break down some common ones below:
Working With Vendors and Third Parties
Supply chain audits should check whether the organization is working with suppliers that offer quality work at competitive prices and whether it complies with relevant regulations. Because regulations limit what National Grid can charge, customers have been under pressure to improve efficiency. Among other functions her team will test the process used to select suppliers to verify that they comply with company policy.
Contract Management
Once an organization's suppliers are reviewed and contracts are in place the focus shifts to contract management. This often requires clarity on which department (usually purchasing or business) is responsible for managing contracts and monitoring supplier performance. It was a business decision; the main focus of the audit was that ownership was clearly established she added.
Inventory Management
Inventory and warehouse management is another key area for asset-intensive companies operating across multiple geographies.
While this is not part of a strict supply chain they will also test controls related to distributing food to individual beneficiaries to ensure they are getting the correct amount for themselves and their families. This usually involves confirming that the food is weighed throughout the process Process and review the ordering process to ensure the right amount of food is ordered and delivered.
It's very difficult but we're very good at what Harvey calls the kind of work. This is very beneficial.
Data Protection and Cybersecurity
Two-thirds of respondents to a Crowdstrike survey said their organization had experienced a software supply chain attack. Almost all (90%) incur some financial cost with an average price of up to $1.1 million.
With many companies connecting with suppliers electronically the risk of such attacks has increased said Bernie Donachie managing director and head of Protiviti's global supply chain practice. To test this auditors can review what data is accessible and who can access it.
Geopolitical Risks
Geopolitical conflicts can disrupt trade routes while changes to trade agreements and tariff schedules can increase costs and even force companies to find alternative sources of supply. Eaton said internal audit could consider ways to mitigate these risks. such as business units If there is a problem with a country or its currency have other suppliers been identified?
Challenges of Auditing Supply Chains
Even as supply chain audits become increasingly important auditing can be challenging. The first is the number of processes involved in the supply chain from procurement to warehousing and contract management. Due to time and resource constraints auditing is usually concentrated in one section which makes it It's hard to get a holistic view. Furthermore since these processes are interrelated determining the root cause of a problem may require constant digging. Even if you find a gap, the root cause may need to be addressed elsewhere.
A sound supply chain audit requires an understanding of third-party risk a unique skill. Auditors often need to understand data and physical security regulatory requirements as well as supplier codes of conduct among other functions. Some supply chain risks such as Geopolitical risk is less important when auditing other areas.
Approaching a Supply Chain Audit
Given the challenges how can auditors successfully conduct the supply chain exam? Fu engages with stakeholders in advance usually meeting them quarterly to check that they understand her team's plans and to provide an update on their progress.
Fu also ties the audit team's plans to the company's financial operations and compliance goals.
We'll take care of the business by providing "kick tires" and making sure risks are managed to achieve business goals or identify areas of improvement she said. Supply chain audits may require visits to suppliers' factories and warehouses for example to conduct physical product inspections of the supply chain inventory and make sure the business actually exists.
Because these risks affect departments across the organization such as legal and human resources cross-functional teams are also often needed to prioritize and decide how to mitigate these risks Eaton said.
In addition auditors need to be proficient in subjects such as current affairs macroeconomic trends and trade agreements. If the U.S withdraws from the trade agreement what will be the impact on suppliers?
Given the increasing complexity of many supply chains the scope and number of their audits are likely to increase. Internal auditors need to be prepared.
Strong supply chain auditors understand the business and environment in which they operate and can work with individuals within the organization who can help identify supply chain risks and develop response plans.
Supply chain audits are comprehensive reviews conducted to assess and improve the efficiency, sustainability, and compliance of a company's supply chain processes. These audits scrutinize various elements of the supply chain, including supplier relationships, manufacturing practices, logistics, and distribution methods, with the goal of identifying risks, uncovering inefficiencies, and ensuring adherence to regulatory standards and ethical practices. Effective supply chain audits not only help organizations to optimize their operations and reduce costs but also play a crucial role in enhancing product quality, ensuring fair labor practices, and minimizing environmental impact. By fostering transparency and accountability, supply chain audits enable companies to build more resilient and responsible supply chains.