The development or use of audit systems ensures that your team can regularly check the compliance of suppliers, the provision of resources, and the ability to continue serving your company in the future. Reminders and records of previous audits are invaluable when dealing with a large supply chain.

Many companies implement auditing when a supplier is underperforming, by which time it is often too late. Additionally, this means suppliers see audits as a negative undertaking, carried out only to find problems in the process.

To find out more about creating the perfect supplier audit, Altius Managing Director Gary Plant answered your most commonly asked questions.

What is the current situation regarding auditing of suppliers and how effectively do organisations handle these?

The term audit, in a non-financial context, is used somewhat loosely to cover a multitude of supplier checks or interventions undertaken by a customer organisation, or their agent. The most commonly used meaning is where the checks are undertaken at the supplier’s site and this is my focus.

There are many examples of large numbers of audits being undertaken in some sectors, particularly where there are safety risks. Why should this be the case? The audit is used as a tool to check the supplier is doing what he is supposed to be doing, i.e.meeting legal requirements, behaving how the customer expects him to, knows what he is doing, acting safely and, most importantly, not causing the customer any problems.

Is there room for improvement?

If the audit finds problems, and many do, what does this mean? A common conclusion is that the supplier is not good enough and he’s told to do better. Sometimes he’s replaced completely. It’s not uncommon for more audits to be commissioned, since the results show that there are problems and they need to be identified and dealt with. Could it be that what the audit is really telling us is:

• The process that brought us to this point didn’t work?
• Did we choose the right supplier in the first place?
• Did they know what we wanted or didn’t want and how we expected them to behave?
• Is the audit telling us that there is an opportunity for improvement?

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Most suppliers want to do a good job and keep their customers happy. We need to make sure we choose these suppliers, make sure they understand what we want (and don’t) and use audit processes to monitor whether or not both parties are getting this right. Once we do get supplier selection, wider assessment and communication right, we can do fewer rather than more audits, which will save both time and money.

What is the key to a successful audit of suppliers and supply chains?

The key to a successful audit is to clearly define its purpose. The famous Pablo Picasso quote “Computers are useless. They can only give you answers”, could be adapted to audits, which could be described as only exposing problems and, therefore, not always constructive. While it’s convenient to blame the supplier’s shortcomings, this is unlikely to make things better.

Where should organisations start, or what should they demand of their audit supplier?

The audit should be undertaken for a specific purpose, for example, to ascertain whether or not the supplier’s operatives are aware of the customers’ requirements with respect to safety. An audit of a contractor could be undertaken to check that their operatives know what the customer’s policies and procedures are with respect to contractors working on their premises.

Without this clarity of purpose, it is likely that the supplier, and indeed the audit provider, will fail to meet the customers’ expectations.

What kind of issues need to be examined?

Any audit should be limited to matters that pose risk to the client’s business, yet they are frequently used unnecessarily, e.g. to ensure effectiveness of a supplier’s quality management system, despite the fact that the quality of the supplier’s products presents no risk to the customer. Audits are too often undertaken because it’s standard policy, without questioning the sense of that policy.

How can this be done effectively, without just relying on what suppliers themselves say?

Audits can confirm that there is evidence that the customer’s requirements have been met. Where that evidence cannot be found, we can’t know whether or not the requirement has been met. What the supplier tells us doesn’t really change that so we can’t be sure we’re safe from the original risk.The supply chain process needs to be adjusted to make sure the evidence is available in future. It could be as simple as making sure the supplier knows we want it.

How far down the supply chain should such audits go?

It could be argued that the ideal scenario is that no audits are done at all because the customer has total confidence in the supply chain process and supplier and doesn’t need to spend any money checking. In the real world, some monitoring is necessary, but it should be effectively targeted as part of a wider compliance framework. This will minimise cost and reduce timescales.

Audits are a valuable monitoring tool for suppliers, but they are expensive. Who should monitor your supplier’s suppliers? Surely they should. If you require them to have effective supplier management in order to fulfil their obligations to you, then they should be able to provide evidence they’ve done so.  Have you made them aware of your requirements?

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If, however, you decide to audit your supplier’s sub-suppliers, in doing so you take away your supplier’s responsibility to do it. If something goes wrong, they will rightfully point out that you audited them and said they were OK.

What are the limitations here, either due to practicalities around working with suppliers or the limitations of the audit providers themselves?

Audits are a tool that will help you understand if your processes for buying-in goods and services are working, that’s all.  They won’t help if you choose the wrong suppliers because of a poor selection process. They won’t help if you fail to enlighten the supplier as to what you do and don’t want from them. They happen very late in your process and are a sample at a point in time and at a single location.  The very best audit service provider will add little value if they’re not given a clear idea of what you are looking for evidence of.

Is there more that can be done?

Audits are, however, invaluable when used in the right circumstances. Use them to find out if your processes have worked, particularly for processes that bring about specific outcomes or protect you from risks associated with purchasing goods and services. If the audit uncovers shortcomings, it may be an indication that your processes didn’t work, rather than a supplier failing. This is an opportunity to examine whether you need to fix the process, rather than doing more audits or blaming suppliers.  Do that and the audit is worth doing.

Is there a need for procurement to work together with other procurement organisations across sectors to put pressure on both auditing organisations and suppliers to improve the quality of audits?

There are nearly always benefits from working together to bring about improvements. I would suggest, however, that if things aren’t improving in your supply chains, it isn’t because you need better audits!  If your audits say everything is fine when it clearly isn’t then you need better audits, but if your audits are uncovering poor suppliers, then you either need better supplier selection procedures and supplier management processes, or you need to examine whether your auditors are asking the right questions.

How else could such audits be made more effective?

Audits are most effective when they are used for their intended purpose. If your freezer is keeping food at +10C, you don’t buy a better thermometer.Get a clear idea of the risks associated with buying in products and services and understand what you will require from suppliers to protect yourself from them. Choose suppliers that are capable of doing what you want.

Make sure they understand what you want, including what will be done or delivered, the behaviour you expect and the evidence you require.  Use audits to see if everything is as you asked. If it isn’t, make improvements for next time and use audits to see if things have improved.  Repeat as necessary!

After choosing a supplier to carry out the work you require, your attention should shift towards the contract, and what can be done to ensure it is fully executed. Between you and the supplier, you should be: ensuring you both fulfil your expectations of each other, manage the risk and any supply chain vulnerability, and deliver continuous improvement and learnings.

To do this, key performance indicators (KPIs) should be identified at the start, and monitored against on a regular occurrence, to ensure the supplier is performing to the standard you require. Of course, the KPIs you look to monitor against will differ depending upon the supplier’s work.

To give you a head start, here’s some objective KPIs you could look to implement:

1 – Delivery time and completion

For suppliers who will deliver goods to you or your clients, how often are deliveries made on time? How many of these deliveries result in issues, damaged or incorrect goods? The supplier should take the lead in assessing these KPIs on a frequent basis, making sure information and performance are shared in regular meetings.

2 – Level of non-conformance

Whether they’re delivering a product or service, how many times, or what percentage, has the supplier’s work resulted in something that doesn’t meet your standards. As well as recording the incidences, this KPI should also focus on what specifically has gone wrong, and what can be done to eradicate it in the future.

Non-conformance can also be attached to the controls and restraints you put in place as part of managing your suppliers. If you’ve expressed that an electrician should not enter the second floor, of the building for example, this should be recorded and fed back to the supplier’s operational team.

3 – Invoice accuracy

While financial details should have been organised from the start of on-boarding your new suppliers, the accuracy of invoices of suppliers that work with you frequently, could become a KPI to track. With so much on your plate already, the last thing you want to be doing at the end of the financial year is to be chasing suppliers for their final invoice of the year.

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Delays in invoicing, as well as inaccuracies in the amounts, can lead to disruption not just in your supply chain, but in your whole organisation too.

4 – Project milestones

One-off or infrequent suppliers would find project milestones more useful. No matter what the project, time and cost are always two of the biggest KPIs that supply managers need to keep track of.

There’s always going to be incidences that increase the money or time spent on a project, but by clearly planning and talking through the project with your suppliers, you can hold them accountable too.

5 – Customer complaints/returns

Probably one of the biggest frustrations for a supply chain manager is discovering that a customer has complained about the quality of product or service from one of your suppliers. As well as feeling let down by your supplier, the fact that your business was the ‘face’ of the purchase makes it an even hard pill to swallow.

Of course, there are always going to be complaints and returns for some products, it is a case of assessing what the natural amount of comebacks you may face, based upon the number of products or services you sell. This also provides a great learning curve for your relationship with your new supplier to eradicate problems as early on as possible.

6 – Flexibility

The ability for suppliers to change depending on yours or your customer’s needs is essential in a fast-moving economy. Can your supplier meet your two-week deadline change? Are they able to be flexible enough to change their logistics 24 hours later? Whatever your requirements, flexibility may be a KPI that suits you and some suppliers.

7 – Levels of waste

At a time when corporate social responsibility is a big part of a business’ goals, the pressure on large organisations to control what their supply chain does too is increasing. Recycling, landfill disposal, carbon footprint and CO2 emissions are just four areas that you may wish to track and monitor your suppliers on.

8 – Communication and compliance

As well as attending monthly meetings, or updating you on the latest project, you could monitor your suppliers based on their compliance feedback. Have they given you the latest version of their insurance when their last policy expired? How long have they taken to get back to you on your compliance questions? Do they still hold the industry certifications they need to undertake work?

If your suppliers fail to meet the basics of giving you compliance information, who knows what they may be hiding when it comes to the physical work you signed them up for in the process. This is why continual improvement, communication and relationships with your suppliers are important.

The right KPIs for the right suppliers

From these eight examples above, you will understand that key performance indicators have to be chosen in line with what the supplier will do for you. While you will always expect that suppliers will perform at 100% all of the time, this is un-sustainable and a suitable target KPI should be set between the two of you to deliver a quality service while giving room for continuous improvement.

To find out more about KPIs and how they can help to increase the performance of you supply chain, download our free guide, ‘Introduction to Supply Chain Compliance Best Practice’.

Have you got ambitions of creating an inefficient and broken supply chain? Of course not. But the actions that some supply chain managers still undertake mean they’re putting their business, suppliers and contractors at risk too.

Whether you’re simply time poor to complete all the tasks, or feel like your processes need updating, here’s five compliance techniques that you should try and avoid at all cost unless you want to guarantee poor supply chain operations.

Supplier database on a spreadsheet

A spreadsheet to hold all of your supplier information just isn’t good enough anymore. As well as being harder to use and more chance of duplications and mistakes, it is also riskier to keep vital information in a document – no matter if its password protected or not.

Larger organisations that have more than one spreadsheet of supplier information can also suffer too. As well as taking more time to find the right information, the lack of standardisation amongst the several spreadsheets can cause confusion and potential mistakes internally too.

Not outlining requirements correctly

Outlining and agreeing on requirements with suppliers and contractors is often underrated. Yes, agreeing what you want the supplier or contractor to do is important, but there are additional requirements that you need to be clear on.

Health and safety, of course, is a requirement that requires additional outlining, especially if the work you require is at height. As well as outlining these requirements, you should also make note of the things you don’twant to happen as well.

For example, if your premises is nearby a school, work on repairing the roof before and after school hours as children are walking home may be restricted to avoid injuries or incidences.

Gathering unnecessary contractor information

Giving every contractor the same questionnaire to fill out their information is time-consuming and completely unnecessary. Asking contractors for their gas certifications, despite only being the company’s window cleaners is of no use to anyone.

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Instead, you should be tailoring your information to the new contractor you’re going to be working with. Window cleaners may not need to show certifications to work on gas maintenance, but they do need to draw upon insurance and certifications for working at heights – so collect this information instead.

Irregular supplier audits

There is no ‘set’ time to audit a supplier, although annual checks are a good place to start. A multi-layered approach with both desktop and on-site audits make sure you’re suppliers are both in check and in good health too.

Without such regularity, information such as financial, certifications and insurance documents could have expired – leaving you and your supply chain exposed to risks the supplier brings.

No new supplier references of certification checks

For new suppliers, you should be thoroughly checking their financial and insurance information already, but to assess their capability of carrying out the work they want, extra checks are required.

For specialist suppliers or contractors, certifications of their expertise such as an electrician, should be sought and kept on file (although spreadsheets aren’t the greatest to keep this kind of information on them!). Together with references from other organisations, certifications can offer a piece of mind that they will deliver the quality of work you desire.

Implementing supply chain best practice

With so little time, and so many suppliers and contractors to take care of, implementing supply chain best practice can be difficult. However, Altius have created a free eBook entitled ‘Introduction to Supply Chain Compliance Best Practice’ so you can get the basics in place.

Download your free eBook and see how you can better assess the capability of new suppliers, improve your supplier management and implement KPIs to improve supplier performance. Download your free Introduction to Supply Chain Compliance Best Practice here.

Supplier management is the key to having an effective supply chain – one that is optimised and can be held accountable. Your suppliers sit at the heart of all of your organisation’s activities and processes and they also ensure that a company can run as it should. In order to do this effectively, though, you should take the time to ensure your suppliers are approved.

In Why Supplier Management should be central to your procurement thinking, Peter Smith stated “it is essential to ensure suppliers meet immediate needs and to enable performance and value improvement activities to be pursued through the course of the contractual relationship. That requires the right data of course – which must be relevant and usable.”

What can you do to achieve approved suppliers? We explain in three simple steps:

Information

While this might seem like an obvious step, it’s often one that can be missed or rushed in the process of signing a new supplier. You must spend time and resource researching and gathering information on a potential supplier.

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Information is needed to establish whether or not a supplier has the capability to carry out the service that they are proposing, or to deliver their product to the standards that are required of the client.

This includes checking that the supplier:

• Does what the client needs
• Works in the right area geographically
• Or that their business is big enough to handle the contract they’re being considered for.

This information will be vital to ensuring that the job is carried out to your high standards.

Top tip:

Use a process and a system that provides this information to you and keeps it up-to-date.  Why make work for yourself?

Verification

Introducing any new supplier to your supply chain will carry an element of risk that can be mitigated by following this verification step.

Taking the claims of a supplier on face value, shouldn’t be adhered to as the best practice. You should always work to verify that what they suggest their capabilities are, are facts. Failing to assess the supplier could leave you in a vulnerable position further down the line if a suppliers claims prove to be false.

While we suggest that this step is essential in approving your suppliers, in some cases when working in specific industries verifying information provided by a supplier is a legal requirement. Checks that are carried out on supplier information should always be evidence based and may involve verification with certification bodies or insurance companies.

Top tip:

Use a process and system that adapts to the supplier and what they do.  After all a one size-fits-all process may not fit anyone.

Authorisation

Authorisation is the process of approving a supplier to deliver work for your company.

Once a supplier has demonstrated that they can provide the products or services that they claim to offer, your next step to share with the supplier and their employees, exactly the kind of work that they have been verified to carry out – in granular detail.

This part of the process will also include providing the supplier with any site access, permits or documentation that they will need in order to begin work on the job that they have been verified for.

Authorisation will ensure that you don’t find yourself in a situation where work is completed outside of a client’s verified scope, impacting on the reputation of your business and your supply chain.

Top tip:

Don’t let your good work go to waste by asking, or allowing, the supplier to do work outside of the scope you’ve checked them for.

Best practice

Managing a supply chain can be a complex undertaking so it helps if you can confidently understand the best practices of supply chain compliance. This doesn’t have to be as daunting as it sounds.

From assessing supplier capability through to monitoring your KPI’s, our guide, the Introduction to Supply Chain Compliance Best Practice explains how you could use compliance management to improve your overall supplier performance and mitigate unnecessary risk.

How well do you know your suppliers?

I can imagine that right now you’re thinking one of two things – either, that you could answer every question that you were asked on all of your suppliers. Or, that you’re uncertain about your supplier’s information, and would feel a little stressed should you have to recall any in under 60 seconds.

Whichever side you’re leaning more towards, this blog is about to put you to the test…

Here are the top 10 pieces of supplier information you should know (or have access to) in under 60 seconds:

1. Company information

A little basic yes – but you should be able to state easily the following:

• Who the company are
• What they do
• Their size
• Their location
• And what skillset they bring to your supply chain

…as comfortably as you recite your ABC’s.

2. Management team

This is also key – if something bad was to happen, who is it you’re going to be dealing with. Do you know what their name is, what their job role is, or what their responsibilities are? Make sure that you do.

3. Compliance information

When authorising and approving your suppliers, you will have obtained various evidence to ensure that their claims ‘check out’. Keep track of where you keep these – you never know when they’ll be useful to you.

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4. Contact details

Again, this might seem like an obvious piece of information that you’ll need to know – while it isn’t necessary for you to remember these details; it is vital to have them stored somewhere that is easily accessible – and always ensure they’re kept up to date.

5. Company profile

In some situations, it might be essential for you to know a concise description of your supplier. This could include their history, quality of their resources, current or anticipated performance and details of their reputation.

6. Insurance

This is imperative. Different suppliers will need different levels of coverage depending on the work that they will be carrying out for you. Always make sure that these documents are up to date and cover the supplier for their work.

7. Health and safety

Similar to insurance documents, this is also critical. Certain suppliers will have specified health and safety procedures that they have to follow at all times – you should know exactly what those are.

8. Financial information

You should always know the financial situation of your suppliers. Problems with cash flow could lead to problems or delays in the service or product that they provide. Checking the credit score of new suppliers and contractors is essential to negating risk that a poor financial company may bring.

9. Quality management

It wouldn’t be realistic for you to check the quality of every product that goes out to the client from your suppliers. It is integral that you know their quality management procedures inside and out, so you can be assured nothing will reach your client without being the highest quality.

If something bad were to happen, it would be easier for you to pinpoint where in the process it went wrong.

10. Products and services

While this might be an obvious one – knowing the products and services that your suppliers provide should be something that you remember. Just knowing the basic areas that they work in isn’t enough, you should have access to details of their procedures and product range, should something go wrong.

So, how do you think that you would do reciting (or finding) these pieces of supplier information in under 60 seconds? Why not put yourself to the test, choose a supplier and see how far you get – then identify the areas that you need to improve on.

Gaining supplier information fast could play an imperative role in how quickly your company could react in an emergency, so make sure that you take the time to get to know your supply chain and your individual suppliers.

Supply chain best practices

Knowing your suppliers is one thing, but understanding the best ways to manage your supply chain compliance is another. Download our guide, An Introduction to Supply Chain Compliance Best Practice and learn how to assess the capability of your suppliers, monitor their performance, and more.