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Supply Chain Internal Audit

Step by Step: How to Do an Internal Audit of Your Supply Chain

Keeping a business healthy means knowing what’s going on, inside and out. The world is a changing place, and your supply chain may have once been built on ethical and sustainable practices and has since slipped – or even the opposite, and it has become better over time. Without a good awareness of what’s going on, you don’t know for sure. Fortunately, you can perform a supply chain audit to build and maintain that awareness. The question is, how? Auditing can broadly be divided into three phases: preparing for the audit, performing the audit, and putting the results of the audit into action. Here’s how to do it, start to finish.

Step 1: Understanding a Supply Chain Audit

A supply chain audit is a systematic and total assessment of your supply chain processes, from your initial procurement to the point you deliver your products and everything in between. The goal is to evaluate and document every element of your business processes, as well as the entities you work with throughout your supply chain. This helps you identify and work to eliminate any potential risks, make sure you and the people you work with are in compliance with both regulatory policies and your own ethical positions, and ensure that everything is within the scope of customer requirements.

All of this becomes a foundational awareness of how your business functions, who you rely on, how they function, and where your weaknesses may be. You can then use this information to try to improve, from reducing possible fragile business interactions and unethical suppliers, to even potential security or fulfillment problems.

A Supply Chain Audit

Audits can be performed internally or externally. Internal audits are performed by your own business and your own agents, while an external audit comes from an external source, like a regulatory body or certification agency. Performing your own internal audits is very important, so let’s go through the process.

Step 2: Defining the Scope and Objectives

The first step of a supply chain audit is to understand and define the scope and objectives of the audit. This depends primarily on the size, complexity, and overall nature of your supply chain. It can also be adjusted based on any specific issues you want to focus on. For example, you might focus on the financial aspects of the elements of your supply chain, or on the ethical and sustainable implications of each business along the way.

For example, any or all of the following elements of your supply chain might be part of your audit:

  • Procurement. Consider evaluating how you source, purchase, and contract the production of or delivery of raw materials, various components, and even services from providers external to your business.
  • Inventory Management. Consider evaluating how you store and handle everything from raw materials to finished products, how you track them throughout the supply chain, and how there may be gaps or losses along the way.
  • Manufacturing. Consider evaluating the processes used to transform raw materials into products, and if those methods can be made cheaper, more efficient, more ethical, more sustainable, more environmentally friendly, or overall better in one way or another – and what the trade-offs might be for those changes.
  • Logistics. Consider evaluating the shipping, fulfillment, transportation, distribution, and delivery of goods, both to you from your suppliers and from you to your customers.
  • Quality Control. Consider evaluating the processes you use to inspect, test, and validate the quality of the products you offer to your customers. Critically, make sure you don’t slip into validating the quality of the products; your audit is about the quality control assurance process and is not itself quality control.
  • Supplier Communication. Consider evaluating how you communicate, collaborate, and work with your suppliers and whether there are gaps, difficulties, or roadblocks to fixing issues as they arise.
  • Overall Sustainability. While the elements above may all include some analysis of ethics and sustainability, you can also perform an overall audit into the ethics, human rights, green practices, and overall sustainability of your supply chain.

Again, you don’t have to do each and every one of these. You can also decide how far back in the chain you want to investigate. A small business might be able to simply work with an ethical supplier rather than independently verify everything from the raw materials on up. On the other hand, you might want to validate everything “from dirt to shirt,” so to speak. It’s up to you to determine how deep you want to go with an audit.

Setting Audit Goals and Objectives

Defining all of the above is the scope. What about the objectives?

  • Seeking to identify inefficiencies and bottlenecks in your supply chain.
  • Looking for waste in the supply chain, especially waste you can mitigate.
  • Identifying risks and weaknesses where your supply chain is subject to easy disruption or loss.
  • Looking for potential sources of fraud and ways to preemptively mitigate it.
  • Identifying how you validate data and processes to minimize errors, delays, and waste.
  • Pinning down compliance with legal and regulatory bodies and laws. Note that this is also often handled by external auditing to validate for those laws, but if they’re more of an “enforce when breached” kind of law, it’s worthwhile to proactively seek compliance.
  • Looking for ways to improve overall function, speed, efficiency, and customer satisfaction with your processes.

So, the first step of the auditing process is to define a tangible, specific list of everything you want to look for in your scope. An audit should not be open-ended if you ever want it to finish.

Step 3: Assemble an Auditing Team

The next step is to put together the team that will do the auditing. Depending on the size of your organization, this may be a team made up of employees from various affected departments who will have access and authority to see relevant information and develop reports. In smaller organizations, it may need to be partially or even totally an external company that can work with you for the auditing process if you don’t have anyone you can spare.

An Auditing Team

Remember that for an audit to be successful, the people performing the audit need to be detail-oriented and able to access the information necessary to evaluate each part of the supply chain adequately. Assigning an audit to an intern just means they are unlikely to have the access or availability to perform the task, for example.

Step 4: Prepare Documentation and Access

Ideally, your business should have comprehensive documentation about every element of your supply chain, from who you’re working with and why to the specific details of your contracts, what you’re getting, how much it is, and more. All of this information should be assembled as much as possible, with relevant information and evidence collected and ready for auditors to comb through.

This might be a significant number of documents. Contracts, invoices, reports, receipts, policies, manuals, records, and documented procedures; all of these are relevant and may need to be accessed and evaluated by auditors.

Moreover, your auditors may need access to various systems, so it might be important to set up view-only auditing accounts to grant them the access they need to evaluate details on a more granular level.

Preparing Documentation and Access

If you have trouble getting all of this together – or if some of the documentation is missing – this is itself a flaw that must be remedied and can be considered one of the first results of the audit.

Some of the more detailed audits may also involve in-person and on-site visits, which can involve significant scheduling, travel, and investigation. Depending on the scope of your audit, this may be necessary, or it may be an unnecessary expense.

Your final preparation step is, if necessary, to plan out the scheduling and methodology of the audit. This might just be hours per day of combing through documents, or it might be a rigorous schedule of investigation.

Step 5: Collect and Analyze Data

The next step, and the first step of the actual audit, is to begin harvesting any data that needs to be harvested. There are a thousand checklists available online for auditing frameworks; these can be a great place to start. You have your pile of documentation, your goals, and your process; start putting it all together, figuring out what you need but don’t have, and go about gaining that information.

Collecting and Analyzing Data

Analyzing the data is next and is perhaps the most complex part of the entire process. There are many different kinds of analyses, depending on your goals and the kind of data you’re evaluating. You might seek a gap analysis, a root cause analysis, a SWOT analysis, or even simply benchmarking data for future audits to compare. Again, this all needs to align with your goals.

Step 6: Develop Reports and Recommendations

Once you perform the data analysis, you have everything you need to draw conclusions.

Developing Reports and Recommendations

These conclusions can include:

  • Elements where data was lacking, and what that reveals about your documentation, record-keeping, and access processes.
  • Overall analysis of how operations are faring, what the strengths of the business are, and what weaknesses exist in the supply chain.
  • Gaps or risks that have been identified, as well as potential solutions to them, if it’s within your scope to identify those solutions.

If, at some point during the audit, you uncover signs of something potentially devastating, criminal, or otherwise incriminating for individuals, past or current, within your organization, this may form an ethical or even legal imperative to report it to relevant authorities. This can include anything from signs of fraud and embezzlement all the way to cybersecurity or data breaches that need to be disclosed by law.

All of this is developed and written into specific reports that can then be delivered to stakeholders, the board, the directors, and others who have a relevant interest in the results of the audit.

Step 7: Taking Action After the Audit

Audits are not the solution to a problem. They are the way you identify that there is even a problem in the first place and, if there is, what the problem is specifically.

At this point, you may need to do further investigation. Maybe you need to question or renegotiate terms in your supply chain contracts. Maybe you need to sever or let some of those contracts expire, and replace them with other contracts. Maybe you need to embark on a plan to improve software parity with the standards of the industry, improve cybersecurity, or work on communication with suppliers.

There are any number of possible results of an audit, and the way those cascade into a plan of action after the audit will depend, again, on your initial goals. For example, a complete deep dive into the ethics and sustainability of the elements of your supply line might lead you to explore alternative suppliers more local than the ones you’ve been working with. After all, if it’s been years since you last looked, maybe there are new possibilities that didn’t exist before.

Taking Action After a Supply Audit

At this point, you put your plans into action, but that’s not the end of it. You also need to create a feedback loop of monitoring, investigation, analysis, and updated information. You may need to do audits on an annual or biannual basis, or you may use the audit as a way to establish continuous monitoring. Whatever the case may be, you can leverage the results of the audit to improve, and repeat the process down the road to improve once again.

We’re also willing to help you out. Not with the auditing – that’s the job of a consulting firm – but as an ethical supplier of customized merchandise. We can be one of those updated, ethical suppliers you’re seeking. Alternatively, we can simply help you out when it comes to merchandise and branded products to use in employee appreciation events, trade shows, conferences, and more. Whatever your needs, when it comes to ethically produced and sustainably made products, we’re your go-to. Just browse our store and see what catches your eye, or reach out if you have any questions or requests.