Supplier Assurance: robust audit process is a must

 

In a competitive marketplace, an effective supply chain can be the source of a commercial advantage – marking the difference between profitability and administration. Large and successful businesses depend on them. But what makes an effective supply chain? Why do some chains drive value to the bottom line, but others bring added costs?

This is a complex issue. If it were simple, every business would have an efficient, value added model. But the reality is most struggle with managing complex global chains due to the nature of trade-offs in supply chain decision making.

Consider an example from the perspective of a procurement professional: ‘Supplier A’ is very nearby. They have been running for years. They have a good local reputation, and there are no concerns about their practices, as their record is untarnished. ‘Supplier B’ is based thousands of miles away. Supplier B’s local reputation is not certain, but Supplier B’s quote of delivered goods is 25 percent cheaper than Supplier A and would mean the procurement team’s cost saving target is achieved. How might you get more certainty in the decision?

Most procurement professionals would consider many factors in making the decision, including: the relationship with Supplier A, the risk of working with an unproven supplier, and the benefit of cost savings. All else being equal, if we can reduce the risk of working with an unproven supplier, the decision becomes much easier. 

Consider the recent case involving Pret-A-Manger, in which a customer tragically died in 2017 from an allergic reaction to dairy proteins after eating a sandwich labelled “vegan” and sold by Pret. Pret is taking legal action against the supplier, Co-Yo, who they claim mis-sold them a dairy-free product shown to contain dairy protein in independent testing. However, it is Pret-A-Manger having to manage the impact with their customers as a result.

So, how do procurement professionals reduce the risk introduced by unproven suppliers? Best-in-class organisations have lists of pre-qualified, or ‘assured suppliers’. This provides assurance to individual buyers that suppliers on that list are fit for purpose, and a safe choice. It hastens the decision-making process described above and makes procurement teams more efficient. If there is greater certainty that Supplier B has a solid local reputation, a clean track-record, and is run ethically, I’m more confident and efficient in my decision-making process and more likely to meet my cost saving targets.

But many organisations struggle with how to get started in the pre-qualification task. It feels like a large mountain to climb. However, there are a series of simple steps organisations can take to ensure suppliers share their values and can deliver goods, and services, without adding undue risk or cost to the supply chain.

BUILDING A LIST OF ASSURED SUPPLIERS Compile: start with a list of suppliers Classify: group suppliers by risk and strategic importance Assure: Seek varying levels of assurance, appropriate to classification, that those suppliers are fit for purpose Communicate: ensure the business is aware of the assurance status of each supplier to facilitate cost savings and efficient processes Analyse: review the performance of suppliers and assurance levels regularly

 

Most of these steps can be managed internally. Supply chain leaders quite often prioritise the first two: easy access to supplier lists, and varying degrees of supplier classification by product and service provided, company size, geographic location, and strategic importance. These efforts are in support of gaining a greater understanding of how suppliers, and supply chains, introduce risk and potential costs to the business. Steps 4 and 5 involve internal reporting and communications, that, while complex, remain in the control of the buying organisation.

Step 3, however – gaining supplier assurance – is often dependent on external resources, and where organisations are most likely to get stuck. Gaining supplier assurance can be tricky; suppliers’ marketing departments are often the most visible sources of information and going deeper than marketing content can be difficult. Simply googling a supplier will not provide meaningful information.

So how do best-in-class organisations deliver assurance of the supply base? Dominic O’Malley, Achilles Information’s Regional Head of Audit, believes the answer is within auditing.

Achilles has found that, in the UK Utilities Sector, audited companies are 40 percent less likely to have an accident, when compared to the RIDDOR average. Varying levels of validation and audit provide much needed assurance that suppliers are fit for purpose, and that they remain so over time.

“Auditing, in its very essence, is how a supplier moves from just ‘tell me’ to ‘show me’. It’s all well and good saying you can do something but being able to physically demonstrate it, with evidence, is something quite different,” he explains.

“Through auditing we can close the gap between company policy and what is happening on the ground. In terms of assurance, nothing beats a thorough and knowledgeable auditor putting a company through the process – simply put, you gain a precise understanding of which suppliers are good to work with, and what can beat that?”

A strong audit process relies on independent, knowledgeable, and skilled auditors. These professionals leverage consistent, measurable audit protocols – which is a fancy way of saying they know which questions to ask, to whom to ask them of, and how to obtain an appropriate, evidenced answer. A good audit delivers an accurate picture of how the supplier operates. It isn’t about catching a good supplier out or enabling a poor supplier to look good. Effective auditors paint a true picture of a supplier organisation and inform buyers of the front-line reality – good and bad. They interview at multiple levels, incorporating the responses of company directors with those of employees at various sites across the business. This ensures that company policies are more than just pieces of paper and are practised at all levels of the supplier organisation.

Here are Dominic’s key reasons as to why every organisation should have a fully robust auditing process:

1. It sets the standard
   Making higher risk suppliers subject to an audit process enables you to set the standards you want your suppliers to meet. An auditor is trained to fully measure whether the suppliers are meeting the standards you require, systematically and independently gathering evidence across a range of topics – from health and safety to modern slavery. At Achilles, our data demonstrates that audited companies are, on average, 20 percent more likely to evidence environmental documentation, risk assessments, and training policies in place compared to non-audited companies.
    
2. It helps employees throughout the supply chain get home safely
   An audit doesn’t just help companies comply, improve operating effectiveness, and save money in the long run. Standards of Health and Safety within audited companies are higher, resulting in fewer incidents. Comparing audited and non-audited companies in the Achilles network, we find companies audited by Achilles exhibit lower lost time injury frequency rates, and lower fatality rates. These companies have shown dramatic improvements in health and safety statistics since Achilles started auditing companies nearly 30 years ago.
    
3.  It drives improvement
   On top of raising standards across an industry’s supply-chains, an audit drives continuous improvement. Knowing an audit is coming is strong motivation to implement compliant policies and procedures and make sure those processes are followed throughout the organisation. Also, as audits are valid for 12 months the process ensures suppliers continually strive for improvement, to maintain high audit scores over several years.
    
4. It protects your reputation
   Having an auditing procedure is like an early warning system – you can identify issues and nip them in the bud before they cause damage to your reputation.  This provides assurance that audited suppliers conduct business in accordance with your values – meaning less potential for damage to your brand.
    
5. It reduces your supply-chain risk
   Many audit protocols include sections on how suppliers manage their own supply chains. This helps buyers get that crucial visibility beyond Tier 1 suppliers, to build a more informed picture of their supply base. If your Tier 1 suppliers have robust policies and procedures in place to manage their suppliers, they are less likely to introduce upstream risk to your supply chain through non-compliances in the Tier 2/3/4 level and beyond.
    

Dominic adds: “Audits, by their nature, need to be carried out by independent bodies – not influenced by the incentives in play at the buyer or supplier organisation. This can be a stumbling block for many buying organisations, but with a number of respected audit providers in this space today, a buying organisation can find appropriately vetted audit services across a range of topics and protocols that meet international standards.”

Katie manages a team of procurement experts, product owners, and pricing specialists to drive the development and release of innovative supply chain solutions for Achilles.  She has 15 years’ experience supporting procurement clients with insights and analysis. Achilles offers supply chain risk and performance management solutions.   The opinions expressed in this article are the author's own and do not reflect the view of Beroe Inc.