Supply Chain Audits

Supply Chain Audits

The years since the beginning of the Covid epidemic have raised awareness about supply chains and logistics services as shortages and delays became the norm. C-suite executives added supply chain resiliency and risk to their list of priorities. For supply chain managers the positive aspect to the disruptions is a heightened profile of their profession. The need for annual audits of supply chains to help mitigate future disruptions is obvious but execution can be difficult. Audits sometimes become a “back burner” issue or are postponed in favor of other projects. There is no regulatory requirement to perform supply chain audits so the reasons for avoidance include staffing, unwillingness to devote resources ($), the belief that the company is too small, and lack of C-level commitment. If supply chain audits are to be performed and effective C- level leadership is the most critical factor.

Supply Chain software and checklists can be used to produce an “off the shelf” audit. However, a customized process will be more effective as an analytical, planning, and training tool. Supply chains vary from simple to complex depending on many factors including location and distances between sources and markets, country of origin of components, logistics service providers, and regulatory issues.

This article is intended to present a suggested set of guidelines for developing customized audits rather than a checklist of numbered tasks. Strategic goals are the purview of C-level executives providing tactical direction to supply chain auditors.

Strategic Level

Supply Chain Strategy

An audit will consider strategies to ensure that the 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 order to meet customer service requirements. Transparency must be implemented at the strategic level, enabling better communication throughout the entire supply chain. Furthermore, a good strategy will examine social responsibility, quality, sustainability, environment, and responsible sourcing.

HR Implications

An audit can analyze the supply chain to determine if an effective organizational 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.

Supply Chain Processes

 The audit will examine tactical functions of the supply chain: inventory management, technology tools or software, procurement, logistics and customer service. KPIs to be implemented for tactical functions and updated as needed.

Vendor Mgt

 An audit will ensure that vendors are complying with relevant regulations and identify instances of non-compliance and potential red flags. In addition, the audit will ensure compliance with legislation and contract clauses. Vendor management will also confirm that the work offered by vendors is of a high standard competitively priced. With high level management cooperation vendor supply chain audits may be a contract requirement.

Risk Management

While a good management program can mitigate risk, there is no way to eliminate risk entirely.  An audit 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.

Environmental, Social, and Governance (ESG)

Supply Chains are the veins and arteries through which corporations function. ESG issues are top priorities for C Suite executives in the 21st Century. They will establish ESG priorities, oversight and management, and stakeholder engagement. Priorities specific to the corporation or industry include:

Environmental- Climate, Sustainability, Waste and Recycling

Social- Diversity, Equity, and Inclusion, Human Rights, Community Service

Governance- Ethics and Compliance, Corporate Governance, Safety and Health Regulations

Tactical Level

  • Staffing the Audit- Auditors must be allowed as much independence as possible. If conducted internally recruit from Finance, Marketing, Manufacturing, Legal, and IT as well as Supply Chain. Assign these professionals to audit departments other than their own to avoid bias and management pressure.
  • Network Design- the framework of the supply chain. Review and update as needed a documented supply chain strategy, aligned to business goals, and translated to KPIs, incentives, and compensation. The audit will determine gaps in technology and software. Consider benchmarking against other supply chains with similar characteristics. Common KPIs: Measurement of Risk/Vulnerability- specific to company or industry, Resilience- Estimated recovery time for various scenarios, Evaluation of software and IT systems.
  • Customer Service- Four utilities add value to customers: form, possession, time, and place. Form utility is generated in procurement and manufacturing. Marketing creates possession. Logistics provides time and place utility. The ultimate in logistics service is to deliver all orders completely, on time, to the right location, in perfect condition, with complete and accurate documentation.  Common KPIs:   Orders shipped on Time and Complete, Orders delivered on Time, Orders Returned, Warranty Processing, Invoicing Accuracy, Timely Responsiveness to Customer Issues, Proactive surveys, Response to customer reviews.
  • Procurement- the beginning of the supply chain. Implement a vendor management process to include how suppliers are selected, supplier performance KPIs, regular review meetings, action plans for improvement, and emphasis on value and Total Cost of Ownership vs price. Common KPIs: Price, Order Placement Efficiency, Supplier EDI Capabilities, Invoicing Accuracy and Timeliness, Returns Programs, Warranty Programs, Follow Up and Responsiveness,
  • Inventory Management- The supply chain functions with the biggest fiscal impact are inventory and transportation management. Reducing inventory saves money but can drive up transportation costs and risk lost sales. Conversely, increased inventory can reduce transportation costs but be a drag on profits. Supply chain management seeks a balance in this key area. Common KPIs include Total inventory in system, Safety stock in system, Inventory turnover, Order fill rate, Order cycle time, Lost sales, and Inventory Carrying Costs.
  • Inbound Logistics- Best practices require checking inbound items for quality, quantity, and condition upon arrival. An efficient supply chain will utilize an appointment schedule for deliveries and an advanced notification process by suppliers when possible. Logistics Service Providers (LSPs) are covered further below. Common KPIs: On Time Deliveries, Advanced Shipment Notification, Shortage/Damage Upon Delivery,
  • Outbound Logistics- Distribution of products from warehouse to end user or FSL (Forward Stocking Location) may be insourced to private fleet or outsourced to LSPs (Logistics Service Providers). If insourced, it is essential to measure fleet utilization to reduce equipment down time/empty miles and ensure that vehicles are of the right type and capacity.  Fleet managers must have the ability to adhere to safety, maintenance, and hours of service regulations with appropriate KPIs. Outsourced distribution is discussed under LSPs. Common KPIs: Equipment Utilization/Down Time, Empty Miles, Safety and Accident Rate, Fuel Consumption, Training.
  • Logistics Service Providers (LSPs)- selection process for providers should be based on value and not on price alone. KPIs are essential in tracking on-time performance, loss/damage, customer service responsiveness, billing accuracy, and other services. Conduct and document regular review meetings to address service issues as well as rates. Incorporate transportation providers’ KPIs into your supply chain audit as they will impact customer service. Service level agreements should be implemented with high volume providers and updated as needed. Importers may consider a separate audit of their Customs Broker or, at least, engage brokers who perform self-audits. Common KPIs: Price- compare net rates not % off because base rates differ, Transit Times/Reliability- on time pick-up and delivery, Capability/Access- provider has right equipment in right place at right time, Security- Loss and damage experience, Operation Ratio- providers with marginal or negative O/R present a risk, Relationship- customer service experience and problem solving responsiveness.
  • Warehouse- Warehouses or distribution centers are critical supply chain nodes. They are strategically positioned for storing inventory, staging finished goods, and shipment consolidation and deconsolidation. 21st Century warehouses add value through fulfillment services, inventory control, and return services. Common KPIs: Inventory Control Accuracy, Loss/Damage, Capacity Utilization, Equipment Maintenance and Utilization, Pick/Pack Productivity, Shipping/Receiving Productivity, Customer Service, Safety Record, Training.

In summary, the guidelines presented in this article can produce an audit that can be used as a tool for analysis, planning, and training and not just a document for the files.