Three current trends are making effective supplier audits increasingly important: globalization of the supply chain, more government regulation, and heightened public awareness. In the past, onsite audits have been conducted most often to assure compliance to quality standards. But that approach no longer suffices.

Companies are now judged — and often harshly — by their commitment to operating in a manner that is socially and environmentally responsible. Further, social and consumer activists often look down the supply chain and place the sins of the supplier firmly on the shoulders of the contracting company.

And with globalization, it’s crucial that companies are aware of who is supplying their suppliers. The inability to obtain a material or component could have a ripple effect and cause suppliers up the chain to miss production quotas.

These, along with all the traditional reasons to conduct a good supplier audit program, call for examining and scoring 10 specific areas over four categories. All of these areas should be closely examined during the initial vendor qualification phase; some can be revisited infrequently once a relationship has been established.

Further, as Mike Hales and Raj Arumugam describe in “The Case for Supplier Development” in the March/April 2014 edition of Supply Chain Management Review, these audit areas can be used in a long-term program to develop suppliers.

Audit scores will be given in 10 separate areas that are spread over four categories. It is convenient to assign each separate item audited a possible 10 points. A perfect score would then be “100.” The four general categories are:

• Organization
• Resources
• Health
• Responsibility

Audit team

The above list — and the corresponding 10 areas — make it clear that a variety of disciplines should be represented on the onsite audit team. Technical, financial, personnel, and management experts all have important roles to fill. The overview presented here only touches on the points to be examined in each audit area. The specialists on your team will want to create detailed checklists specific to your company’s requirements.

Also, consider establishing a program to train others in your audit procedures so its work can continue without interruption should someone leave your organization or be unable to participate in an audit.

Organization

In the category of organization, four separate areas are audited: management, people, quality, and innovation.

• Management. The purpose of the management audit is to determine if the supplier’s management structure is adequate to achieve its stated organizational goals. It also judges the overall performance of management, which involves looking at previous goals and seeing how well they have been met. Does authority rest in the proper managerial positions?
• People. Is the right team in place? Do individuals in critical positions have the experience, background, education, and training to perform their responsibilities effectively? Also, look at the supplier’s training program to be sure that employees up and down the line get the training they need.
• Quality. Are quality standards met consistently? Auditors need to look at the systems that are in place and determine if they are sufficient to meet the needs of their company. Are document control procedures enforced? Are accreditations or certifications in order?
• Innovation. Determine the supplier’s commitment to innovation. Market pressures require increased productivity, and that always requires innovation. Be sure you’re working with a supplier who is dedicated to improving processes.

Resources

There are two areas to look at here: technology and process. These define the day-to-day resources used for production. In large part, they determine the ability of your supplier to meet your needs today.

• Technology. Examine equipment to determine if it is adequate to produce your materials. Look over maintenance records. Ask management about plans to upgrade and timelines.
• Process. In many cases, experienced industrial engineers or manufacturing supervisors will be required to assess the supplier’s process. Has the process been optimized?

Health

The term “health” isn’t used in the occupational health and safety sense; it refers to the supplier’s corporate health and ability to continue to produce for you.

• Finance. In this area your auditor needs to determine what risk there is for the supplier to go out of business, or be forced to belt tighten so much that it would threaten the timely supply of your product.
• Supply Chain. If there are critical materials or components that your supplier depends on receiving from another source, how stable are those suppliers? The threats can come in many forms, including geopolitical uncertainties.

Responsibilities

A growing awareness of corporate responsibility makes these areas very important today. As you consider them, you’ll see that they also relate to areas such as management, technology, and process.

• Environmental. Auditors need to examine the supplier’s commitment to the environment as well as its environmental record. Are the right technologies and processes in place to assure sound environmental practices?
• Social. Many companies with otherwise sterling public relations have found themselves in the middle of controversies due to the way their suppliers treated their workers. Look at internal mechanism for protecting workers health and safety, as well as the supplier’s history.

To make effective use of these 10 areas, have your audit team create separate checklists for each one and guidelines for granting scores between one and 10. When the audit is complete and the points tallied, you can use the total score to determine how frequently the supplier should be audited and how you might help your supplier improve.

A copy of Cadbury Schweppes’ vendor approval form and checklist can be viewed here. The detailed questions and points to be examined during the audit procedure closely reflect the recommendations here. It could be used as a model for a wide variety of industries.