Why Is a Supplier Audit Program Necessary?

Most people, unless they’ve just won the Nobel Peace Prize, don’t want to find themselves mentioned in the headline of a front-page newspaper story.

It’s the same for business, and it goes even further. Not only do businesses want to keep themselves out of the crosshairs of journalists — except when being noticed for positive achievements — they also want a way to avoid negative internal communication within the companies they count as customers.

Apple Computer

A good reputation is one of those intangibles that is difficult to build and easy to tear down. For example, to consumers, Apple Computer has an excellent reputation for the products it creates. But, it so carefully guards that reputation that in 2012 it increased its efforts of auditing suppliers by 72 percent.

According to DailyTech, Apple even starting auditing smaller component makers along with the big names that we often hear about in the news, like China’s Foxconn. Further, the maker of iPhones, iPads, iMacs, and more found enough sufficiently serious problems that it cut loose at least one major supplier. These problems could have threatened the company’s reputation or Apple’s ability to timely deliver products that meet its quality standards. Both are important reasons for a good supplier audit program.

The fact that we turn to a fully online news source for details about the situation with Apple highlights one factor that has made good supplier audit programs an imperative. In previous years, problems with distant suppliers would likely go unnoticed by the media. Traditional reporting sources just didn’t have the reach to cover stories that to many readers would seem like ancillary issues.

However, with the advent of blogs, citizen journalists, and narrowly focused websites, nothing occurs without accompanying commentary today. Further, industry insiders are often the driving forces behind much of this reporting, and they are sensitive to the kind of events less informed observers would miss.

This is part of the impetus behind supply chain mapping, a practice that is being increasingly adopted by major corporations. It can be a very powerful tool to manage and limit risk. We cover mapping more fully in our discussion of health, safety, and welfare issues below.

As we’ve noted, harsh working conditions and underage labor have been the two issues plaguing Apple Computer through its chain of suppliers. However, there is a panoply of reasons that it makes solid business sense to set up and maintain a robust supplier audit program. Some of these can be broadly placed under the umbrella of reputation protection, as illustrated by the Apple Computer case study, while others are important for different reasons. Specifically, these include:

  • Quality
  • Capacity
  • Finances
  • Economy
  • Safety
  • Performance
  • Environmental protection

Focus varies by industry

Any manufacturer that has been a supplier of items to the military would be familiar with military quality standards and requirements for audits. The same is true for virtually any manufactured products where levels of performance and reliability are specified. Those who do the final assembly of computers, for example, need to be assured that the components they rely on are of sufficiently high quality. Testing regimens and tolerances will be specified, but it is a responsibility of the buyer to audit suppliers at intervals. As one president famously put it when the United States entered into a nuclear weapons treaty with the Soviet Union: Trust, but verify.

Other industries may have priorities that differ, but the principles are the same. Virtually all the items listed above can, if there are problems, have a devastating effect on a business.

Continued supply

A common industry scenario is the new product introduction. Engineers and purchasing professionals will work to find the best component suppliers — everything from the parts that can be purchased as commodities to the items that might need to be custom made. Partnerships are created during the startup phase and even if they do appear to be successful, supplier audits must be an integral part of the relationship.

If these new products become popular, will suppliers have the capacity to keep up with demand? The relationship may have been fine initially, but if the supplier takes on additional customers and begins to bump up against its own capacity, the supply chain could be threatened in the future.

The financial health of suppliers is also a concern. This is, of course, not always easy to learn for privately held companies, but a close relationship and regular inspections and audits can give clues of trouble. If a company goes from running three shifts down to one, it would signal a problem, for example. And when a company starts to struggle with financial headwinds, sometimes quality can be the first thing thrown overboard.

Maintaining competitive advantage

As product lines mature, the importance of cost control can increase. Generally there will be direct competition or competition from similar products that threaten market share. Margins get squeezed. Audits can reveal waste among suppliers, and when that is noted, it’s time to have serious discussions and find ways for suppliers to increase efficiency and pass along some of the savings.

Situations like these also highlight the importance of finding multiple suppliers for critical components. And if the manufacture of some components is especially difficult, it is even more important to have multiple suppliers. Production of some highly technical products can stop if a single supplier suddenly “loses the recipe.” This points to another compelling reason to audit: Be assured that suppliers follow procedures and don’t take shortcuts that can result in component failure.

Safety, health, and welfare

The Apple Computer example illustrates corporate concern for the welfare of workers in its supply chain. With the globalization of the economy, these issues are becoming increasingly important. Walmart recently received bad notice in the press after a garment manufacturing building burned and crashed in Bangladesh; Walmart wasn’t even aware that it was in its supply chain.

This underscores the importance of mapping supply chains, according to Tim Burt writing for Procurement Leaders. Many larger companies today are going beyond auditing just their direct suppliers. They are taking a look further down the line to discover the firms that their direct suppliers use. Some of the most notable cases where mapping down to the initial source could have prevented a string of problems were the recent instances of horse meat being passed off as beef in Europe.

Mapping puts sources that are behind a company’s first tier of suppliers in a visual perspective and can make risks that would otherwise be hidden come to light. For example, the methods of transporting goods between lower level suppliers are noted. In cases of labor strikes or natural disasters, this can be important information, especially if multiple lower tier suppliers depend on the same transportation modes are included within a single map. Maps may also show where the supply chains of competitors overlap. Those points of convergence indicate weak spots in the supply chain that carry a higher probability of failure.

These mapping systems are cooperative agreements between suppliers up and down the supply chain. Each level agrees to share supplier information with one another so a complete picture, or “map,” is created to everyone’s benefit. It is an important tool in corporate or manufacturing risk management.

Smart managers today are implementing these more advanced supplier audit and control strategies, and the need for them will continue to grow in tandem with greater globalization of the supply chain. There are predictions that just as Asia has risen as a place where many major suppliers are located today, Africa is poised to be “the next big thing.” Roger Angelli, CEO of Brazil’s Vale, the world’s largest producer of iron ore, notes that Africa has the natural resource supplies for which Asia has the growing demand. Investments are pouring into in Africa, Angelli says. Accompanying this will be a need to establish supply chains between Africa and the rest of the world; good supplier audits and mapping will be crucial.

Environmental concerns

Finally, given today’s heightened awareness concerning environmental issues, many companies are adding a “green” column to their audit checklists. Computer maker HP is one major company that is now including pollution prevention in its audit routine. The manufacturer verifies how its suppliers deal with waste, water, chemicals, and various banned substances.

One can easily envision businesses where these types of concerns might be among an audit’s primary objectives, for example, any business that specializes in the sale of organic or natural products.

This list is certainly not all-inclusive. Each business must assemble and prioritize the scope of its own audits. However, two facts are unassailable: without a formal audit program, success is left to chance and risk is left unmanaged.

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