Supplier audit: What it is and how to conduct one

A supplier audit is an evaluation process that examines a supplier's capabilities, performance, and compliance to ensure they meet the buyer's standards and requirements.

Neglecting to perform thorough audits can lead to significant consequences, such as quality issues, delivery delays, and even legal problems, all of which can damage your business's reputation and bottom line.

Let’s break down the different types of supplier audits, how to effectively prepare for and conduct an audit, and some critical issues to watch out for.

What is a supplier audit?

A supplier audit typically involves on-site visits, document reviews, interviews with personnel, and observation of operations. They may be conducted prior to establishing a relationship (pre-qualification audit), at regular intervals (routine audit), or in response to performance issues (for-cause audit).

Benefits of conducting a supplier audit

Regardless of when a supplier audit is performed, it's a valuable effort to ensure your supply chain remains reliable.

From identifying vulnerabilities to ensuring adherence to standards to improving communication with suppliers, supplier audits offer several benefits:

• Quality assurance: Ensure that suppliers meet quality standards, helping you maintain product consistency and reliability
• Risk mitigation: Examine the supplier's operations to spot risks before they turn into costly problems. This proactive approach helps prevent production delays, quality issues, and reputational damage.
• Regulatory compliance: Ensure that suppliers meet all necessary regulations to protect your business from legal trouble and keep your reputation intact
• Efficiency improvements: Identify bottlenecks and inefficiencies that may be slowing down production or increasing costs
• Customer satisfaction: Ensure that suppliers consistently deliver top-quality products or services to maintain high customer satisfaction and reduce complaints and returns
• Continuous improvement: Identify opportunities to refine processes, encourage transparent communication, and establish clear benchmarks

Supplier audits contribute to a more resilient and reliable supply chain that protects both business operations and reputation.

Who conducts a supplier audit?

Some companies choose to develop internal audit teams who become specialists in evaluating suppliers according to company standards. Others might bring in third-party auditors who offer an objective perspective and specialized knowledge, particularly when dealing with compliance matters or industry-specific regulations.

However the team is formed, supplier audits are typically conducted by those with the right mix of skills and expertise to thoroughly evaluate suppliers:

• Quality assurance professionals: They understand product specifications and quality standards inside and out and can spot potential issues before they become problems
• Procurement specialists: They bring their deep knowledge of supply chain management and supplier relationships to the table. They understand the contractual requirements and can assess whether suppliers are meeting their obligations.
• Subject matter experts: They might join the team depending on what you're auditing. For example, if you're examining a food supplier, having a food safety expert on the team is invaluable.

The best audit teams combine technical knowledge with strong interpersonal skills and should approach the process as partners in improvement rather than inspectors looking for faults.

How to conduct a supplier audit

During any type of audit, consider factors like financial stability, capacity constraints, and business continuity plans. Consider creating a supplier scorecard to help assess risks based on audit findings, allowing you to prioritize high-risk vendors for more frequent checks or corrective actions.

To help you effectively conduct an audit, we've put together a supplier audit checklist:

1. Prepare and plan

Preparation and planning lays the foundation for a successful evaluation that yields actionable insights while maintaining positive supplier relationships.

• Choose an audit type and format: This will guide the entire process.
• Select an audit team: Choose those with relevant expertise, ideally including members from various departments for a comprehensive perspective
• Develop an audit plan and checklist: Outline the scope, areas to review, and evaluation criteria
• Communicate with the supplier: Discuss the upcoming audit, its purpose, and what's required from them. This sets clear expectations and promotes cooperation.
• Plan the audit date: Coordinate with the supplier, making sure the relevant people from both sides can attend

2. Gather information

Thorough information gathering gives your audit direction to focus your evaluation on the areas that matter most.

• Review key documentation: Include quality manuals, process flows, SOPs, and previous audit reports to identify areas needing closer examination
• Provide a pre-audit questionnaire: Gather information from the supplier to help plan and prioritize the focus of the actual supplier audit

3. Conduct the audit

With your audit plan in hand and preparations complete, conduct the on-site assessment to gather comprehensive insights about your supplier's operations.

• Hold a meeting: Review the audit's purpose and scope, agree on communication methods, and clarify the audit plan. Address any ambiguities from the pre-audit questionnaire.
• Conduct a thorough tour of the facility: Observe operations directly to learn the scale and capacity of the supplier's operations. Assess the cleanliness and condition of the facilities.
• Gather evidence: Observe processes, question staff, review documentation and records, and address any issues of concern. Record all observations clearly and support them with objective evidence.
• Hold a closing meeting: Present your findings and conclusions to the supplier's management. Highlight both strengths and areas needing improvement to provide a balanced view.

4. Analyze findings

After completing the on-site portion of your audit, carefully review and analyze your findings to determine how well the supplier meets your requirements and identify any areas that need improvement.

• Organize all collected data: Include notes, observations, and evidence
• Identify nonconformances: Compare findings against predefined criteria and standards, documenting deviations with specific examples
• Evaluate the supplier's overall performance: Base this on the compiled data and identified nonconformances
• Assess results: Note how well the supplier meets quality standards and compliance requirements, considering strengths and weaknesses

5. Report and follow up

The final critical step involves documenting your conclusions and working collaboratively with your supplier to address any identified issues for long-term relationship improvement.

• Create a detailed report: Include an overview of the process, key observations, and identified nonconformances with supporting evidence
• Share the report with the supplier: Highlight strengths and improvement areas
• Develop a corrective action plan: Work with the supplier to outline specific steps to address each issue and set realistic deadlines
• Monitor the implementation: Track improvements and corrective actions through regular follow-ups with the supplier

Conducting supplier audits on a regular basis ensures continuous improvement and maintains the integrity of your supply chain. The end result will depend on which type of supplier audit you conduct.

Types of supplier audits

Each type of supplier audit addresses specific aspects of the supplier relationship. Choosing one allows companies to efficiently target their most significant risks and opportunities for improvement rather than conducting unnecessarily comprehensive evaluations.

How to choose an audit type

To choose the most appropriate audit type, consider your primary objectives and the specific aspects of the supplier relationship that present the greatest risks to your business.

Quality audits are best when you're concerned about a supplier's ability to consistently meet your specifications and standards. Process audits make sense when you need to verify that a supplier's workflows and methodologies align with industry best practices or your requirements.

Product and compliance audits should be prioritized when you face significant regulatory requirements or when supplier goods directly affect your final product's safety or performance.

The right audit type serves as your compass for effective supplier audit management, guiding you toward meaningful improvements while protecting your business against potential risks and compliance issues.

Supplier audit formats

Each serving a specific purpose and offering unique insights into a supplier's operations and compliance, supplier audits can be conducted in various ways:

• Announced audits: These are scheduled in advance, allowing suppliers time to prepare. They're useful for thorough, planned evaluations of the supplier's systems and processes.
• Unannounced audits: These occur without prior notice, providing a real-time snapshot of the supplier's operations. They're effective for assessing everyday practices and identifying any hidden issues.
• Desktop audits: Conducted remotely, these audits review documentation and records rather than on-site operations. They're useful for initial assessments, follow-ups, and when on-site visits aren't feasible.

Critical issues to watch for during a supplier audit

While the hope is always for a smooth, thorough, and cooperative audit, there may be times when issues arise that must be handled before they affect the supply chain's reliability and quality.

• Unusual financial discrepancies: Look for inconsistencies in financial records, unexplained cash flow variances, or significant revenue or expense changes that lack clear explanations
• Lack of documentation or incomplete records: Missing or poorly kept records can indicate weak internal processes or even attempts to hide information
• Overly complex or unusual transactions: These can obscure the supplier's financial status and may require in-depth scrutiny to uncover hidden risks
• High employee turnover in key roles: High turnover might indicate a problematic work environment or possibly even efforts to mask unethical practices
• Inconsistencies between reports and operational reality: Taking time to compare official documentation against your personal observations and conversations with staff can help uncover hidden issues that might otherwise go unnoticed
• Resistance or lack of cooperation during the audit: Delays in providing information, evading questions, or a general lack of transparency can be red flags. Such behavior may indicate that the supplier is concealing issues that require attention.

Addressing these critical areas with thorough attention and maintaining open communication will allow you to strengthen supplier relationships while protecting your business interests. Remember, the goal isn't just identifying problems, it's creating partnerships built on transparency and mutual improvement.

How to mitigate a failed supplier audit

Despite best efforts and careful planning, you may occasionally encounter a failed supplier audit. This doesn't necessarily mean the end of the business relationship, but it does require prompt and effective action.

Communicate openly

Discuss the audit findings with the supplier in a clear, non-accusatory manner. Focus on facts rather than blame, and ensure they fully understand the issues identified and why they matter to the business.

Develop a Corrective Action Plan (CAP)

Work with the supplier to create a detailed plan addressing each finding. The plan should include:

• Specific actions to resolve each issue
• Clear timelines for implementation
• Designated responsible individuals
• Measurable outcomes for success

Both you and the supplier can use the CAP as a guide when addressing issues uncovered in the supplier audit.

Set realistic deadlines

Allow reasonable time for meaningful improvements while maintaining urgency. Consider the complexity of issues when establishing timeframes. Some changes may require substantial time for proper implementation.

Offer support and resources

Consider providing training, documentation, or other resources to help the supplier meet your standards. Sometimes, sharing best practices or connecting them with industry experts can accelerate improvement.

Conduct follow-up audits

Schedule follow-up assessments to verify that corrective actions have been properly implemented. These should focus specifically on previously identified issues to confirm resolution.

Consider probationary periods

For critical suppliers with significant findings, establish a probationary period with increased monitoring and more frequent check-ins. This demonstrates the seriousness of the situation while showing commitment to the relationship.

Document everything

Maintain detailed records of all communications, action plans, and follow-up activities. This documentation creates accountability and provides valuable reference information for future audits.

Prepare contingency plans

While working through remediation, develop backup plans in case the supplier can't resolve critical issues. This might include identifying alternative suppliers or adjusting production schedules to minimize business disruption.

Remember that the goal of addressing audit failures is improvement, not punishment. With the right approach, a failed audit can become an opportunity to strengthen the supply chain and build more resilient business relationships.

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