Internal Auditing within Supply Chains

An audit is a process of examining a company’s existing extended supply chain. Part of the audit procedure involves benchmarking the processes that represent the company’s best practices as well as those within its particular industry.


Why Internal Audits are necessary

A supply chain audit of suppliers and factories, as well as operational aspects, is an essential component to safeguard a company’s brand, performance and overall reputation. This allows for insight into and exposure to better compliance in terms of social responsibility, sustainability, anti-bribery, health and safety and product quality assurance. The risks that accompany supply chains are ongoing and will continue to expand as a result of globalisation.


Regular audits provide crucial information for reporting on the health and safety aspect throughout the supply chain whereby each audit acts as the opportunity for many organisations to make further progress. Continually evaluating every party within the chain, and throughout the workplace, is an important step towards a cycle of continuous improvement.


Organisations need to ensure that their audits are conducted properly since poor quality audits result in a less beneficial impact and are more likely to compromise the consistency of the reports. One way to achieve this is to use a professional third-party auditor that is independently monitored to ensure the standard of advice and knowledge offered is both high and is maintained.


The Audit Process


The BSI Supply Chain Solutions’ report provides details on the auditing process. These are as follows:


Supplier Self Assessment - These assessments allow a company to undertake an informal audit to identify any weaknesses within the entire supply chain. With self-assessment, the results are usually immediately available for review, take up half the time of a standard audit and allow organisations to focus on areas of major risk.


Onsite Audit - These audits are usually in person and cover all the documented processes and procedures leading to the formulation of an action plan as to how to track these processes, amending and improving them where necessary.


This looks at risk assessments in more detail, ensuring that each risk is assessed consistently across all the suppliers in the chain. The dedicated audit team should take into account best practices and standardised approaches.


Opening and closing meetings - A formal meeting should be held at the beginning of each supplier verification audit which should cover the scope of the audit, its purpose and the overall process. This should be followed by a closing meeting when the major findings are reported and a constructive action-orientated plan is presented.


Certificate of excellence - Once the planned corrections have been carried out, there should be an independent review. Additionally, as evidence of compliance, the third-party auditor should issue a signed certificate of excellence.


Re-verification audit - This verifies the continuing effectiveness of compliance in relation to both internal and external changes, demonstrating the company’s commitment to the improvement of processes and the enhancement of performance and determining if the supplier’s operation meets the organisation’s policies and objectives.


Major non-conformities - In the event that a major non-conformity is discovered during an audit, an additional visit is required to ensure that this has subsequently been handled appropriately by the organisation.


Risk management is a large component of the overall health of a supply chain, particularly in view of the instability of the global marketplace, political uncertainty and trade tariffs. Having an internal audit carried out first can provide business leaders with the necessary framework to develop a risk management program. This can be achieved through risk reduction and increased security.


  • Reviewing and understanding supply chains, including their strengths and weaknesses, in developing markets to validate monitoring programs

  • Working with the company’s supply chain specialists to help to develop a monitoring process that can be repeated

  • Helping to identify which suppliers are critical

  • Assessing which suppliers may be vulnerable to threats and helping to draw up a residual mitigation profile

  • Identifying strong risk control procedures

  • Helping to develop key analytic tools and techniques

  • Aiding with compliance monitoring


Internal audits can also take into account the processes identified by the Global Supply Chain Forum which are customer relationship management, supplier relationship management, order fulfilment, product development and commercialisation and returns management. These are additional hallmarks of a healthy and successful supply chain showing the links between the chain and every other facet of a business.

Benefits of supply chain auditing

There are many reasons why an audit of a supply chain is worthwhile, one of which is that it gives the company a competitive advantage by giving them an opportunity to evaluate the risks within their organisation and regularly amend and monitor them. It shifts the focus onto improving the environment for the employees involved in the chain, ensuring safe and fair working conditions as well as the success of the business.


The presence of cross-checks throughout supply chain documentation is key to developing an adept supply chain audit. The ability of suppliers to correctly format their transactions and send data on a timely basis establishes the foundation for the monitoring and management of each vendor’s performance.


Audits also increase a company’s credibility and reliability. This is particularly applicable to organisations that conduct activities on a global scale, as different countries can have different values and expectations as to how a business operates. Although business owners may believe their way of operating the business is the right way, or believe that they are great employers, this might just be in their local context. Audits can assist organisations to discover whether they are abiding by national or international laws and regulations and whether the way they operate their global businesses is consistent.


Audits also improve sustainability and business relationships as they are usually a catalyst for driving positive and sustainable change. Although an audit does not fix all the surrounding issues, conducting one is a way to objectively measure the risks within the chain, foster dialogue between buyers, suppliers and stakeholders and enable positive conversations.


An example of how audits can improve sustainability and positive change can be shown in the textile industry. There are several cases now in which workers in this industry are paid significantly less, especially where the manufacturing of clothing is offshored to third world countries. There are also cases where workers are injured due to the handling of equipment and the lack of safe work clothing. Another issue is workplace discrimination, in several companies, there’s a lack of employee empowerment. Due to this, employees are reluctant to voice their ideas and suggestions for improvement within the company. In performing audits, having a third-party auditor review company culture would be beneficial in improving the company.


Overall, an internal audit aims to support managers in optimising their processes and direct management to approaches that may prevent or reduce negative effects. This would then improve the effectiveness, efficiency and performance of several functions within the organisation.


To increase supply chain strength and agility, organisations would have to develop a framework for their approaches to risk identification and management. This will better their practices and enable them to proactively address organisational supply chain risks on a regular basis, a practice that enables a stronger company and brand protection against risk gaps.