Vendor Audits, are they worth it?

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An intriguing discussion is taking place in one of the LinkedIn’s strategic sourcing and procurement groups. Over a period of more than a month, the question of the worth of vendor audits has attracted more than 85 comments. As a regular observer of and periodic contributor to such LinkedIn discussions, Denis Henry, Director of Contracts Online, WebCM says he has not seen such a topic attract so prolonged and varied a commentary.

More intriguing though, is the range of responses and reactions to the question. Highly qualified and experienced procurement professionals have raised numerous variations on the principal topic:

  • why they are/aren’t necessary
  • types of audit; compliance, financial, operational, ensuring continuous improvement, due diligence
  • who should do them: procurement, independent 3rd parties, manufacturing operations, the technical/audit group
  • who should pay including the suggestion that it should be on the vendor

But prima facie, the LinkedIn “jury” looks to be holding a range of opinions on the principal question; yes, no, maybe, sometimes and even “who cares, if the goods are on time, at quality and on your terms”.

There are so many examples of disasters arising out of supply chain incidences; under aged Chinese workers disguised through forged documents, horse meat scandals, deadly fires in Bangladeshi garment factories and highly risky, unsafe and punishment-oriented working conditions in Chinese garment factories.

Most procurement and contracting professionals are able to quote these types of example so how, in the face of such evidence, could the default position be anything other than; of course audits are necessary? The answer, unsurprisingly is manifold, hence the 86 and counting, comments.

The first issue is that the old maxim of on time, on spec and within budget just doesn’t cut it anymore. Enterprises have learned that reputational damage from a single incident in their supply chain can quickly negate years of sourcing effort in driving down costs. So risk management demands that enterprises assure their supply chains.

The second issue is that much as we would like to immediately imbue our newly minted suppliers, selected after an exhaustive tender process, with our full confidence and trust, it ought not be so. Trust is a relationship foundation which is won over time and in procurement’s case reflects the buyer’s confidence in the ability and intention of a supplier to provide correct information or perform promised actions.

 Establishment of trust follows a set course of behaviours:

  • Experimental – we try something that requires the supplier to perform as expected and if they respond appropriately, they prove themselves capable of being trusted
  • Experiential – as the relationship develops there are more opportunities for the supplier to perform as promised and they prove they are reliable
  • Implicit – at the point where we implicitly trust the supplier, we are able to predict their reactions and behaviours in various contract circumstances

So the paradigm of trust demands that we design our contract management protocols in such a way as to satisfy ourselves that the supplier has provided and continues to provide correct information and perform promised actions over time.

What does this all add to answering the question; are vendor audits worth it? There are three distinct stages in our Active Contract Management model:

  1. Behaviour management – where the focus is on compliance and, deliberate and frequent measurement, read testing or audit . It continues until the contract manager is confident in the behaviours of the supplier.
  2. Dynamic management – where the level of trust is maturing and the constancy of surveillance of the supplier can be reduced
  3. Convergent behaviour – where the its clear both parties are working to the same objectives and the buyer side trusts the supplier sufficiently to champion them both internally and externally

So the answer is yes most definitely! Vendor audits are necessary but, when the level of trust and confidence between the parties is implicit, they are beyond their use by date.

 

 

About Author

Procurement and Supply Australasia (PASA) is the leading provider of information and education to procurement and supply professionals throughout Australia and New Zealand. PASA supports the largest community of engaged procurement stakeholders in the region, through its renowned series of events, publications, awards, plus various community and network building activities. PASA is a trading name of BTTB Marketing, for many years recognised as the leading producer of conferences and events for the procurement profession in Australia and New Zealand. Whether producing under the BTTB, CIPSA Conferences or now PASA brands over the last ten years, our events have consistently led the market in terms of both educational and networking opportunities.

2 Comments

  1. I agree with you regarding the merits of vendor auditing.
    However your vendors internal and market place dynamics are an every changing thing, so vendor audits are never “beyond their use by date”.
    Subtle changes in competitor dynamics, leadership, customer base, capital investment, shareholders etc. all have the potential to impact vendor relationships and/ or the vendors ability to continue service levels to the same standard.
    So some form of vendor auditing should continue to identify these risks before they have a material impact your business.

  2. Pingback: Vendor audits – are they worth it? | WebCM

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