Transparent audits provide businesses with the opportunity to work in partnership with suppliers ©Getty Images
Transparent audits provide businesses with the opportunity to work in partnership with suppliers ©Getty Images

How to conduct meaningful supplier audits

There has long been a question over whether supplier audits are truly able to identify risks in the supply chain, but if used correctly, they can be cost-effective and efficient

Auditing is a valuable and necessary tool for managing supplier relationships, but many issues around auditing stem from the relative ease with which they can be cheated. You only have to look at the media storm around clothing retailer Boohoo last year, after it was revealed that some of its UK suppliers in Leicester had been paying employees £3.50 an hour and not adequately protecting them from Covid-19 risks, despite factory audits having taken place.

Earlier this year, a study by Oxfam found workers need alternative ways to voice their concerns, as auditing and compliance procedures have often failed to resolve their issues. “Auditing itself has become commodified and it’s in firms’ best interests to get the best auditors they can and to demand a lot from them,” Kumi Consulting senior consultant Luke Smitham tells Supply Management.

“There are a lot of limitations. If you’re going to use audits, use them sparingly. Think about where and why you’re using them. What is the intent behind it? Is it fundamentally so you can say you had an audit and if something happens then it’s not your problem? Or is it to understand and get a 360-degree vision of a factory?”

Regardless of the outcome, auditing remains one of the most common methods firms use to gain insights into their supply chains. Todd Bradley-Cole, senior manager, corporate social responsibility at John Lewis Partnership (JLP) tells Supply Management that while it acknowledges audits are not always the best way to monitor supply chain risks, they can still be a valuable way to build better relationships with suppliers.

Be sceptical
Almost all commodities or services come with a unique set of risks in the supply chain that could potentially lead to reputational damage to your brand over time. For instance, in Leicester, risks of forced labour and underpaid workers had been widely reported since at least 2015, yet no corrective action had taken place in the years since, increasing the degree of reputational damage.

In India, common risks uncovered at factories include low wages and gender discrimination, while workers in China are often subject to very long working hours, Smitham says. All of these risks are common in factory conditions and therefore something businesses should take into consideration both before beginning an audit and when reviewing the information. When you do receive audit reports, says Smitham, it’s okay to be sceptical and ask questions based on their findings.

“Use your knowledge of the context of the country that you’re looking at, and then review the report in that frame of mind because it will help you identify certain things more easily,” Smitham says. For example, if you receive an audit report that shows your supplier has a predominately female workforce with male management, consider the potential for issues relating to discrimination.

Dig deeper
The style of audits and the auditor you choose to carry out the leg work is what will really make the difference. Analysing systems such as confirming identities, whether workers have proper bank accounts and are being paid properly is just one piece of the puzzle, according to Bradley-Cole. “Probably the most important element for us was the one-to-one interviews with the workers,” he says. “They worked extremely well.”

Choosing an appropriately qualified partner is essential, says Bradley-Cole, to ensure the interviewing process is as effective as possible. For example, he says, if your organisation is assessing a supplier located in another country, ensure the auditors speak their language or even multiple languages to create a more comfortable environment for workers to share their experiences. This is something JLP took into consideration with its own audits.

“We were almost doing a sample of the workers, understanding what languages they spoke and then making sure that the auditors are able to talk to them in their mother tongue. It’s making the workers feel heard and comfortable enough to say what they want to say, knowing that there are no recriminations. This is an open conversation and you learn an awful lot more by doing that at the same time as for practical systems stuff as well.”

Work with suppliers
Communication with suppliers and continuously building up a relationship is critical for getting the most out of an audit. It may seem counter-intuitive, but a pre-audit conversation with the supplier about the purpose and desired outcomes of the audit can make a difference, Bradley-Cole says. “Being clear about what you want to investigate and why is helpful. We had pre-audit conversations just to say ‘this is what we’re going to do’. We were asking them not to alert people or change the way they behave because what we were going to do is to share things openly. There’s no risk to people, it’s not as if we’re going to use it to penalise anyone. You should have that really open engagement early.”

This collaboration has meant JLP has not put contractual rewards in place for suppliers to “do the right thing”, he adds. “That’s part of the ethos of the partnership. We work with our suppliers, and where there are gaps, we work together to address those gaps. We don’t penalise, and therefore we don’t go to excess to reward.”

Partnerships should be long-term
Smitham agrees that communication about the expectations of the audit is key. “There needs to be a level of clarity and trust. The audit has been used to verify certain things but it could have a negative impact on your overall relationship,” he says. “If you audit a factory while you’re in a relationship, you need to be really clear that the expectation is not that the supplier should just resolve the non-compliance but that you’ll help them set up a system that is long-term,” Smitham says. “You need to go through that journey and make it a partnership. It is hard when you have really big supply chains, but you can do that with a few factories to begin with.”

Where possible, procurement teams should ensure they are engaging or even physically visiting their suppliers themselves in order to build those relationships outside of auditing practices. Where there is evidence of non-compliance, it’s then important to work closely with your suppliers to ensure they are able to explain how they plan to fix the issues, and how they will ensure they will not happen again.

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