Supplier Audits: A Complete Guide

As a company's supply chain grows, so does its risk. With every new supplier comes the threat of poor performance. The quality of supplied parts and components can slip through the cracks without proper oversight. A supplier audit is an effective way to examine the quality of a particular supplier and the risk it presents to the organization before it becomes a problem. Companies can improve their overall quality by ensuring their supplier's product quality and delivery standards remain high – something a supplier audit seeks to establish.

Supplier issues can cost a company money or, worse yet, cause harm to its customers. With effective supplier quality management, a supplier audit can be painless and identify serious problems early in the production cycle.

• What is a Supplier Audit?
• Benefits of Performing a Supplier Audit
• Who is Responsible for Supplier Audit?
• Types of Supplier Audits
• The Supplier Audit Process
• Preparing a Supplier Audit Checklist
• Establishing the Criteria for Performing Supplier Audits
• What Is a Supplier Audit Report?
• Mitigating a Failed Supplier Audit

A supplier audit evaluates and assesses a company's suppliers to ensure they meet specific quality and compliance standards. This review ensures that the products or services the supplier provides meet the requirements and expectations of the company using them.

During a supplier audit, a company will typically review the supplier's production processes, quality control measures and overall business practices. This effort can include inspecting the supplier's facilities, reviewing their documentation and records and interviewing key personnel to understand their operations.

Why Conduct a Supplier Audit?

The need for a supplier audit arises because a company's success often depends on the quality of the products and services it receives from its suppliers. Poor quality or unreliable suppliers can lead to production delays and defective products, ultimately harming the company's reputation and bottom line.

A company can mitigate risks, maintain its reputation and optimize its supply chain by conducting regular audits. Holding suppliers to high standards demonstrates an organization's commitment to quality and accountability, enhancing its standing with customers, investors and regulators.

How to Build a Resilient Supply Chain

For highly regulated manufacturers who rely on suppliers for critical materials and components, having effective supplier quality management can reduce the negative impacts of supply chain disruptions.

Download the Guide

The following is a list of benefits that manufacturers can realize by conducting a supplier audit:

1. Adopt organizational quality standards: The quality of your final product strongly depends on the quality of your suppliers. It makes sense to enforce the same standards across the supply chain to ensure consistency. Industry standards and regulations can be automatically tracked and measured within a supplier quality management system. A quality audit will uncover any noncompliant material and set a plan to ensure conformance to industry standards, minimizing risk and eliminating associated penalties.
2. Practice effective document management: A supplier audit will ensure all quality documents related to a supplier are in place and properly archived. Vital records for inspections, nonconformances and supplier approvals are verified during the audit process.
3. Identify areas of potential risk: Complete traceability and product genealogy of every part, subassembly and final assembly ensures operational excellence throughout the product lifecycle. A supplier audit will identify any gaps in the supplier quality process, manufacturing process, engineering change process and shipping process, allowing a manufacturer to close the loop on any deviations, nonconformances or delays. In a recent Deltek Clarity government contracting industry study, 60% of respondents identified supply chain issues as presenting a high potential for risk.
4. Recover the cost of poor quality: A supplier audit provides a comprehensive look at supply chain performance to identify high-performing vs low-performing suppliers. Suppliers can have a significant effect on the cost of quality. Many factors contributing to the Cost of Poor Quality (COPQ) stem from supplier-related activities. Manufacturers can then work with a supplier to improve quality or pursue cost recovery through supplier charge-backs to recover the cost of faulty products.
5. Improve supplier communication: Visibility into supplier-related activities provides an open exchange of information and complete transparency on both sides of the supplier relationship. When goals are aligned, the likelihood of manufacturing success is much greater.
6. Improve customer satisfaction: A supplier audit clearly defines quality objectives and enhances the process of bringing high-quality goods to market. Investigation into areas of risk identifies any adverse safety occurrence before it happens. Focusing on firm compliance and quality standards will improve customer satisfaction with the end product.
7. Enhanced brand reputation: A company's reputation can be significantly affected by the quality put forth by its suppliers. A supplier audit is an easy way to introduce accountability into the supply chain and adequately measure supply chain performance.

Overall, conducting supplier audits helps organizations manage risks, improve quality, reduce costs, foster collaboration and ultimately enhance competitiveness and customer satisfaction in the marketplace.

Responsibility for conducting a supplier audit typically falls within the purview of the organization's quality management or procurement department. However, the specific individuals or teams involved may vary depending on the organization's size, the nature of the supplier relationship and the industry sector.

Here are the key stakeholders typically involved:

• Quality management team: This team is often responsible for overseeing the overall quality management system within the organization. They may lead or coordinate supplier audits to ensure suppliers meet quality standards and comply with regulatory requirements.
• Procurement or supply chain management team: The procurement or supply chain management team manages supplier relationships. They are responsible for selecting, qualifying and managing suppliers, including conducting audits to assess supplier capabilities and performance.
• Internal audit team: In some organizations, the internal audit department may conduct supplier audits as part of their broader responsibilities for assessing and monitoring internal controls, compliance and risk management practices.
• Cross-functional teams: Supplier audits may involve input or participation from cross-functional teams representing various departments, such as engineering, operations, finance and legal. These teams provide expertise and insights on supplier performance or compliance aspects.
• External auditors or consultants: In some instances, organizations may engage external auditors or consultants with specialized expertise in supplier auditing to conduct independent assessments or provide guidance on audit processes and best practices.
• Management and executive leadership: Management and executive leadership provide oversight and direction for supplier audit activities, ensuring alignment with organizational goals, objectives and priorities.

Ultimately, responsibility for conducting supplier audits is a collaborative effort involving various stakeholders across the organization, each contributing their expertise and insights to ensure the effectiveness and integrity of the audit process.

Supplier audits encompass various types, each serving specific objectives and focusing on different supplier performance and compliance aspects. Here are the most common types of supplier audits:

1. Quality system audit: This type of audit evaluates the supplier's quality management system (QMS) to ensure it meets defined standards and regulatory requirements. It assesses the effectiveness of quality policies, procedures, documentation and processes at the supplier's facility.
2. Process audit: Process audits focus on specific processes within the supplier's operations to assess their efficiency, effectiveness and adherence to quality standards. Examples include manufacturing processes, quality control procedures and supply chain management processes.
3. Product audit: Product audits involve inspecting and evaluating the quality of the supplier's products or services. This audit type verifies whether the delivered products or services meet specified requirements, standards and customer expectations.

How To Successfully Manage Quality and Audits

Learn why maintaining exceptional quality standards is critical to successfully navigating audits in aerospace and defense manufacturing.

Watch The Webinar

The supplier audit process is a multifaceted endeavor that involves precise planning, execution and follow-up actions.

Initially, companies outline the scope and objectives of the audit during the planning stage, identifying critical areas of focus and establishing criteria for evaluation.

Once the audit plan is in place, auditors conduct the actual assessment, often involving on-site visits, interviews with personnel and examination of documentation and records.

Findings and observations are documented following the audit to provide a comprehensive overview of the supplier's performance and compliance status.

Preparing a supplier audit checklist is crucial for ensuring a comprehensive evaluation of a supplier's performance. Here is a summary of the key steps involved in preparing a supplier audit checklist:

1. Define audit objectives: Clearly outline the objectives and scope of the audit to determine the areas and aspects of the supplier's operations for assessment. Consider factors such as quality management system compliance, product quality, process efficiency, regulatory compliance and risk management.
2. Gather requirements and standards: Identify relevant requirements, standards, regulations and contractual obligations the supplier must meet. This effort may include industry-specific standards, quality management systems and regulatory and customer-specific requirements.
3. Review supplier documentation: Review the supplier's documentation, including quality manuals, procedures, work instructions, certifications and records, to understand their quality management practices and processes. This review helps ensure the audit checklist aligns with the supplier's documented procedures and requirements.
4. Identify audit criteria: Based on the audit objectives and requirements, identify specific criteria and indicators to assess the supplier's performance and compliance. These criteria may cover quality control, production processes, supplier management, documentation control, corrective action processes and continuous improvement initiatives.
5. Include objective and measurable criteria: Ensure audit questions and criteria are objective, measurable and verifiable to facilitate consistent and reliable assessment of the supplier's performance. Use precise language and avoid ambiguity to minimize interpretation errors.
6. Tailor checklist to supplier and industry: Customize the audit checklist to reflect the unique characteristics, processes and risks associated with the supplier's industry and operations. Consider factors such as the type of products or services provided, manufacturing processes, supply chain complexity and regulatory requirements applicable to the industry.
7. Pilot test the checklist: Before finalizing the audit checklist, test it by conducting mock audits or trial runs to assess its effectiveness, usability and comprehensiveness. Solicit feedback from audit team members and stakeholders to identify gaps or improvement areas.
8. Finalize and distribute checklist: Incorporate feedback and revisions based on pilot testing to finalize the audit checklist. Ensure the checklist is comprehensive, user-friendly and aligned with audit objectives and requirements. Distribute the final checklist to audit team members and stakeholders involved in the audit process.

By following these steps, organizations can effectively prepare a valuable supplier audit checklist for conducting thorough and systematic supplier performance and compliance evaluations.

Establishing the criteria for performing supplier audits is a critical step in the audit process. The requirements should be carefully thought out and aligned with the company's strategic objectives and quality standards.

Here's a summary of key considerations and steps involved in establishing audit criteria for supplier audits:

1. Define audit objectives: Clearly define the objectives and purpose of the supplier audits, considering factors such as quality assurance, risk management, regulatory compliance and supplier performance improvement.
2. Identify key requirements and standards: Identify relevant requirements, standards, regulations and contractual obligations suppliers must meet. This list may include industry-specific standards, quality management system, regulatory (i.e., ISO 9001, AS9100, DCMA) and customer-specific requirements.
3. Consider risk factors: Assess the risk factors associated with each supplier and their impact on product quality, business operations and regulatory compliance. Prioritize suppliers based on their criticality to the organization's operations and the potential consequences of non-compliance or performance issues.
4. Assess supplier performance history: Evaluate historical performance data and feedback from previous audits, inspections and supplier performance evaluations. Consider factors such as product quality, delivery reliability, responsiveness to corrective actions and compliance with requirements.
5. Review supplier documentation: Review the supplier's documentation, including quality manuals, procedures, work instructions, certifications and records, to understand their quality management practices and processes. This evidence helps identify areas of focus and criteria for assessment during supplier audits.
6. Define audit scope and criteria: Based on the audit objectives, requirements and risk factors, define the scope of the supplier audits and establish specific criteria and indicators for assessment. This may include criteria related to quality management systems, production processes, product quality, supplier management practices and regulatory compliance.
7. Consider industry best practices: When establishing audit criteria, consider industry best practices, benchmarks and standards. Incorporate relevant guidelines, frameworks and industry-specific requirements to ensure that audit criteria are comprehensive and aligned with industry expectations.
8. Involve cross-functional stakeholders: Collaborate with cross-functional stakeholders, including quality assurance, procurement, supply chain management, engineering and regulatory compliance teams, to ensure that audit criteria reflect the diverse perspectives and requirements of the organization.
9. Regularly review and update criteria: Continuously review and update audit criteria based on changing business needs, regulatory requirements, industry standards and feedback from audit experiences. Ensure audit criteria remain relevant, practical and aligned with organizational goals and objectives.

By following these steps, organizations can establish robust criteria for performing supplier audits that support achieving quality, compliance and performance objectives while driving continuous improvement in supplier relationships and supply chain management practices.

The purpose of a supplier audit report is to provide a detailed assessment of the supplier's capabilities and to identify any potential risks or opportunities for improvement. Businesses can use it to make informed decisions about whether to continue working with a particular supplier, negotiate better terms or address any issues requiring improvement or corrective actions. The report is a critical communication tool between the auditing organization and the supplier and internal stakeholders involved in supplier management and quality assurance.

Mitigating a failed audit can be a daunting task for any organization. However, with the right approach and mindset, turning a failed audit into a valuable learning experience and an opportunity for improvement is possible.

Here is a summary of critical steps to mitigate a failed supplier audit:

1. Assessment of findings: Begin by thoroughly reviewing the audit findings to understand the root causes of the deficiencies and areas of non-compliance. Identify areas where the supplier fell short of expectations and prioritize them based on severity and impact on product quality, regulatory compliance and business operations.
2. Open communication: Establish open and transparent communication channels with the supplier to discuss audit findings, address concerns and collaborate on corrective actions. Encourage the supplier to provide their perspective on the audit findings and engage in constructive dialogue to find mutually acceptable solutions.
3. Develop Corrective Action Plan (CAP): Work collaboratively with the supplier to develop a comprehensive Corrective Action Plan (CAP) to address identified deficiencies and prevent recurrence. The CAP should include specific actions, responsibilities, timelines and measurable objectives for implementing corrective measures and improving performance.
4. Implementation of corrective measures: Implement the corrective measures outlined in the CAP promptly and effectively. Monitor progress closely and provide support or resources to ensure successful implementation. Regularly communicate with the supplier to track progress, address challenges and reinforce commitment to improvement.
5. Continuous monitoring and verification: Continuously monitor and verify the effectiveness of corrective actions taken by the supplier to address identified deficiencies. Conduct follow-up audits or inspections to assess compliance with corrective measures and verify sustained improvement.
6. Supplier development and support: Offer guidance, training and resources to support the supplier in implementing corrective actions and improving performance. Provide access to best practices, industry standards and technical expertise to help the supplier build capabilities and enhance quality management practices.
7. Reassessment and reaudit: After implementing corrective actions and demonstrating sustained improvement, reassess the supplier's performance and readiness for reaudit. Conduct follow-up audits or assessments to verify compliance with quality standards, regulatory requirements and contractual obligations.
8. Supplier relationship management: Maintain ongoing communication and collaboration with suppliers to foster a positive and productive relationship. Recognize and acknowledge improvements made by the supplier while holding them accountable for meeting performance expectations and maintaining compliance.

By following these steps, organizations can effectively mitigate the impact of a failed supplier audit, address identified deficiencies and work collaboratively with suppliers to drive continuous improvement and ensure long-term success in the supply chain.

Tackling Challenges that Impact the A&D Supply Chain

Managing supply chain disruptions is critical for A&D manufacturers. Learn to build a prescriptive supply chain, establish KPIs and practice continuous improvement through digital transformation.

Watch The Webinar