How To Conduct a Supply Chain Audit

Supply chain audits help organisations learn how effective their relationships with third parties are.

After all, you can sign contracts outlining responsibilities and providing instructions on how supplier interactions should work, but you need to make sure these are working as intended.

In this article, we explain how a supply chain audit helps you review your practices and the specific ways it can help your organisation improve and grow.

What is a supply chain audit?

A supply chain audit is a detailed examination of the processes that an organisation conducts when delivering goods and services.

It looks at each of the suppliers that you use and identifies opportunities for improvements. The audit examines the organisation’s involvement across the supply chain – both internally and with third parties – providing insight into every part of the delivery of goods and services.

For instance, it could spot bottlenecks in the supply process, inconsistent costs or performance, or nonconformities with GDPR compliance practices.

Obligations for data controllers to manage the processing of personal data throughout their supply chain is set out in Articles 28 and 29 of the GDPR.

When conducted correctly, supply chain audits give organisations a detailed understanding of:

• Their supply chain procedures;
• Key performance indicators and other metrics;
• Inefficiencies in the supply chain; and
• Their supply chain baseline compared to industry benchmarks.
• Risks relating to processing of personal data
• Non compliance to contractual terms
• Whether there is a lack of information security controls in place

What are the benefits of a supply chain audit?

A supply chain audit helps your organisation operate more efficiently while reducing risks. The process also demonstrates to stakeholders that your organisation is doing everything it can to operate responsibly and cost-effectively.

By reviewing your organisation’s contractual agreements with third parties, you build better business relationships with suppliers. You can prove that you take your responsibilities seriously In relation to the processing of personal data and ongoing compliance with the GDPR.

In the next section, we look at some specific risks that you should include in your supply chain audit.

Supply chain risks to include in your audit

A supply chain audit offers enough flexibility for you to include any relevant business risks, from compliance failures to operational risks.

The specific risks that will be within the scope of your assessment will depend on the nature of your organisation. However, there are certain risks that apply in almost all cases.

• Reputational risk

Your supply chain can affect your reputation in several ways. For instance, if a partner suffers a delay when fulfilling an order, the disruption could ripple down through the supply chain.

Even though you might not have been responsible for the delays, customers and other stakeholders are liable to simply see you as the problem.

Similarly, your organisation’s reputation is closely tied to your supplier’s actions. If you work with a partner that has a negative public perception – perhaps it has been caught doing something illegal or it’s involved in unethical practices – then customers might think that you condone these actions.

• Cyber security risk

Cyber security incidents are a particular type of risk that can damage your reputation and cause delays. People are increasingly aware of the risks that accompany data breaches, and they won’t be happy if personal data that they gave to you has been compromised.

However, you can protect your reputation if you demonstrate that you’ve taken appropriate steps to prepare for incidents like this. A swift incident response strategy, with a clear and transparent statement alongside helplines to answer people’s questions, will go a long way to mitigating the damage.

The same thing also applies to the operational risks that come with data breaches. Depending on the nature of the incident, you could face severe delays as work grinds to a halt and your resources are taken up managing the incident.

But with the right response strategy in place, you could minimise the financial and logistical problems that come with cyber security incidents.

Likewise, an appropriate response is essential when it comes to your regulatory compliance requirements.

Several legislations, such as the GDPR and the PCI DSS (Payment Card Industry Data Security Standard) contain strict rules regarding data protection and incident response, and the former even specifically states that you can be held liable for security incidents that occur at third parties.

• Contract compliance risk

Your contracts with third parties are key to your success. They outline responsibilities and other objectives – including cyber security requirements – and any errors in this documentation will expose you to risk.

It’s why your supply chain audit should ensure that someone owns the contract and enforces its commitments. You should also audit the contracts to make sure that policies, controls and systems are up to date and accurate.

• Quality risk

The quality of the goods and services you receive is a crucial part of your supply chain. Damaged or poor-quality materials can affect your reputation or lead to delays as you request replacements.

As part of the supply chain audit, you must have quality assurance procedures in place to ensure that the goods and services that you receive meet an acceptable standard.

Free supply chain audit checklist

With the threat of security and privacy incidents growing each year, it is essential that organisations identify and manage their data protection risks.

But that isn’t limited to risks within their own systems.

It is equally important to address vulnerabilities within supply chains, because damage to a third party can have significant knock-on effects. You can do that by performing a supply chain audit.

We have created a checklist of activities that a supply chain audit should cover.

How do you prepare for a supply chain audit?

There are several steps you must take to prepare a supply chin audit. These include:

• Project planning

You should have a strict plan that outlines the scope of the audit as well as your aims and objectives.

• Standardised criteria

The scale of the project might require multiple auditors tasked with separate parts of the supply chain. As such, you need to ensure they follow a consistent pattern to compare findings and avoid confusion.

• Feedback

The supply chain audit is only as useful as the conclusions you draw from it. You therefore need to decide how you’ll communicate the results to stakeholders.

The findings should be presented in a clear, concise and uniform manner so that interested parties understand how you came to the decisions you did and why any recommendations you make are necessary.

• Next steps

The supply chain audit doesn’t end with your recommendations. You must ensure that stakeholders follow through with improvements, and that means having a plan at the outset to determine how this will be done.

Streamline supply chain audits with DQM

As you can see, supply chain audits are not simple. It’s why many organisations turn to independent experts such as DQM GRC to complete the process.

Our Supply Chain Audit Service provides all the support you need to manage third-party relationships. We’ll design an audit programme around your risks and controls, and seek answers from your suppliers and processors about their practices.

We’ll also create an audit template and test it before carrying out the assessment. You’ll receive a report that identifies areas of good practice and highlights deficiencies, supported by recommendations to resolve or mitigate them.

We will also work with you to monitor the ongoing effectiveness of the audits. The frequency of this review cycle will be agreed upon in advance but will also be triggered by changes to contracts or data-sharing agreements or by known breaches and incidents and will take place at least annually.