Why Companies Need to Take a Serious Look at Factory Audits in Supply Chain Management (SCM)

Editor's Note: Take a look at our featured best practice, 4 Stage Model Supply Chain Assessment (Excel workbook). The purpose of the 4 Stage Model is to provide a high-level qualitative assessment of an organizations practices and processes. The model aligns with the Supply Chain Council's SCOR model and is broken down into Plan, Source, Make and Deliver. Within each of these major processes are a series of [read more]

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Factory Audits are often conducted by companies to confirm whether the supplier is delivering the supplied goods per agreed-upon terms and standards (e.g. quality, safety, ethical, environmental, etc.). This has become an important undertaking for companies to continually ensure that it consistently meets it’s quality and performance standards. In a time where there is global competitiveness coupled with a disruptive economy, the importance of strengthening Supply Chain Management has become a factor for survival and sustainability.

A Factory Audit is critical before placing the initial order. It is also important for companies to continuously conduct a Factory Audit throughout their relationship with the supplier.

The Importance of Factory Audits

A Factory Audit is a snapshot of a factory at a particular moment in time. Its goal is to verify whether everything the company said about themselves is true. At this time wherein competition has become fierce and consumers more demanding, companies are now pushed to provide the products and services that the market demands. And often, when there are problems, companies realize that these problems are due to suppliers’ inability to provide the right product in terms of quality, volume, and time. When this occurs, often it can be costly for companies to switch suppliers.

Before placing an initial order, it is critical that a Factory Audit must be undertaken to validate the details of the proposal. A Factory Audit ensures that the original terms are continuously met and it identifies areas for improvement so that progress can be encouraged over time.

It is possible that your supplier is just trying to win your business. Conducting a Factory Audit will let you know for sure.

What Factory Audit Must Your Company Undertake

There are different types of Factory Audits. Companies must be able to know the type of Factory Audit that is best suitable for them.

Let us take a look at 2 of the 6 types of Factory Audits.

1. Manufacturing Audits. The primary purpose of the Manufacturing Audit is to determine if a supplier is capable of producing a product that meets the company’s specifications, addressing costly disruptions, and preventing further costly disruptions once production is launched. If a Manufacturing Audit is conducted, it enables the company to align its sourcing policies with that of the supplier’s policies. It also allows the company to already identify and mitigate potential quality, operational, and ethical risks at the early stage of production.

2. Ethical Audits. The Ethical Audits ensures that social accountability is reviewed and that appropriate work conditions are being followed. If this is undertaken, it ensures that the company’s Supply Chain has decent working conditions and human rights practices. It is also useful in determining compliance with statutory requirements and prevent unauthorized subcontracting.

The other 4 types of Factory Audits are Structural Audits, Environmental Audits, Customs-Trade Partnership Against Terrorism (C-TPAT) Audit, and Food Supplier Audits. Structural Audits include auditing of structural integrity, fire safety measures, relevant codes, and conditions. Each and every type of Factory Audit has its purpose and benefits. All types of Factory Audits ultimately lead to the goal of protecting the company’s image and brand image.

The Revolutionary Transformation of Factory Audits: The Digital Audits

There is a new type of audit system that digitizes the process and plays a vital role in Digital Transformation. This is the Digital Audit. Digital Audit is a new Factory Audit process that evaluates supplier performance in more depth. It is an advanced system that links risk and product quality to inspection outcomes.

With Digital Audits, it has increased the effectiveness of Factory Audits as a risk management tool. It can also tie CSR (Corporate Social Responsibility) oversight to performance indicators that affect buyers’ bottom line. With a digitized audit platform, both CSR and product quality factors can already be included in factory inspections. These are the PLUS Factors and many more that can be highly beneficial when it comes to Supply Chain Management.

Interested in gaining more understanding of Supply Chain Factory Audits? You can learn more and download an editable PowerPoint about Supply Chain Management (SCM): Factory  Audits here on the Flevy documents marketplace.

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Supply Chain Management (SCM) is the design, planning, execution, control, and monitoring of Supply Chain activities. It also captures the management of the flow of goods and services.

In February of 2020, COVID-19 disrupted—and in many cases halted—global Supply Chains, revealing just how fragile they have become. By April, many countries experienced declines of over 40% in domestic and international trade.

COVID-19 has likewise changed how Supply Chain Executives approach and think about SCM. In the pre-COVID-19 era of globalization, the objective was to be Lean and Cost-effective. In the post-COVID-19 world, companies must now focus on making their Supply Chains Resilient, Agile, and Smart. Additional trends include Digitization, Sustainability, and Manufacturing Reshoring.

Learn about our Supply Chain Management (SCM) Best Practice Frameworks here.