Supplier AuditsBy Michael Wilson | March 25, 2020 << Back to Articles
As distributors move up the ladder, providing supplies for more and larger organizations, they can expect to undergo what is commonly referred to as a supplier audit. Many sizeable organizations conduct audits at least once per year, more often if they have uncovered irregularities or issues in a previous examination.
These audits are typically part of a “quality management system” that larger organizations have with their suppliers. They are not necessarily designed to fire a distributor. Instead, they are intended to ensure that the relationship is a good fit, works well for both parties, and to determine where improvements can be made.
Audits of any kind can vary significantly. When an accountant who handled tax audits for businesses was asked what to expect in an IRS audit, he answered, “It depends on the auditor. Some check that every i is dotted and every t is crossed. Others ask a couple of questions, such as why the return was pulled for an audit, and you’re out the door.”
It’s pretty much the same with a supplier audit. You really never know. However, in both cases, it is essential to be prepared for anything and everything. Having detailed records readily available will go far to save the day, and for distributors, may help save the account.
The groundwork for faring well in a supplier audit typically begins before customers make their first purchases. Some customers may not realize that mutual expectations should be laid out from the start. Because of this, the distributor must take the initiative and ensure expectations are addressed. This is so important that they should be outlined and written into a working agreement.
Distributor-customer agreements should include several elements:
Timeliness of deliveries. Both parties must ensure products are delivered when expected so that there are no supply interruptions. Typically, the customer places reordering issues into the hands of the distributor. Some distributors use online dashboard systems to help monitor the customer’s use of products, product selections, and ensure there are no supply interruptions.
Availability of products. Some products may not be as readily available as others. The customer and supplier must acknowledge this from the start and, once again, take steps to avoid supply interruptions. Further, if defective products are delivered, it should be clear how this will be addressed. Will the customer be given a credit or refund, or will the defective item be replaced? And at whose discretion?
Pricing. At this stage, the customer and the distributor should have formalized how much products will cost and whether the customer can expect any miscellaneous, incidental charges, either from the manufacturer that must be passed on to the customer, or from the distributor directly. Shipping costs should also be reviewed.
Invoicing and discounts. One distributor’s invoice to a major airline included the following notation at the bottom: 2/10 Net 30. It was not clear to the accounts payable department what that meant, and they never asked for clarification. If they had, they would know that 2/10 means there is a 2 % discount if the invoice is paid in 10 days, but if not, the full amount is due in 30 days. Paying the distributors’ invoices in 10 days could have saved the airline thousands of dollars. Invoicing and discounts should be in the working agreement and clarified with the customer.
Communication. What is the preferred form of communication for both parties? Timely responses are appreciated by both parties, and that often depends on which channel is used.
Reviews. A review is not an audit. Typically, a review focuses on current deliverables to determine whether they are proving both cost and performance effective for the customer, whether product changes are necessary, and whether logistic or delivery issues need to be changed or addressed. A schedule for reviews and what they should entail should be included in the agreement.
Audits. There should be no surprises as to the scope of an audit or its frequency. An audit is intended to ensure that all the items covered in the initial agreement are being met. For the purpose of the agreement, both parties should prepare a list of additional topics that can be brought up during the audit. For instance, if payments are due in 30 days, but the customer is taking 45 days or longer, that is something the distributor should bring up. If there are supply interruptions, the customer should raise for discussion when they happened, how they were addressed, and how quickly they were attended to. In all cases, proper documentation is mandatory.
Typically, a supplier audit takes about half a day, but as referenced before, this can vary. Try to schedule the meeting in the morning. If all goes well, take the client out to lunch afterward. That’s a welcome way to end the process.
Here are some other details distributors should be aware of:
In most cases, the distributor will meet the customer at their place of business. However, in some cases, the customer will ask to come to the distributor’s facility. If so, the facility should look neat and clean, starting with the parking lot. The customer should be greeted courteously and with smiling faces. Appearances and attitudes matter. Audits are both objective and subjective. The look of the facility and the way the customer is treated are a reflection on the supplier and can play a significant role in the audit process.
Avoid rescheduling the audit. If the distributor asks to reschedule the audit, it can appear unprofessional, possibly indicating they are unprepared.
When the audit begins, the ball is in the customer’s court. They should bring up and present to the distributor any issues that have occurred over the past year or since the last audit. Many times, these are billing and invoicing issues. These might include inaccurate charges or price changes that were not discussed, inconsistencies in the distributors’ invoices, double billing, unexpected shipping, transportation, or miscellaneous charges.
Both parties should take thorough and accurate notes of everything discussed. This will help everyone when it comes time to write an evaluation and ensure all issues are adequately addressed going forward.
Next, the distributor lays out any concerns from their side of the relationship. When packages and products are delivered, for instance, does the customer have someone available to accept them? Are the distributor’s drivers treated professionally? Distributors, drivers, and the products they deliver are crucial to an organization’s operation and should be treated accordingly.
We mentioned earlier that the goal of a supplier audit is not necessarily to fire a supplier. It is to see, among other things, if the relationship is a good fit.
It’s true that the audit and its results give both parties the option of discontinuing the association if needed. However, in most cases, rather than signaling the end of a customer relationship, the outcome indicates where improvements can be made. For example, in one case, both parties were happy overall, but the customer indicated that they would prefer to work with another salesperson in the distributor’s office. Remember, audits can be subjective. A little flexibility can be the difference between keeping and losing a client.
Finally, if the audit has a good outcome, it serves the customer well to pass along positive commentary to the distributor and everyone they work with at the distributor’s office. Positive comments are one way to ensure this relationship continues to work well in the future.
About the Author.
Michael Wilson is director of marketing for Afflink and its eLev8® division. He may be reached through his company website, www.afflink.com.