Quarantining, social distancing and travel restrictions are likely to impact business interactions for the foreseeable future. So, companies are looking for new ways to conduct audits traditionally done on-site.
In an increasingly risky market, buyers need to validate new suppliers and manage existing relationships. But they're now leaning on contractual obligations and technology to curtail the use of physical audits. Collaboration tools, video conferencing, more regular communication and greater scrutiny of supplier records are enabling many to perform audits virtually.
Travel restrictions, distancing make physical audits difficult
The current landscape has brought risk management and supply chain management to the forefront in many organizations, Jonathan Eaton, principal and National Supply Chain Practice leader at Grant Thornton, told Supply Chain Dive. Given their heightened risk of supply chain disruption, many companies are challenged with having to take a closer look at their suppliers at a time when travel is difficult.
"It’s very hard in their landscape to get on a plane and fly somewhere and look at their facility," Eaton said. "They have to look to other options."
"We basically did a virtual audit on FaceTime in an hour and a half that would have taken me two days to do in person."
While some companies have started using new ways to perform audits, others have stopped site visits entirely. In March, the FDA said it would not enforce FDA Food Safety Modernization Act (FSMA) supplier verification onsite audit requirements temporarily, if other "appropriate supplier verification methods are used instead." These other methods include sampling, testing and a review of safety records.
The FDA's Food and Drugs Commissioner, Stephen Hahn, said in a press release that the policy was designed to help minimize disruptions in the food industry while also continuing to conduct supplier verification activities.
Needs can vary by industry. Eaton advised clients to use models to identify, score and quantify risks based on the likelihood of it happening and the impact it would have on the business. Some of these common risks include supplier failure due to liquidity issues and the ability for suppliers to get what they need upstream. Another primary concern is safety protocols and the potential for shutdowns or outbreaks in facilities.
Traveling with technology
Many companies are looking to new technologies and tools to virtually replicate on-site audits.
Video conferencing tools have already proven to be very valuable for many auditors, Michael Zimmerman, partner at Kearney, told Supply Chain Dive. He recently conducted a virtual audit of a chemical facility in Savannah, Georgia, where the site manager walked around with his phone and gave a virtual tour via FaceTime. The manager was able to show Zimmerman bulk containers, trucks, fixtures and all other relevant points of inspection — all in real-time.
"It really worked well. All of the things we would normally have to do were accomplished," Zimmerman said. "We basically did a virtual audit on FaceTime in an hour and a half that would have taken me two days to do in person."
Companies are now also looking to artificial intelligence (AI) tools to analyze data to do what they can without physical assessments, Sharon Chand, principal at Deloitte Risk and Financial Advisory, told Supply Chain Dive.
For example, a buyer may be able to analyze data related to material inflows, supply outflows, labor, operations or other factors to identify any outlying trends. In addition to this data, they can also investigate certified assessments such as SOC 2 or compliance standards like ISA/IEC 62443.
"We’ve seen clients start to look at some of those data analytics technologies to minimize the need to actually do on-site reviews," Chand said. "The on-site assessment of risk is really only required for those vendors that are most critical. There’s a lot of layers to go through before that."
"The on-site assessment of risk is really only required for those vendors that are most critical. There’s a lot of layers to go through before that."
Principal, Deloitte Risk and Financial Advisory
Because virtual audits are so much more efficient, auditors typically can spend more time on certificates of insurance, certifications and business practices, Zimmerman said. In most cases, he can ask more questions and make examinations in greater detail than he would in a site visit.
A bigger part of operating in a world with no or limited site visits is fostering better relationships based on trust, transparency and contracts. Eaton is advising clients to look more to contracts and addendums to certify compliance in many areas. That includes ensuring suppliers have their own business continuity plans in place and that they have clear service level commitments, as well as a fallback and notice period, should they not be able to perform.
The future of on-site audits
One silver lining in the current situation is that many companies have been forced to find better ways to conduct physical audits, Eaton said. Many are transitioning from reactive to more proactive strategies that foster collaboration, information-sharing and communication about certifications. While physical audits will always exist in safety-conscious industries like pharmaceuticals, food and aviation, they may become less prevalent in other sectors, Eaton said.
Even before COVID-19, Chand had seen the frequency of physical visits decline to once a year for higher-risk suppliers and once every two to three years for common suppliers. "Some of the new technologies are moving us towards better information to make decisions, based on more of a continuous risk monitoring and at a lower cost," she said. "There are a few big business imperatives to move gradually away from on-site physical assessment."
"People are going to remember they could do an audit in three hours instead of three days."
But virtual audits lack valuable face-to-face contact, Shand said. The inability to shake hands and establish in-person connections with suppliers will make more regular calls and virtual conferences important.
While it won’t be an instant change, Zimmerman said he believes the pandemic could be a catalyst for learning how to ensure compliance with fewer site visits. As someone who used to travel four days a week and work from the office on the fifth day, he has found greater efficiency and effectiveness in doing more virtually.
"People are going to remember they could do an audit in three hours instead of three days," Zimmerman said.
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