In this article, learn about:
How suppliers identify and manage key supply chain risks
Benefits of risk audits for efficiency, quality, and partnerships
Steps to create and follow a risk audit plan
Why Risk Audits Matter for Suppliers
In an ever-evolving supply chain, there are ever-evolving opportunities and risks. As a supplier, mitigating and managing potential risks plays an important role in ensuring your business remains resilient and successful in the long term.
In this article, we’ll dive into how to proactively identify and address potential supply chain risks.
What is a Risk Audit?
In basic terms, a risk audit is simply an assessment of potential areas of risk. More specifically, in the supply chain, risk audits are used to identify and assess areas of weakness and vulnerability that could lead to potential disruptions.
For suppliers, risk audits can take many forms—from regularly reviewing sourcing and manufacturing partners to assessing internal processes like order fulfillment, data security, and regulatory compliance.
Regardless of format, the goal is the same: surface risks before they become costly problems.
Related Reading: Risk Audits for Your Retail Business
The Impact of Unmanaged Risk
While risk audits may seem tedious or feel like a drain on resources for something that may or may not happen, they shouldn’t be sidelined. For CPG suppliers, the consequences of unmanaged risk are often costly and sometimes highly visible.
For example, the stakes are especially high for suppliers producing food, beverages, and other consumables. A single breakdown in quality control, traceability, or compliance can lead to customer illness, product recalls, regulatory action, lost retailer trust, and ultimately long-term brand damage. In addition to potential product risks, operational and technology risks can easily lead to workplace injuries, lost time and resources, and ultimately become a drain on overall profits.
It’s important to note that while risk management is important, not all risks can be fully mitigated. A clear example of this was the COVID-19 pandemic that upended the global supply chain. Sudden shutdowns, labor shortages, transportation delays, and economic uncertainty left suppliers scrambling to find solutions.
While some disruptions are unavoidable, the suppliers who are best positioned to handle them are those that already know their vulnerabilities. These suppliers can more quickly identify weak spots and have likely already created contingency plans for sudden changes.
That’s why building a resilient supply chain is important. Resiliency doesn’t mean everything always goes correctly, but rather that when issues do arise, the supplier is quickly able to adapt. This is where risk audits play an important role. Instead of being reactive to issues when they arise, risk audits allow suppliers to avoid or prepare for potential disruptions.
Related Reading: What is Supply Chain Resilience?
The Benefits of Risk Audits for Suppliers
Limit inefficiencies: Uncover operational gaps that could lead to process bottlenecks, inventory inaccuracies, or the need for manual workarounds.
Mitigate risks: Identify potential financial, operational, compliance, and data risks to address vulnerabilities before they become costly disruptions.
Control of product quality: Strengthen quality control by identifying potential problems in sourcing, production, testing, and traceability that could otherwise lead to defects, recalls, or compliance violations.
Strengthen retail partnerships: Demonstrate reliability and accountability, helping build trust with retail partners and reduce deductions and compliance fines.
Improve customer satisfaction: Minimize disruptions and deliver a more reliable experience that improves satisfaction for both retailers and end consumers.
Potential Risk Areas for Suppliers
For suppliers, risk audits typically focus on the areas of the business where breakdowns are most likely to impact operations, retailer performance, and profitability.
Operational
Operational risk audits evaluate whether day-to-day processes can consistently support business needs. Questions to consider include:
Do we have clear visibility into inventory levels across all warehouses and on retailer shelves?
Are production and fulfillment processes documented and consistently followed?
Can our current capacity scale during peak demand or promotions?
Are we overly reliant on a single manufacturer, warehouse, or carrier?
How frequently do we miss ship dates or fill-rate targets?
Do we have backup plans for labor shortages, equipment failures, or transportation delays?
Financial
Financial risk audits focus on protecting margins, cash flow, and financial stability. Questions to consider include:
Are pricing, contracts, and payment terms clearly documented and consistently applied?
Do we have a standardized process for reviewing and disputing deductions?
Are invoices accurate and aligned with retailer requirements?
Do we have visibility into where margin erosion is occurring?
How dependent is our revenue on a single or few sources?
Are financial forecasts updated regularly and based on reliable data?
Do we have internal controls in place to prevent errors or fraud?
Compliance
Compliance risk audits assess whether suppliers are meeting regulatory, legal, and retailer-specific requirements. Questions to consider include:
Are we up to date on applicable food safety, labeling, and regulatory requirements?
Are all required certifications current and properly documented?
Do we have processes in place to track retailer compliance programs and scorecards?
Are audit results, corrective actions, and documentation centrally stored and accessible?
How do we monitor changes in regulations or retailer standards?
How do we hold retail partners (manufacturers, carriers, etc.) accountable for meeting our compliance standards?
Do we have a clear escalation process when compliance issues arise?
Related Reading: Vendor Compliance Checklist
Data & Technology
Data and technology risk audits examine whether systems and data support accurate and secure operations. Questions to consider include:
Are systems (ERP, WMS, retailer portals) properly integrated or heavily reliant on manual work?
Who has access to critical systems and data, and is access reviewed regularly?
Do we have cybersecurity measures in place to protect sensitive business and customer data?
Is there a backup and recovery plan if systems go down?
How quickly can we identify and correct data errors that impact retailers?
How to Conduct a Risk Audit
So, what do risk audits look like in practice? Conducting a risk audit is not a one-size-fits-all exercise. Audits are highly dependent on things like the supplier’s industry, operational complexity, size, and business model.
A crucial part of having effective risk audits for your business is creating a risk audit plan that defines what will be audited, who will conduct the audit, when audits will take place, and how any identified risks will be managed.
How to Create a Risk Audit Plan
1. Define Audit Scope
Start by determining which areas of the business the audit will cover. The questions listed in the potential risk areas above are a great starting point to decide which areas of your business need evaluation. For suppliers new to risk audits, it can be helpful to start small by focusing on the high-risk areas, such as warehouse management or compliance with retailer requirements. Over time, the scope can expand as the process becomes more established.
2. Identify the Audit Team
Next, determine who will be responsible for conducting the audit. This could include internal stakeholders from operations, finance, IT, or compliance, depending on the audit scope. Alternatively, if your internal team doesn’t have the capacity or expertise to conduct audits, you may consider bringing in an external auditor team to help provide a professional and impartial assessment of your business.
3. Determine Audit Cadence
It’s also important to establish a regular cadence for conducting risk audits, so they don’t get overlooked or pushed aside during busy seasons. A supplier may choose to do a widespread audit once a year or break the process down into smaller, more frequent reviews focused on specific risk areas. Regardless of the timing, it’s important to have a regular cadence for audits. Since the supply chain is ever-evolving, suppliers should consistently review and optimize their business practices to stay ahead of changing requirements and risks.
4. Create Audit Checklist
Once scope and cadence are defined, develop a checklist to guide the audit. Checklists help ensure consistency across audits and make it easier to track progress over time. Audit questions should be specific, measurable, and aligned with retailer and regulatory requirements.
Related Reading: How Do I Create A Plan For Supply Chain Risk Management?
5. Make a Plan to Address Identified Risks
Finally, define how audit findings will be documented, prioritized, and addressed. It’s possible that not all risks will require immediate action, but each identified risk should have a clear owner and next step. This is a particularly crucial step, because if there is no follow-through with audit findings, audits simply become a task rather than a driver of meaningful improvement across your business.
Protect Your Profits with SPS Revenue Recovery
When issues arise in your supply chain, retailer deductions can easily snowball into major profit loss. SPS Revenue Recovery can help you recover lost revenue and prevent future losses by fighting deductions and performing root cause analysis.
