While supplier audits are not new, many companies have conducted more of them in recent years as they sourced more from suppliers in low-cost regions and because of last year's economic downturn, which challenged the financial solvency of some suppliers.

And the audits are going deeper, encompassing tier-two and three suppliers, as well as social responsibility, among other issues.

Companies will often audit potential new suppliers to make sure they have the manufacturing capabilities, quality systems and technical know-how to produce products that meet the specs of the OEMs. However, many companies will also periodically audit even their preferred suppliers. The idea is to reduce risk and prevent quality and manufacturing problems.

Case-in-point: Celestica Inc, an electronics manufacturing services provider (EMS) in Toronto. Celestica conducts about 40 on-site audits of its preferred suppliers per year. All of its preferred suppliers get audited about once every two years.

“We have suppliers that we have dealt with for many years and sometimes they lose the formula and run into quality management issues,” says Jim Simpson, director of supply chain management, engineering and corporate services at Celestica. Celestica's auditors evaluate a supplier's quality systems and then put the supplier on a quality improvement plan.

Many audits are to qualify a potential new supplier. “With qualification audits we go into a new supplier to make sure the supplier does what it says it does,” says Simpson. So if a supplier claims it can produce a certain number of printed circuit boards to spec at a certain quality level, an audit will check out the supplier's manufacturing and quality processes to verify the claim.

“We make sure the supplier has the proper procedures and quality systems in place. We will view capabilities and look at the supplier's training and education programs,” says Simpson. “We ask if the supplier is ISO 2000 approved. Does it conform to our barcode spec? Does the supplier comply with RoHS (Restriction of Hazardous Substances) requirements?”

Audits often are very comprehensive, according to Erick Prause, director of supplier development at EMS provider Jabil Circuit in St. Petersburg, Fla. Jabil audits manufacturing processes and controls (receiving through shipping), supply chain and purchasing controls and measurement systems of suppliers, he says. Auditors also look at a supplier's document control, change management, product environmental compliance and controls, corrective and preventive action, social and environmental responsibility, ethics and regulatory compliance.

Setting expectations

At Xerox Corp., based in Stamford, Conn., a potential new supplier is sent documentation that lays out Xerox's expectations and requirements before any auditor visits the supplier.

“As part of the process, we send a supplier assessment survey to suppliers ahead of time and we ask them to do a self assessment,” says Bradley Bulger, manager of the global procurement engineering organization. “Once we receive the self-assessment, we schedule a time for us to go and do a survey on site at the supplier's location.”

Xerox's audits assess effectiveness of the company's quality management and environment management systems. The audit also covers how the supplier manages its sub-tier suppliers, as well as adherence to supply chain standards and the Electronics Industry Citizenship Coalition (EICC)'s code of conduct, which provides guidelines on how workers should be treated.

If audits reveal deficiencies in quality management or manufacturing processes, Xerox gives suppliers a corrective action plan, which must be implemented before the supplier can be qualified for consideration for Xerox business.

While Celestica will audit preferred suppliers every two years, many companies audit their current suppliers only if there is a quality, production or other type of supply chain issue.

“For Xerox we do audits on an as-need basis,” says Bulger. “With the economic downturn, we have done a lot more audits than we have previously concerning suppliers' financials,” he says.

When to audit

Besides quality issues Xerox will also audit a current supplier if the supplier relocates a manufacturing facility or if there are changes in the supplier's senior management team or ownership.

Bulger says various departments at Xerox are involved in audits, depending on the types of audit. “If it deals with new supplier assessment, environmental management, quality management systems, the audit will be led by the supplier quality engineering organization,” he says.

If the audit is a business assessment to understand the financial resources of a supplier's production capacity or business resources needed to fulfill our requirements, it will be led by supplier managers or supplier quality engineers.

“If the audit is an assessment of a potential supplier with a new technology, it would be led by the design organization.” says Bulger. He adds technology assessment audits are a collaborative effort across design, manufacturing, engineering, supplier quality engineering and supplier managers within global purchasing.

How special

In some cases, companies need to do “special case” audits. An example is RoHS: When it went into effect in 2006, many electronics companies audited their suppliers to make sure the products they produced did not contain lead, mercury, cadmium or other hazardous substances covered under the law.

“We went to our build-to-print suppliers and said 'show me how you are isolating your RoHS materials from non-RoHS materials,'” says Celestica's Simpson. “'Show me you have taken all of these chemicals out of you plating processes.'”

Many companies that are moving manufacturing and sourcing to low-cost countries are doing corporate social responsibility audits. Some companies in emerging low-cost areas use child labor, or force workers to work long hours and provide substandard working conditions for employees. As a result, many companies have adopted the EICC code of conduct, which prohibits such practices. Audits are used to monitor and enforce compliance to the code.

“We did roughly 40 social responsibility audits last year and some follow-up audits in addition to that,” says Barbara Ceglinski, manager of global purchasing business operations at Xerox. She says Xerox focuses on the top 50 suppliers by spend and on suppliers that are in “high-risk areas” such as Southeast Asia.

With social responsibility, Xerox has a no-tolerance policy for certain EICC infractions in its audits, but is flexible with lesser issues. “For instance, if a supplier has issues with child labor or inhumane treatment of workers we have zero tolerance,” he says. “But if we had an instance where documentation of a process was insufficient, that would be different. It may be a management process that would have been in nonconformance that could be negotiable,” she says.

Xerox isn't the only company auditing suppliers concerning corporate social responsibility (CSR) issues. Apple Inc. adopted a rigorous auditing process for CSR issues after it was criticized for the way workers at one of its EMS providers were treated back in 2006. The workers build iPods and other Apple products.

In the loop

When Apple audits a supplier, an Apple supplier-responsibility auditor takes the lead with support of local third-party auditors. The supplier responsibility auditor coordinates each audit with the Apple procurement manager, who manages the supplier's business relationship with Apple. So, if a problem is identified the purchasing manager is informed and in the loop from the beginning.

“The direct involvement of Apple procurement managers in the audit process emphasizes to our suppliers that social responsibility is integral to their business with Apple,” says Apple's 2010 Corporate Social Responsibility Report that was released in March.

In 2009, Apple conducted audits at 102 facilities and found 18 core violations at its suppliers' facilities, including use of child labor and the charging to employees of high recruitment fees among other violations. (See sidebar below.)

Whether it is social responsibility, quality or engineering issues, suppliers must take audits seriously or risk losing business. More important, they need to adopt the corrective action measures that their customers specify.

Some suppliers will lose business because they did poorly on an audit and don't take the necessary corrective action. “When we do an audit, we have a checklist of criteria they have to go through,” says Simpson. “There is a minimum score that they have to achieve.” The score will vary depending on the type of audit.

If a supplier does not achieve that minimum score, Celestica will develop a corrective action plan for the suppliers. “If a supplier fails to bring its score up to standard, then it will be removed from our preferred supplier list (PSL),” says Simpson. If the supplier is not on the PSL, it will be removed from Celestica's regular sourcing list.

If a supplier is below the minimum score, but adopts the corrective action plan and improves, “we welcome it with back open arms,” he says.

In fact, few suppliers lose Celestica business because of failure to adopt a corrective action plan. “At the end of the day, suppliers want to grow their business. Most suppliers look at this as an opportunity for improvement and take the necessary steps,” says Simpson

Bulger adds that supplier audits are important for the well-being and competitiveness of an OEM. “We need to measure our suppliers to assure they are adhering to our requirements. We feel audits are necessary for us to be successful.”