Digital Audits as a Tactical and Strategic Management Resource

New factory audit processes are helping companies that outsource production to evaluate supplier performance in more depth. The payoff: more effective decision-making.

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U.S. companies that outsource production to manufacturing hubs in countries such as China and India lower their costs, but the practice comes with substantial reputational risk. Manufacturers in these countries run the gamut in how lax or strict they are about enforcing labor and environmental regulations.

To offset this risk, enterprises have made sizable investments in factory audits, which can include asking suppliers to meet externally certified accreditations or hiring third-party auditing companies to make site visits. However, persistent scandals involving illegal or dangerous working conditions show that the standard factory audit is inadequate as a business risk mitigation strategy.

There’s a better way. A new type of audit system that digitizes the process is transforming on-site facility inspection programs. This advanced system increases the effectiveness of factory audits as a risk management tool, and provides new insights into the efficiency of remote manufacturing operations. By linking risk and product quality to inspection outcomes, digitized audits also can deliver cost savings and process improvements.

Problems in the Current Factory Audit System

Reports of poor or illegal practices by suppliers and subcontractors have become all too common. One of the highest-profile tragedies was the collapse of the Rana Plaza apparel factory in Bangladesh in 2013, which killed 1,134 people and injured another 2,500. Suicides in contract electronics manufacturing, forced labor across industries, and child labor in the toy supply chain continue to plague manufacturing operations in countries where costs are lower but regulatory oversight is less stringent.

Controversies like these — and countless others that go unreported — occur despite the existence of well-established factory audit systems and supplier management programs. Moreover, research being carried out by the MIT Responsible Supply Chain Lab indicates that less than 1% of consumer-facing companies share audit results publicly, making it is difficult to address the shortcomings of audit systems.

What we do know is that three key issues hamper modern audit practices: standardization, cost inflation, and fraud.

  1. While standardization makes it easier to use the audit process, it also dilutes the value of the exercise. For example, companies might create a supplier code of conduct, which is then translated into a list of check boxes that guides third-party factory auditors. But standardized lists often fail to assess unique supplier issues and regional variations in production practices.

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