How can you identify cost savings opportunities when auditing suppliers?

1 Define your audit objectives

Before you start auditing your suppliers, it's important to have a clear idea of what you want to achieve and how you will measure it. Depending on your business goals and industry standards, your audit objectives could include reducing the total cost of ownership (TCO) of your products or services, improving the quality and reliability of your suppliers' deliverables, ensuring compliance with environmental, social, and ethical standards, streamlining your procurement processes and reducing administrative costs, or enhancing your innovation and competitive advantage. Aligning your audit objectives with your supplier selection criteria and contract terms can help you focus on the most relevant aspects of your supplier relationships and avoid wasting time and resources on irrelevant or redundant audits.

2 Gather and analyze data

Once you have defined your audit objectives, you need to collect and analyze data from various sources to assess your suppliers' performance and identify cost savings opportunities. This data can come from supplier invoices, purchase orders, delivery notes, quality reports, certificates, feedback, contracts, agreements, SLAs, self-assessments, surveys, and audits. Additionally, internal data such as inventory levels, lead times, defect rates, and customer satisfaction can be used. To analyze the data effectively you can use benchmarking to compare your suppliers' performance with industry best practices or your own standards. Spend analysis is another useful tool for identifying spending patterns and trends across suppliers. Cost breakdown analysis can be used to break down the components of your suppliers' prices and identify the drivers of cost. Lastly, value analysis can be used to evaluate the value-added and non-value-added activities of your suppliers and eliminate waste and inefficiencies.

3 Conduct site visits and interviews

When auditing suppliers, conducting site visits and interviews is another way to identify cost savings opportunities. This will enable you to verify the accuracy of the data you have gathered and analyzed, observe the actual processes, practices, and conditions of your suppliers' operations, identify potential risks or opportunities that may not be evident from the data, and establish rapport with your suppliers. To ensure that you cover all your audit objectives and criteria, prepare a checklist of questions and topics. Additionally, document your findings and recommendations in a report or scorecard to share with your suppliers and stakeholders.

4 Negotiate better terms and conditions

Auditing suppliers is an effective way to negotiate better terms and conditions that reflect your cost savings objectives and opportunities. You can negotiate on price, quality, delivery, service, and innovation. For example, you can reduce the unit price and secure discounts, increase quality standards and reduce defect rates, reduce lead times and improve delivery reliability, or improve communication and responsiveness of your suppliers. Utilize the data and findings from your audits as evidence and leverage to achieve a win-win outcome that benefits both parties and strengthens your long-term relationship.

5 Monitor and review your results

The final step to identify cost savings opportunities when auditing suppliers is to monitor and review your results. This means tracking and measuring the impact of your audits and negotiations on your procurement performance and costs. You should consider metrics such as savings, ROI, quality, delivery, and service. It is important to regularly report these results to suppliers and stakeholders, and use them as feedback for future audits and negotiations. This will help you achieve continuous improvement and cost savings in your supplier sourcing.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?