In this article I would briefly like to present a different type of due diligence, which, in terms of methodology, is almost completely the same as the article introducing the due diligence process.
Despite the similarity in methodology, there are also significant differences that are worth highlighting. In these cases, the goal is not to acquire a business organisation; instead, the company wants to find a reliable, stable supplier.
What is a supplier audit?
A supplier audit is the process during which a company evaluates its supplier or potential supplier along with the product or service to be supplied. During this process, not only the finished product is examined but the whole manufacturing process too. Assurance is gained that the sample received is not just a specially produced piece, but the product of a procedure that is able to guarantee the given quality even when manufactured in large number. So it is almost always explicitly required that the supplier has a quality management system.
Generally speaking, those who would like to become suppliers spend sufficient time and energy on complying with the strict requirements of this area.
What else are they interested in?
If a product is good, the question is what else does the customer want to examine regarding its supplier?
The answer is actually quite simple: the customer is interested in whether the business partner will be capable of supplying the product according to the contractual parameters in the long run (at least over the term of the contract). To make sure of this, the customer can check areas that seemingly do not have much to do with the product itself.
This is when many receive an unpleasant surprise and are confronted with the fact that they have indeed neglected certain processes that are weighted similarly to the product itself during a supplier audit. But it has to be understood that a customer audit is not autotelic. These areas working and being regulated appropriately contribute largely to the successful and efficient operation of the enterprise.
What are these areas?
The areas in question clearly vary by business segment of course. In addition, although supplier audits are increasingly in vogue, they are typically characteristic of segments where manufacturers have to comply with very strict requirements, and so they essentially require the same from their suppliers. Such typically include vehicle manufacturing and the pharmaceutical industry.
During a supplier audit, it is important to question how stable a supplier is. An enterprise that can only serve its current customers whilst balancing on the verge of insolvency cannot hope for significant orders. Customers do not want to finance otherwise loss-making enterprises that do not operate efficiently.
Internal rules of documentation at a company is important too. Such as what type of controlling and approval processes external and internal documents go through, in what form these documents are kept and stored, whether they are retrievable, etc.
Additionally, it can be interesting whether the persons charged with governance have the appropriate qualifications, experience and competence. Together these can guarantee that the internal accounting system of the enterprise operates properly, and in line with tax laws, which is ultimately vital for the company’s long-term survival.
It is easy to see that these are primary interests not only of the customer but also of the enterprise itself. Having recognised this, enterprises pay increasing attention to these areas, and they consider involving an external expert if needed, so they can optimise other processes in addition to having good production and good products, which may even offer a competitive edge for them in the case of a supplier audit.
The first part of our series of articles about due diligence can be found here.
