Audit in Logistics & Supply Chain

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Audit in Logistics & Supply Chain

While scope of logistics audit is quite comprehensive, it is not a cost audit, instead it’s a comprehensive audit of processes, practices and cost. Objective of Logistics Audit is to examine organization’s competitiveness and robustness of logistics operations, efficiency and cost, writes Vikash Khatri, Founder, Aviral Consulting Pvt Ltd.

Vikash Khatri, Aviral Consulting

Audit is an official inspection of an organization’s accounts, officially by an independent body. The word is predominantly used in financial accounting. As audit of financial accounts is mandatory as per accounts, Audits are conducted to check fairness of statements, adherence to policies, detection / prevention of errors and frauds by an independent body. The objective of audit is to provide fair and transparent view on accuracy and compliance within the organization. 

Like financial audit, certain functions / domains have adopted audit concept successfully like cost audit, risk audit, security audit or energy audit. Some of these are mandatory by nature for specific industries like cost audit, while others are non-mandatory by statute. Adoption of audit in non-mandatory areas is still not very good. One of the major reasons for poor adoption of audit is linked to perception about it. Most of the time, audit is considered an activity to find fault and auditee function does not welcome it.

Logistics audit is not statutory and that’s why logistics audit never gets priority within organization. Only inventory audits are done in companies in order to ascertain inventory accuracy and valuation, which has an impact on financial reporting of the organization. Inventory audits have no link with competitiveness and robustness of logistics processes. While scope of logistics audit is quite comprehensive, it’s not a cost audit, instead it’s a comprehensive audit of processes, practices and cost. Objective of Logistics Audit is to examine organization’s competitiveness and robustness of logistics operations, efficiency and cost. This activity also provides recommendations and guidelines on logistics management to improve overall efficiency.

The SUBSETS

Logistics audit comprises of quantitative and qualitative audit. This audit comprises of following subsets:

  • Logistics cost audit: Transportation and warehousing
  • Logistics process audit
  • Logistics procurement audit
  • Logistics performance audit
  • Logistics technology audit 

Most of the activities in logistics and supply chain are outsourced. Logistics cost audit also ensures that cost of outsourced activities is aligned or lesser than the industry benchmark. Logistics cost benchmarking can be done through various ways such as activity based cost model, comparison with industry peers or mystery checks. Audit process also checks that price discovery mechanism of organization determines the best possible cost. The cost audit is applicable on transportation and warehousing both. In case of large and complex network of supply chain, audit of each lane and warehouse might not be possible. In such cases, audit scope can be for certain outward location, certain inward location, certain warehouses, which can be selected based on outlier data or random basis. The audit process also aims to find the unwarranted wastage and leakages in logistics cost head.

Second part of logistics audit is process audit, which is an examination of outputs to ascertain whether the logistics activities and resources are being managed efficiently. It is entirely different from transaction audit. Process audit’s outcome suggests removal of redundant / non-value add activities and may also suggest inclusion of few new processes, which can add value. One of the core objectives of process audits remain to achieve seamless flow in supply chain. Therefore, scope of process audit is quite comprehensive and includes various processes like warehousing process, transportation process, vehicle indent process, placement process, etc.

Procurement of logistics function comprises of overlapping activities between supply chain function and logistics function. Various factors like demand & supply and seasonality impact pricing trends in market specially in transportation segment. So, supply chain procurement requires a robust structure. Basically, it procures to pay audit of supply chain, which covers RFQ process audit, vendor selection process audit, contract audit, payment audit, bill audit, etc. Efficiency of supply chain procurement has a direct impact on cost and also avoids any biasing in overall process.

Fourth part of performance audit deep dives into the performance indicators and measurability matrix of supply chain. A study shows that most of the time performance measurement of logistics partners take a back seat in the organization. Only handful of organizations have institutionalized robust process of periodic performance review. While regular service performance reviews highlight all issues and act as preventive measure to avoid risk. This audit reviews the process of vendor performance matrix and frequency on various parameters. Regular and structured review pinpoints bottlenecks and issues impacting supply chain on which organization and its vendors can work for improvement.

Last but not the least part of logistics audit is technology audit. This is not technical audit, instead its functional audit. This audit deep dives in area, where technological intervention can improve the productivity in logistics. In a full-blown form, such audit can lead to business case for supply chain automation. Now a days, organizations use outsourced service of control tower for monitoring logistics operations. The success of such outsourced control tower depends on best utilization of available tools and smooth coordination with service provider. This audit of control tower and its scope leads a way to improved utilization of control tower services.

The SCOPE & IMPACT

The scope of logistics audit is quite comprehensive. Due to its nature, it becomes a tool for supply chain head to check their efficiency. Many times, some critical things get missed due to routine work. In such scenario, such external audit can help in the following way:

  • Identification of commercial gaps which can help in cost reduction
  • Identification of leakages of cost if any
  • Identification of process gaps of transportation and warehousing leading to inefficiency
  • Setting up process of structure performance measurement matrix to evaluate partners
  • Identification of supply chain risk and plan to mitigate them
  • Performance improvement by challenging existing non-value add practices
  • Support in development of new strategies to drive supply chain forward

In the era of competition, such audits are more relevant, as these audits pinpoint gaps and shortcoming in the process and cost structure. In broader view, audit will help the organization, but in myopic view, it can be considered as an activity to pinpoint the errors. Such audits are not statutory, so it can move forward only when functional team take a participative view to improve efficiency.

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