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SIMSA is an integrated Audit Management Platform based on the PDCA (Plan-Do-Check-Act) framework of operational excellence. It cuts out the bureaucratic layers of reviewers & approvers, therefore quick to deploy and intuitive to use. Its simplicity and mobility feature is the key factor for the buy-in from the operational staff. It can be used for self-assessments and tracking of corrective actions.
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A rapidly changing and dynamic environment poses both risks as well as opportunities for the businesses. Therefore, the need for operational excellence is felt by the business more than ever. In the changing context, the focus of operational excellence (OE) is also shifting i.e., from heavily leaning on the Lean to creating a fine balance between Lean and risk management.
Considering the uncertainties and volatility that we face today, the likelihood of OE taking a backseat is very high. There are times, when the exceptions or deviations have to be allowed or short-cuts have to be accepted to meet the customer requirement. What is worrying is when the exceptions become the norms and the short-cuts become the acceptable practices, the productivity, quality, and safety start to suffer. Also, the organizations tend to be more siloed in the absence of clarity of direction. On the other hand, the new technologies, the professional outsourcing partners offer the opportunities to take the OE to the next level.
The operational audits are focused on assessing the compliance to certain standards e.g. ISO, SOPs or regulatory requirement. The operational excellence audits help to identify the deficiencies, risks and opportunities for improvements, considering the end goal of customer satisfaction. In a nutshell the operational excellence audit enables the realignment of the operational goals, processes, measurement, people to the continuously changing priorities of the business.
While it may not be fair to apply “one size fits all” rule, the areas under the operational excellence audit remain broadly common to most operations. The indicative areas and checkpoints are:
1. Customer (External / Internal) Satisfaction:
2. Collaborative Sales & Operations Planning:
3. Value Chain Integration (External Collaboration)
4. TCO (Total Cost of Ownership) Approach
5. Leading Technologies
6. Health, Safety & Environment
7. Quality System Deployment
8. Visual Management Deployment
9. Management of Complexity & Variability
10. Team work, skill levels and motivation
Operational Excellence Audits are the need of the hour to unearth hidden risks & opportunities. However, spending internal resources and doing it in a traditional way is no longer sustainable considering the shocks of volatility and black swan events. Using experts and automation of the audit checklist & workflow, reporting, analysis and improvements not only saves the time of over-occupied resources but also improves the governance and effectiveness of operational excellence. SIMSA offers both technology platform and experts to help you institute and sustain the Operational Excellence program.
Conducting regular audits can help the line managers identify problems as well as areas of improvement for efficiency, quality, accuracy, speed, compliance & safety. The heart of any operational audit is the checklist, which determines the effectiveness of the audit in unearthing the gaps & opportunities.
A checklist can be a simple yet powerful tool that can be used to stay focused and ensure the entire scope of the audit is covered. A superficial & high level checklist just looks at the tip of the iceberg and address the problems that have already surfaced. The real purpose of the operational audits is to proactively identify and nip the problems in the bud, before these start harming the business.
So, how do we design a checklist that not only digs deeper but also provides a 360 degree view of the operations. Preparing audit checklist and the rating criteria are very important part of the audit preparation.
In a nutshell, a well thought off and prepared checklist minimizes the risk of surprises and helps to identify the opportunities for improvement. So, have you reviewed your audit checklist?
Managing operations of any kind, be it manufacturing, logistics or services, is getting tougher by the day. Considering unpredictable scenarios, volatile environment and numerous micro and macro factors impacting the operations, it is unfair to assume that managers & people will have a razor-sharp focus on operational efficiency and effectiveness. When the pressure mounts, people tend to take short-cuts and make their own informal procedures which could be detrimental in the long run.
It reminds me of a case when we had a temporary problem with a regular transporter and had to allow non-contracted transporters to ensure timely delivery to the customers. It meant higher cost and a risk of working with unknown carriers. However, even after the regular transporter resumed normal services, the delivery staff continued to use non-contracted transporters on some pretext or the other. It was discovered when one of the vehicles of one such transporter went missing along with the products.
The purpose of an operational audit is to improve the efficiency of day-to-day operations as well as identify risks due to non-compliance to the set procedures & policies. The audits provide a feedback loop to the operational managers based on the assessment of the effectiveness of the processes. These are not same as the internal audits, conducted by the audit department once or twice every year. The operational audits must be carried out as frequently as deemed important. For example, for a laboratory in the pharma manufacturing unit the, 5S audits may be required at a weekly frequency whereas the Contamination audits may be done once every month. For a warehouse operation, the cost efficiency audits may be done once a quarter while the stock audits may be required every month.
Operational Audits are different from Internal Audits
Operational audit programs are much more in-depth than normal internal audits. They do not look at how things are, they also look at how things could be. In one of the examples of the warehouse audit, the auditor discovered that the pickers are travelling to the same area of warehouse multiple times during the observation period. On further investigation, it was found that the orders are being picked individually for each customer order. However, the back & forth movement of the pickers for each order was not only inflating the need for more manpower but also slowing down the operation. The auditor recommended the change in the picking method to batch picking which led significant reduction in picking time & cost. From an internal audit perspective, there was no gap in the process but from the operational audit perspective, there was a significant opportunity for improvement. That is where the operational audits distinguish from the internal audits.
Another important aspect of the operational audit is that the auditors can be from the same team or the operational excellence experts from within the organization.
We already have Metrics in place to monitor and improve performance, then why Operational Audits?
Metrics and performance indicators are the outcomes and by the time the problems translate into visible outcomes, it is often too late. The operational audits are proactive in nature and used to isolate the problems right at its inception. Much before it is big enough to show up in the performance metrics.
A simple example from daily life is effect of your eating habits on the weight. Even though you measure weight on daily basis it may take many days or months before it starts reflecting on the weighing scale. On the other hand, if you audit what you eat and take corrective actions on daily basis, you can be assured about the positive impact on the body weight.
A meaningful operational audit program needs to be well-structured and planned to deliver effective results. The steps involved are:
Operation | Audit Areas | Need for Audit | Frequency | Audit Responsibility |
Warehouse | SafetyCompliance | To fulfil the corporate policy of zero tolerance to safety and compliance | Monthly | Warehouse Manager |
Warehouse | CostQuality | To achieve the set cost & quality objectives | Quarterly | Regional Logistics Manager |
Warehouse | Hygiene / 5S | To prevent the contamination of product | Weekly | Warehouse Supervisor |
Customer Service | AccuracyQuality Cost | To reduce the number of errors and increase the customer satisfaction score | Quarterly | Operational Excellence Manager |
Activity | Risk Involved | Risk Level | Control Measure | Guideline Document |
Moving Vehicles in the Yard | Accidents | High | Put Speed Signages Mark Directions for Vehicle Movement | Signage - Size and Placement Guideline |
Audit Title | Site | Dates | Auditor |
Warehouse Safety & Compliance Audit | Site ABC | From dd/mm/yyyy to dd/mm/yyyy | John Smith |
Site XYZ | From dd/mm/yyyy to dd/mm/yyyy | Jane Doe |
Monitoring an audit program can become extremely cumbersome without a dedicated tool like, SIMSA, which can not only pull all the information on click of a button but also send automated reminders to people, should there be any backlogs. The visibility of the status of the audit programs instils the seriousness and accountability in the organization
Source: How to Conduct a Quality Internal Audit, Seetharam Kandarpa
It is obvious that operational audit is one of the important levers of continuous improvement. Unlike internal audits, the operational audits are proactive in nature because the focus is not what is not right but what could be done better. However, it has been seen that in most organizations the operational audits are missing or done in an adhoc manner. Therefore, it does not translate into any visible improvements. A well structured operational audit program supported by technology like SIMSA, can be an important tool in the hands of operational managers to drive the operational excellence.
The network of sales channel partners not only provides a conduit for the flow of products to the end customers but also enables implementation of various sales programs. Imagine if the conduit is leaky or damaged, do you think your end customers would be satisfied? Which option is better - repair the reported leakages or proactively prevent the leakages?
Often the channel partners are treated as the money making machine. The sales is pushed through the network, irrespective of its capacity and capability. Sooner or later the cracks in the channel network start to appear resulting in leakage of revenue, efficiency and even compliance risks in many cases. A company needs to pay as much attention to the health of the sales channel as to its own business.
A well structured sales channel audit provides a basis for the health check of the channel. It functions as a documented record of all your sales channels processes, operations, assets and compliances. It helps to identify the bottlenecks and roadblocks for increasing your sales, improving efficiencies and maximising the ROI for the channel partners. The channel audit highlights what you do well and areas where you can improve. By focusing on those areas of improvement, you gain a significant advantage over your competitors.
The key benefit of the sales channel audits are:
It is very important to define the scope of sales channel audit. There are various approaches for defining the scope:
The right approach would depend on the maturity level of a company in the channel partners management. At the low level of maturity, a comprehensive approach is preferred and as the understanding of the channel improves, one can move to the risk-based or differentiated approach.
The next most important aspect of the channel audit is to identify the scope, based on the approach adopted. Typically, the areas that are included are:
Structuring a channel audit program requires strategising, planning and execution capabilities. A well thought through program delivers better outcomes as compared to the ad-hoc audits. It should not be merely a paper exercise. The key steps are:
The channel partners' audit is a mean to de-bottleneck sales processes and prevent leakages of revenue & efficiency. A differentiated and risk based approach should be adopted for a sharp focus and targeted improvement. A structured process should be instituted for sustainable and continuous improvements. The use of modern technologies to automate the workflow along with analytics is highly recommended.
Suppliers are the key source of competitive advantage for any business. Your quality, efficiency and service delivery significantly depends on what kind of suppliers you have. Having selected a good and competent supplier doesn't guarantee a perfect partnership. Even the best suppliers can fail or falter depending on a situation. The classic case study of how Ericsson lost months of production due to fire in the microchip plant of Philips, highlights the importance of continuous engagement with your critical suppliers.
Supplier audits have been used as tested tool to ensure that the suppliers not only consistently deliver high-quality materials, ingredients or services but also taking steps to identify and mitigate future risks. Leveraged correctly, supplier audits can identify, address, and prevent problems in a supplier’s product quality or processes before the problems spread.
BENEFITS OF SUPPLIERS AUDITS
Supplier audits is not a one time activity but has to follow a structured approach aligned to the sourcing strategy.However, there are certain stages of the supplier lifecycle management that definitely require the audit interventions, irrespective of any sector or business.
There is no "one size fits all" approach to supplier audits and each audit is driven by the objectives and risks under consideration. However, at broad level the areas covered under the audit are:
The auditor need to assess whether there are SOPs defined for each process, if the SOPs are followed and the checks & controls implemented in the critical processes to detect any deviation.
A common failure in a supplier audit program is turning it into a paperwork exercise, listing all sorts of documentation and exercises in an audit report without much focus on the recommendations for improvement. As the resources required for conducting the supplier audits are limited, therefore, the approach adopted must be both effective and efficient. A risk based approach is recommended in identifying which suppliers have to be audited, how frequently to be audited and what is the expected outcome of each audit.
Given the risk profile of each supplier, some suppliers may be required to be audited at least once a year while others may be once in 2 or 3 years. The key steps required to structure the supplier audit program are:
The supplier audit is a strategic tool to identify and mitigate risks in your supply chain for business continuity planning. Given different nature of risks associated with each supplier, "one size fits all" approach does not work. Instead a risk based approach must be adopted to determine the scope and periodicity of audit for each supplier. Next, the buy-in and early involvement of the suppliers in the structured audit program is essential for the successful outcomes.
The conventional approach to Supply Chain Risks Management and Audits is inadequate to address the ever-changing risk profile of the entire value chain. The audits within the four walls of the organisation doesn’t present the true picture of all the risks the business is exposed to. In today’s connected and dynamic world, an integrated risk-based approach is required.
In the last few years, a number of businesses have been caught by surprise by unforeseen supply chain disruptions across industries ranging from pharmaceuticals & consumer goods to electronics & automotive. Even if we discount the year 2020 as an exception, according to BCI report 2019, about 42% of the companies surveyed experienced at least 1 to 5 supply chain incidents that led to significant disruptions in 12 months. The worrying fact was that almost 22% of the companies surveyed had no idea of what may have caused the disruption in their operations.
Supply Chain Disruptions
Almost 75% companies surveyed have faced at least one disruption in 12 months preceding Covid
The major impacts of the disruption, according to the report, are:
The Covid pandemic has led to a greater divide – the business with proactive supply chain who rebounded much faster than the businesses with not so proactive supply chain. It has thrown the light on importance of supply chain risks management & business continuity planning for business sustainability. There has never been a greater need for supply chain transparency. Understanding the importance of governance, monitoring mechanism & visibility of controls effectiveness are necessary to mitigate risks in supply chain.
The sources and types of supply chain risks may vary a lot depending on each part of the value chain.
The key sources of the supply chain risks are the external environment and internal operations. The external risks e.g., acts of terrorism, critical labour stoppages and port closures, infectious diseases, and natural disasters, cause high levels of concern and are less controllable.
On the other hand, the internal operations risks that involve quality assurance, IT security and uptime, compliance with regulatory requirement, sustainability, health and safety, conflict minerals etc. are much more controllable. The occurrence and impact of internal operational events go unnoticed most of the time and therefore, offer a greater opportunity for improvement through better governance.
The supply chains are increasingly becoming vulnerable to risks. There are multiple factors contributing to the supply chain vulnerability e.g. globalization, outsourcing of operations, stringent regulatory compliance, higher workforce turnover, inadequate transparency & visibility etc.
Supply chain audits present an opportunity for the companies to look at the supply chain processes and operations to make sure they’re doing right things to control costs and mitigate risk factors. Conventionally, supply chains have been audited by the internal audit function – once or twice a year. Given the increasing uncertainty and increasing instances of disruptions, the traditional internal audit process is not sufficient to assess the effectiveness of risks mitigation controls.
The approach needed for the keep pace with changing risks involves:
There are many audit tools available in the market, but most cater to the automation of the conventional internal audit process. This makes these tool too elaborate & complex with multiple level of reviews & approvals, and therefore, cannot be used for the periodic self-audits. SIMSA has broken the conventional thinking on the audits by making the technology available on mobile and does not have too many steps involved to schedule & conduct the audits followed by planning & tracking corrective actions.
No supply chain audit program can be “internal” in the true sense. With increasing level of outsourcing, the involvement of the suppliers and third parties absolutely must for an audit program that really addresses the supply chain risks proactively. However, if each organization in the value chain follows a silo approach for the audits keeping in mind the organization specific objectives & risks, it may lead to sub-optimal results, duplication or missing out on certain areas.
An integrated approach to the audits, keeping in mind the overall objectives of the supply chain and risks in the extended value chain, is required for prioritization and scoping the extent of audits. Many procurement and logistics professionals (who deal with the 3rd parties) tend to take refuge in the contractual terms and liability clauses for certain risks, and therefore, follow the hands-off approach. One must realize that the financial penalties or liabilities may not compensate for the loss of image, reputation or customers’ confidence.
Given the spread and extant across geographies and organizations, no supply chain audit is “internal” in true sense. The outsourcing of operations doesn’t imply outsourcing of risks management.
While supply chain risks are becoming greater headaches for everyone, it requires a different approach to manage risks. The conventional internal audit programs are inadequate to proactively identify, assess and mitigate risks, as the supply chain risks are dynamically changing. A perpetual, integrated and collaborative approach across the value chain, making use of modern technologies, is the need of the hour for effective supply chain risks management.
Humans, by nature (at least a large percentage) are optimistic about future. But this optimism becomes dangerous when it leads to the belief that "it won't happen to me". That's why many people are under-insured, overspeed on the roads or walk freely without masks & precautions during Covid pandemic.
The same optimism bias translates into the approach towards managing risks in the business. Which parts of the business have the maximum exposure to the risks? No points for guessing right - Supply Chain and Finance. While a structured framework of identifying and controlling Financial risks exists in every business, the Supply Chain risks are left to the fait accompli. The reason is the optimism bias, "It never happened to us, why should we even bother", until one day it happens. The "long term" risks management loses the battle to the "short term" costs savings, when it comes to choosing one over another.
What percentage of end to end supply chain is controlled by one company? Hardly much!
With increasing outsourcing of Supply Chain including the manufacturing operations, the extent of direct control of the focused firms is continuously reducing. There have been number of instances of violation of compliances and norms by the contract manufacturers and outsourcing partners, leading to both loss of business and reputation.
The reasons why Supply Chain is becoming a major source of business risks, are:
According to a study done by Supply Chain Insights LLC, the factors contributing to the. supply chain risks have changed over last 5 years. According to the study, in 2013, 80% of the supply chain leaders accepted to have been impacted by, on an average, 3 material disruptions. The source of most critical risks in the near future will be from Operations Complexity, Regulatory Compliance and Geo-politics events.
1. Shed Optimism Bias: This step requires a "foresight" into the changing environment and its potential impact on the entire value chain. The value chain includes your tier 2, tier 3 suppliers if these can't be easily and quickly switched-over to the alternative sources. These risks may have profound impact on the strategic supply chain decisions e.g. how many and which suppliers, logistics partners you will have for a category, the design of distribution network, location of the supply chain facilities, the inventory holding etc.
2. Identify Risks in Operations: Map the processes so that you have visibility of what happens in your operations. Process mapping is a useful tool for risk assessment and continued risk management by enabling business owners to better understand the processes and controls associated with identified risks. Once the processes have been mapped, then assess what may go wrong, what could be impact on the business and what controls exist to prevent the short-cuts & leakages. Prepare a Risk Register and update it periodically.
3. Structure Audit Programs to check the effectiveness of Process Controls: Operational audit or Internal audit has been effective and a tested technique to test the effectiveness of the process controls and risks management. Higher the perceived risk, higher is the periodicity of audits required. However, most of the companies have a very rudimentary system of conducting the audits, using pen & paper or excel sheets that do not provide end to end visibility into the audit management program. Also, few companies use an integrated audit management system that assesses the gaps and tracks the linked corrective & preventive action plans to plug the gaps. Implementing such an integrated system may not cost much but may give multiple times ROI in preventing the process control failures.
Operational or Internal Audits in most of the companies are riddled with long established manual processes, which results into high audit cost of in-house resource, lack of end-to-end audit visibility, and gaps in compliance.
Another gap in the audit process is that it is mostly focused on the internal operations. In the areas of outsourced logistics and sales channels, the audit means only inventory counting, as-if that is one and only risk that exist in the logistics operations. There are whole lot of risks in the categories of safety, security, legal and regulatory compliances, product quality, process adherence that are mostly ignored. What about the supplier audits? How many key suppliers are audited for a comprehensive risks assessment? A structured and automated audit workflow management e.g. SIMSA, based on the framework of operational excellence (Plan, Do, Check and Act) is a best practice to identify and mitigate risks in the operations.
4. Constitute a Risks Management Committee: A committee of senior management as well as independent board members should look into the overall effectiveness of the risks management, assess the risks associated with the gaps observed in various audits and monitor whether the gaps are being closed in a time bound manner. The committee also sets the risks management guidelines, policies, define the roles and responsibilities of the frontline and supporting roles in risks management and approves major decisions involved in the risks mitigation.
5. Build Agility and Resilience in Supply Chain: Despite taking all the possible measures internally, the external disruptions cannot be ruled out. Agility is about how quickly you can shift gears to counter the impact of any disruption. Resilience is the ability to bounce back to business as normal after encountering the disruptive event. Building agility and resilience requires proactive planning involving "what-if" scenarios and preparing a response for each scenario. Systemic use of predictive analytics and market intelligence involving weather data, port & transportation strikes, geo-political situation & impact on trade-policies / duties etc. go a long way in minimising the "time to recover" in the event of disruption.
Given that the frequency and impact of supply chain risks is increasing by the day, the risk management should be one of the top 3 priorities for any company. A structured risk management and business continuity planning is not just an option but a business imperative to survive and become more resilient to the shocks of disruptions.
Warehouses are no longer old dilapidated buildings in dingy lanes, conventionally used for the storage purpose. Warehouses today are part of optimal flow of goods, have increasing levels of complexity & automation, and play a strategic role in fulfilment of customer demand. Increasingly, warehousing operation is encompassing activities like postponement, packing, light manufacturing, sortation, cross-docking , reverse logistics, after sales service, orders fulfilment etc. Also, with use of information technology and automation, the need for the skilled manpower has gone up, which is not easy to find.
The increased level of warehouse complexity and activity also means more exposure to various kinds of risks. Though there are no statistics available for country-wide warehouse incidents but one could assess the gravity of the situation from news reports, while a majority of incidents are not reported. Unfortunately, barring few industries that are quite sensitive to risks across supply chain, most of the companies leave the risks management to their 3PL or don't bother at all. Few 3PLs put in place some common and basic safety & security procedures in place but is it what is needed for effective risks management?
Image: Fire incident in a warehouse in Delhi on Oct 6, 2020 (Image Source: ANI)
Let's first understand what risks warehouses are exposed to. The risks span from Safety, Security, Quality, Service, Regulatory, Legal, Financial, Environmental etc. The risk profile of a warehouse is determined by 3 major factors:
With most of the warehousing operations being outsourced, the companies have a little visibility & control over the operations. Many companies have basic Standard Operating Procedures documents, which most of the time never referred to or updates. Some of these documents are so textual that it makes a good bed-time reading. Most of the supervisors and other people managing the operations may not have even seen these documents ever. Moreover, every site may have different risk profiles. How can one standard document serve the purpose of each site?
So people take short-cuts, especially during month-ends pressure and then slowly it creeps as the bad practice until it snowballs into a big incident. Until then, it is optimism bias that prevails, "it won't happen to us".
Optimism bias, "it won't happen to us" and leaving risks management to your 3rd party logistics provider or contract manufacturers are the biggest risks to your operations. The risks management should start on the day, you decide to build or outsource a warehouse.
Risks management is a three level approach i.e. Strategic, Tactical and Operational.
But then how do you ensure whether the controls are effective and are being implemented in spirit and not just on papers. Internal audit is one of the most tested techniques in proactively identifying the gaps in controls. The audits are effective if:
It may appear an additional work, but not investing time and resources on this aspect of risk management may cost dearly. It's easier to cure a cancer if identified much early, through periodic check-up. It may also sound daunting to manage the entire planning and managing the data as well as tracking corrective actions.
A platform like SIMSA, that is based on the operational excellence framework of Plan, Do, Check & Act, not only automates entire audit workflow but also ensures complete visibility & control over risks & corrective actions.
Warehouses will increasingly play a much larger, complex and strategic roles in the supply chain. Therefore, the risks associated will also be much higher. The risks have to be managed at Strategic, Tactical and Operational levels. Use of information technology can facilitate the effective management of the warehousing risks. It's high time that companies start thinking in this direction and shed the optimism bias or dependence on 3PLs for risks management.