With all the recent news about quality issues and recalls, one might wonder how a company can protect itself from exposure, or at least reduce the risk resulting from today’s integrated economy and the associated high dependence on vendors within the supply chain. The answer may be as simple as monitoring vendor performance and conducting the occasional vendor audit to ensure that things are in order.
Monitoring performance can be an effective tool in managing vendor relationships. Metrics should be identified based on what is most important to your company - quality, lead time, on-time delivery, pricing, etc. Subsequently, performance expectations should be established and agreed upon with your vendors. Finally, you should monitor performance, and act accordingly based on the results.
In addition to monitoring performance, vendor audits allow a company to dig deeper into its detailed transactions/activity with vendors. Audit rights can be acquired through a contract provision, a provision in the terms outlined on purchase orders and/or other means. Vendor audits can cover conflict-of-interest policy compliance, contract compliance (e.g., accuracy of pricing), adequacy of vendor quality procedures, and evaluation of goods or services provided, etc.
Used alone or in conjunction with each other, vendor performance monitoring and vendor audits are good business practices and may help to keep your vendors and employees honest and provide accountability when difficult situations present themselves.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.