Businesses couldn’t survive without a vibrant network of suppliers providing a wide range of equipment, services and supplies to sustain and support the enterprise. High performing suppliers bring consistent value by providing quality goods and services, competitive pricing and predictable performance. After an extensive quoting or negotiation process, we naturally expect our suppliers to live up to the commitments they have made relative to price and business terms.
A regular supplier audit process is an invaluable tool to ensure that your organization is receiving the pricing and terms that your team worked so hard to achieve. In our purchasing and audit experience over the years, approximately 75% of supplier invoices are correctly priced at the line item level according to the negotiated pricing and terms.
While many supplier overcharges can be minor for selected supply items, some overcharges in DMS, telecom, transportation and other high expense categories can result in thousands of dollars per month in overcharges. If 75% of your invoiced line items are correctly priced, then 25% of your items may be inflated and potentially degrading your bottom line profitability.
Typical supplier audit issues
The most frequent discrepancies we find in supplier audits are the following:
- Inaccurate pricing – pricing outside of the agreed upon amounts or rates
- Price creep – pricing changed earlier than expected
- Terms – the agreed to business terms are no longer evident on the invoice
- Fuel surcharges – new charges applied, or when fuel prices drop, higher fuel surcharges have not been reduced
- Utilization – charged for consumption or utilization that has not occurred
- Transportation – new unexpected transportation or delivery charges
Tools required for an audit function
Organization is the key to an effective purchasing and audit function. If the purchasing process is poorly executed or has holes in it, the audit function will be nearly impossible to execute. In order to implement an effective audit function the following requirements must be in place:
- Current copies of pricing agreements/contracts with business terms for all expense categories
- Require a centralized location for pricing agreements/contracts – either on-line or file cabinet
- Resource(s) tasked with regular review and audit of supplier invoices(suggest A/P)
- Process developed to dispute and resolve overcharges with suppliers
- Method of tracking supplier non-compliance for future purchasing decisions
Types of supplier audits
We utilize two different types of audits that have served us well and can be easily adapted by any organization.
Discovery audits – Usually employed at the 60-90 day mark after a new supplier or new pricing with an incumbent has been implemented. We utilize the Discovery Audit to sample a narrow, but representative range of pricing and business terms to determine compliance with the current agreement. The audit is accomplished by matching line items on the invoice to the implemented quote, pricing agreement or contract. If a discrepancy is found, it is noted, or highlighted for future tabulation. Typically, if the line item discrepancies are less than 5% of the line items audited, the audit can be completed and supplier contacted to refund any overcharges. If line item discrepancies exceed 5% of the total, we might then determine that we need to audit at a much deeper level, using the Recovery Audit.
Recovery audit – A Recovery Audit is a much deeper review of a supplier invoice once the 5% threshold has been exceeded. A Recovery Audit is painstaking audit of each line item on a supplier invoice, again matching invoice price to accepted quote, pricing agreement or contract currently in place. Once a complete line item review has been completed, an audit summary should be constructed with accompanying detail(copies of audited invoices) and prepared for the supplier. The supplier should be contacted and an audit review should be conducted to review all of the detail and steps should be implemented to receive a check or a credit on the next invoice.
Supplier follow-up and action
Most suppliers will price their supplies and services accurately on a consistent basis. But mistakes happen in small and large supplier organizations….and it is likely that your suppliers are not immune to those problems. A rational and professional discussion of your findings with the supplier will usually resolve the problems on a permanent basis. Suppliers will know you are serious about rectifying the errors if you request a check for the overcharges or a credit directed to a senior member of management to achieve a high level of visibility. Audit performance by suppliers should be tracked and reported to the management team and utilized when quoting and selecting suppliers.
If your supplier has implemented some new and creative pricing, terms or surcharges that are not part of your original agreement, the new charges should be eliminated, altered or new negotiations should take place to find some common ground. If resolution cannot be achieved, a supplier change might be in order subject to the terms of your agreement. Supplier negotiations should be memorialized with a written addendum to the contract, quote or pricing agreement and attached to all copies within the organization so that future audits will capture any changes agreed upon.
Recommended audit plan
While all expense categories should be audited annually, those that represent the greatest cost to the organization should be audited first. Prioritized audit plans could be based on the following criteria:
- High expense categories
- Categories under contract
- New suppliers – Discovery audits
- Incumbent suppliers with new pricing – Discovery audits
Benefits of audits to dealership
Supplier compliance audits are a necessary component of managing your supplier base. The benefits of a regular supplier audit process can include the following:
- Prevention of overcharges and improved profitability
- Supplier compliance improves with a regular audit process
- Confidence in suppliers improves with regular audit results
- Audit information is helpful in selecting future suppliers
- Audit of your internal purchasing processes
- Internal employee compliance using designated suppliers
In addition to the benefits of auditing supplier pricing, the audit process will validate your purchasing processes as well. If your employees are not utilizing the preferred suppliers designated(which happens frequently), the audit results will reveal that information. Audits will also reveal whether low cost contract items are being purchased rather than more expensive non-contract items. Supplier audits are a valuable tool, that if employed correctly, will yield significant benefits across your dealership.
To receive a copy of a Supplier Audit Summary utilized for internal auditing and supplier resolution, contact Pam Gabor at 952-746-9021, or via e-mail at firstname.lastname@example.org