Part 2: Ongoing Supplier Audits – Identifying Risks and Working Proactively with Suppliers

In this four-part series, we’ll walk you through the key steps of effective supplier management—from evaluation and setup to payment and ongoing monitoring. In this second part, we’ll focus on ongoing checks and how organizations can improve their understanding of suppliers without having to allocate additional resources.  

Most businesses conduct some form of vetting of new suppliers, but surprisingly often that is where it ends. Once a supplier is on board, it is easy to neglect ongoing monitoring of the supplier’s status, and the checks that are performed are often limited and carried out without much structure or process. This exposes the business to significant risk when there is poor oversight of its suppliers. It is also an entirely unnecessary risk to take, as there are systems available that can perform these checks fully automatically.  

Automated controls – tailored to the needs of the business

Different suppliers play different roles in your business. Some suppliers can be replaced overnight, while others may require months—or even years—of work to replace successfully. This, of course, also determines how you should manage your relationship with them and what controls are necessary. Different categories of suppliers simply need to be managed differently. How this categorization should look is determined by your business, but let’s take a look at the two broad categories: “Non-critical suppliers” and “Critical suppliers.” 

Non-critical suppliers 

This will account for the majority of your suppliers—perhaps not in terms of purchase volume, but in terms of number. If we have determined that this group of suppliers is not critical, can we simply leave them as they are? No, not entirely. Your business will still have much to gain from maintaining basic due diligence even for these suppliers. Verifying F-tax status, as we discussed in Part 1, as well as other checks such as fraud and sanctions screening, remain important to have in place even for these suppliers. Smaller companies can often change owners and be taken over by unscrupulous actors. That is why it is important that you know who you are doing business with over time. A lot can happen in the years that pass after you’ve added the supplier and made your first purchase. 

Critical suppliers 

Consequently, this will represent a small proportion of your suppliers in terms of numbers. However, they are crucial to your ability to deliver your service or product, and there is a business risk if something were to happen that forced you to replace any of these suppliers. Therefore, there is a need for controls that assess the health and quality of the supplier. An example of this is a credit rating check, where you ensure that the supplier is above the threshold you have set internally. A credit rating is a metric that assesses the likelihood of a company going bankrupt or being forced into corporate restructuring. A large amount of current data, along with historical data, is factored into the calculation, making it an effective way to identify suppliers at an early stage who are at risk of facing financial difficulties in the future. 

Ongoing monitoring – with every payment or on a daily basis

We have determined that there is significant value in conducting regular checks, both for critical and non-critical suppliers. How often should these checks be performed? For suppliers who are not considered critical, we recommend that checks be conducted before each new payment is made to the supplier. For more critical suppliers, we recommend instead that they be monitored and that more frequent checks be conducted. The exact frequency varies depending on the type of check, but the vast majority of checks are performed on a daily basis for these suppliers. Combined with internal notifications, this provides a seamless way to monitor the status of all critical suppliers. 

Save money and reduce risks – be proactive in your relationships with your suppliers

By monitoring critical suppliers, you can take action on negative information at an earlier stage. For example, if a key supplier were to have its credit rating downgraded or be placed on a sanctions list. It is then a major advantage to be able to act immediately rather than having to deal with the negative information in connection with the next payment, which may occur weeks or even months later. By monitoring suppliers, you can thus reduce the risk associated with them and act proactively. A warning regarding a supplier does not necessarily mean you have to switch suppliers. It may simply involve having a conversation about the supplier’s financial health or clarifying any debts or credit reports the supplier has received and what they actually entail. Being able to demonstrate to your suppliers that you are on top of things can often benefit the relationship and contribute to improved internal controls and proactivity on their part.  

In this series of articles, we focus on supplier management, so we won’t delve deeper into other aspects of transaction analysis. If you’re curious about the other checks in transaction analysis and the benefits they offer, you can, for example, read our article on double payments and double invoicing. 

Be sure to read Part 1 of this series, which focuses on supplier evaluation, and stay tuned for upcoming articles on effective supplier management: 

Part 1: Supplier Evaluation – Choose the Right Supplier and Avoid Unreliable Players 

Part 3: Regular Supplier Audits – Ensure Compliance and Identify Costly Errors 

Part 4: Internal Processes – Built-in Traceability and Enhanced Supplier Knowledge