In a challenging business environment it’s all too easy to blame outside sources for drops in revenues, increases in raw material costs and employee dissatisfaction. Customers are at fault for your lower sales; vendors are ripping you off; and employees are no longer the loyal, productive individuals they were during the boom times.
But what if we told you that a thorough, introspective audit of your production processes, overhead and financial systems could turn up problems that you can actually solve because you have control over them? For unlike fuel costs, raw material increases or cutbacks on the part of your best customers, internal processes are under your firm’s control.
Not the dreaded audit
The Institute of Internal Auditors defines internal auditing as an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and identify risks, and improve effectiveness management, control and governance processes. Using a process that involves scheduling, planning, managing, reporting and verifying (in that order), internal audits:
- Determine the accuracy and validity of business transactions
- Verify the existence of company procedures and ensure that the defined process is followed
- Evaluate operational procedures for adequacy and effectiveness of internal controls
- Evaluate the adequacy related to information relied on during management’s decision-making
Put simply, an internal audit is a self-inspection of your business. It gives company ownership and management a chance to take a step back from the daily hustle and bustle, and consider what really makes the firm tick. Internal audits typically help manufacturers answer three key sets of questions:
- What should we be doing as a company? What are the internal, national and/or international requirements that we must satisfy in order to succeed as a firm?
- What are we actually doing? Do those activities comply with the requirements outlined in Question 1?
- What can we do differently to make the business more efficient and effective? How can we improve our operations in a way that makes the company perform in a more productive manner?
The beauty of the internal audit is that it’s a self-directed exercise that doesn’t necessarily have to involve outside sources, although there are plenty of qualified experts who stand at the ready to help. Unlike an intrusive IRS audit, for example, you get to select who audits the company, what departments or functions will fall under scrutiny, and what steps will be taken to mitigate any issues that are uncovered. Remember, however, that auditing is all about taking measurements and requires a benchmark or standard against which to compare those measurements.
That’s where resources like the National Precast Concrete Association Benchmarking Report prove valuable for precasters. Designed to be a one-stop resource for financial and compensation information, the Benchmarking Report is based on data from precast manufacturers via an annual survey, and then published and made available to anyone who wishes to order a copy. This year’s Benchmarking Report will be available by mid-summer in the NPCA SHOP.
Sam Lines, technical sales and safety director at Concrete Sealants Inc., Tipp City, Ohio, speaks often at industry events about the value of internal audits. His specialty is the quality function, based on his background in the ISO 9000 auditing system and his role as a lead auditor within that system. When conducting an internal audit, Lines advises firms to adhere to two key points: be objective, and be systematic.
“In terms of objectivity, you have to come into the audit with no predisposed ideas,” says Lines. “You can’t look at something and say, ‘I already know this is bad’ or ‘I already know this is wrong.’” To be systematic means being able to trace a process or function from the beginning to the end, with no gaps in between. “I heard someone once say, ‘Staple the invoice to yourself and then walk through the entire process and become the work order,’” Lines says. “Then you can truly know the entire systematic process.”
A big believer in lean manufacturing, which advocates value-added processes and the elimination of waste, Lines says audits can be particularly useful for identifying duplication of functions and information.
Perhaps an employee isn’t following written instructions and is creating double work for the next person up the chain of command. Or maybe a closer look at initiative is in order on a specific area of the manufacturing floor where standards have lapsed.
While the auditing process is straightforward enough, Lines says many manufacturers fall short in the preparation phase – namely, coming up with the documentation needed to review and benchmark processes. “Most companies aren’t prepared to go through an internal audit,” says Lines, who feels that many manufacturers could benefit from a thorough audit, particularly in today’s difficult business conditions.
To precasters looking to get introspective, Lines says a good first step is to ensure that the company has documented records of its processes, or at least what they “should be” in a perfect world. “It’s hard to audit something if you lack this documentation and a known standard for what you want to be doing,” says Lines, who suggests precasters use NPCA’s Quality Control Manual as an industry standard when developing and documenting internal processes.
During the information-gathering phase, Lines says precasters should come up with a series of open-ended questions for those employees who actually perform those processes. So instead of asking, “Do you perform quality inspections daily?” a better question would be, “What are you doing on the manufacturing floor to ensure that castings are poured correctly?” The latter question will elicit a longer, more detailed response than a simple yes or no and help management decide whether further process improvements are needed.
If, for example, the employee says, “Well, I put everything together and hope that it comes out right,” then you can pose more pointed questions like, “Is there anything specific that you look for when inspecting the castings?” Such questioning needs to be planned out well in advance of the actual audit, says Lines, in order to get the most useful, detailed answers possible. As part of that plan, be sure to consider which areas of the manufacturing process will be scrutinized and when (for example, pre-formed inspections one day and post-formed the next).
The next step in the internal auditing process will be an evaluation of the data and information to figure out which areas need the most attention. Evaluate those “non-performance” sections, says Lines, and come up with a system of ranking them by importance. “Try to prioritize the critical components,” he says. “Put your emphasis on those that are most vital to the process, and that will make the most impact when improved.”
A plan of action
After identifying the key areas of improvement, create a plan for solving the problems and designate “process owners” to take the necessary action(s). “Assign these areas of improvement to someone and make sure they’re acted upon,” says Lines. Be sure to document this assigning of responsibility by recording on paper or on a computer spreadsheet the deficiency, the person responsible for fixing it and the outcome.
“After the problem is corrected,” says Lines, “you’ll want to do an evaluation and find evidence that the action taken was effective.” Also important is a written report that documents the audit, the information and data gathered, the deficiencies uncovered, the actions taken to resolve those issues and the results.
When these internal auditing steps are followed, the positive results can be significant. They come in the form of improved quality control, happier customers, more productive employees and increases to the company’s bottom line. One precaster that was dealing with 10 defects per 100 units, for example, was able to reduce that number to two per 100 by performing – and acting upon – an internal audit.
“Most experts will tell you that there’s 20 to 30 percent waste within a single process, so nearly any type of process improvements will translate into financial benefits for the company,” Lines says, “not to mention the myriad other positive results that come from taking a thorough look at your company’s internal processes.”
Bridget McCrea is a freelance writer who covers manufacturing, industry and technology. She is a winner of the Florida Magazine Associaton’s Gold Award for best trade/technical feature statewide.