A standardized approach to understanding and assessing response to supply chain risks
The COVID-19 pandemic has starkly demonstrated what most organizations already knew—while increasingly intricate and increasingly global supply chains improved efficiency, lowered costs and offered access to new markets, they also exposed companies to new and often unexpected risks. As the pandemic broke out in early 2020, many organizations experienced significant supply chain disruptions. And, while the pandemic may have been the most significant and widespread example of supply chain risk, it is not the only cause for concern. Natural disasters and political instability can interrupt your supply chain. Key suppliers or vendors can fail. Cyber breaches can metastasize from a supplier, vendor or customer and ripple through your entire supply network.
Yet, close and often global partnerships with key suppliers, vendors, customers and other entities remain vital to successful growth. The key is maintaining a thorough understanding of and effective control over the risks associated with each—and all—of those relationships. What risks? Consider the following:
- As many companies have learned over the course of the pandemic, failure to understand and mitigate supply chain risks can mean key business operations are disrupted
- If supply chain disruption leaves you unable to meet key customer demands, your organization could be exposed to litigation, remediations costs and reputational damage
- Your company also may end up excluded from key markets
Controlling those risks isn’t just vital to your business, it’s increasingly the subject of attention from customers and other constituencies. Inspection visits and customer evaluations play an increasingly common and time-consuming role in evaluating new business relationships for many organizations. The question is how can you best identify your supply chain risks, ensure sufficient controls to mitigate them and best communicate those controls to interested parties?
Why SOC for supply chain makes sense
In 2020, the AICPA published guidance on System and Organization Controls (SOC) for Supply Chain reports. Similar to the well-established SOC 2 report, which allows an entity to demonstrate effective controls over the systems that produce data and information within the organization, the SOC for Supply Chain provides a flexible, voluntary framework to help your organization and interested third parties understand your supply chain system, principal system objectives and the risks that threaten the achievement of such objectives, and the controls in place to manage those risks. An accurate understanding of principal system objectives and risks regarding those is especially important. System objectives are an entity’s objectives, established by entity management, that are embodied in the product commitments it makes to customers, including producing or manufacturing a product that meets product performance specifications and other production, manufacturing, or distribution specifications. The system objectives also include the requirements established for system functionality to meet production, manufacturing, or distribution commitments.
As defined by the AICPA, a SOC for Supply Chain report consists of four key components that, together, provide an accurate, standardized and disciplined understanding of an organization’s supply chain risks and processes and controls in place to mitigate those risks.
- Management’s description: First, management provides a narrative description of the system the entity uses to produce, manufacture, or distribute products in accordance with the description criteria.
- Management’s assertion: Management asserts that its description is presented in accordance with the description criteria and that the controls stated in the description, which are necessary to provide reasonable assurance that the entity achieves its principal system objectives, were effective throughout the period, based on applicable trust services criteria.
- The CPA’s opinion: A CPA offers an opinion about whether, in all material respects, the description of the system is presented in accordance with the description criteria and that the controls stated in the description, which are necessary to provide reasonable assurance that the entity achieved its principal system objectives, were effective throughout the period, based on the applicable trust services criteria.
- The CPA’s procedures performed: The CPA’s description of the procedures performed and the results thereof, to support the opinion.
Because these components of the SOC for Supply Chain report are based on a prescribed, standardized and disciplined approach, the resulting report provides interested constituents with a reliable source of information for understanding your organization’s approach to supply chain risk management—an approach that is transparent, consistent and comparable among different entities. It also means that you will have robust response ready at any time to answer questions concerning your processes and controls for managing supply chain risks. This minimizes or potentially eliminates the need for ad hoc, one-off responses to questions concerning your supply chain. It also helps your own organization ensure its own understanding of its supply chain risks and controls.
Before undergoing the SOC examination process, your organization may wish to have performed, for internal use only, a readiness assessment consistent with the prescribed AICPA framework in order to understand and address key risks before developing a report for public consumption. A readiness assessment of this sort will help you to identify the overall scope of your supply chain processes and controls and will give you an opportunity to identify and address any gaps before undertaking an attestation engagement.
Given the material disruptions that many companies experienced up and down their supply chains as a result of the COVID-19 pandemic, appetite for more and better information concerning supply chain risks has never been higher. An SOC for Supply Chain report is best approach to making sure your company is ready to respond.
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