The internal auditing of a company involves assessment of an organization to get a clear idea of its operational activities and its resources. It helps to understand the internal capabilities of an organization to carry out its day to day activities and to meet its long term goals. There are various tools that can be used to conduct an internal audit, among them the Value Chain Analysis is most widely used.
The value chain analysis of a company allows in determining its support activities and primary activities that leads the organization to profit making. In order to determine the support activities of a firm, four key elements are needed to be described, which are as follows:
Firm Infrastructure: The infrastructure of a company determines the structure of the management as well as its financial prowess. It also includes its future planning (mission and vision) that can have potential benefits for the company. The firm infrastructure can also include the tangible resources of a company that is crucial to its daily operations and for its revenue generation.
Human Resource Management: This element of human resource management, determines the capacity of the firm in terms of its human capital. The number of skilled and valuable employees, along with the training programs and remuneration can be a major determining for a company’s success. Typically, a company seeks to improve its human resources to improve its competitive advantage.
Technology Development: The technological developments made by a company is often reflected in its product and service design, along with its operational activities. Proprietary or patented technologies allows a firm to offer unique value for its stakeholders. It also helps it to stay ahead of the competition. Investments in research and development by a company allows in introducing new technologies in the sector.
Procurement: The procurement of raw materials is an essential aspect of a company’s supply chain. A steady supply of good quality raw materials is crucial to make sure that the firm is able to deliver the finished products to the customer (or wholesalers), in the right time. Factors like communication with suppliers and inventory management helps a company to increase its operational efficiency, thereby allowing it to generate higher value at lower resource usage.
The support activities of a company, mentioned above are indirectly responsible for its profitability and value generation whereas, the primary activities are directly responsible for it. The five key elements of the primary activities are as follows:
Inbound logistics: The inbound logistics defines the transportation of raw materials or products from the suppliers. A supply chain with an efficient inbound logistics involves proper warehousing and materials handling, strategic location of distribution hubs and effective management of inventory influx.
Operations: The operations of a company mostly involves a standardized business model. It involves activities like manufacturing or service rendering. The underlying processes can vary largely across firms, but is mostly aimed at improving its ability to make profit.
Outbound logistics: The outbound logistics involves the transportation of the final products to the customers or end users. The efficiency of outbound logistics is associated with higher customer satisfaction. The steps taken by a company to ensure timely delivery of the final products can help to improve its brand image, thereby attracting more customers.
Marketing and Sales: The marketing and sales activities involves marketing communication and pricing and selling strategies that can help a company to increase its sales volume. The effectiveness of these activities relies on how well they can improve customer preference.
Service: The service is associated with the intangible aspect of value creating. It includes delivery of products, post purchase service offerings, responding to feedbacks and solving customer queries and handling their grievances.