Addressing internal audit challenges in manufacturing: strategies for operational excellence

When Henry Ford introduced the moving assembly line in 1913, he revolutionized not only the automotive industry but also the entire manufacturing sector. Ford gave the manufacturing platform growth and productivity that had never been seen before, developed cost savings on a manufacturing cost structure that was not in place prior, and an influx of manufactured goods into people's lives that became a possibility for the first time in history. Ford likely never imagined that internal audit would be so strategically essential to keeping manufacturing safe, efficient, and compliant.

The road ahead for manufacturing organizations is undeniably challenging. The pace and frequency of changing regulatory requirements, workforce shortages, increasing operating costs, variability in the global supply chain, uncertainty around geopolitical trade relationships, and the rapid pace of technology advancements do not diminish at all. Deloitte's 2025 Manufacturing Industry Outlook emphasizes that “manufacturers are expected to face a challenging and uncertain business climate due to higher costs, potential policy changes following U.S. and global elections, and geopolitical uncertainty.”

To help understand these challenges, we’ll discuss six areas that internal auditors should focus on: regulations, supply chain, tariffs and trade volatility, workforce, sustainability initiatives, and technology to mitigate risks, enhance efficiency, and drive resilience in manufacturing.

1. Regulatory requirements demand proactive approaches

For manufacturers, navigating regulations is like steering through a maze — every turn presents new compliance challenges. Without proactive navigation, organizations risk costly fines, reputational damage, or even operational shutdowns.

Manufacturers must comply with an array of industry-specific and global regulations, including:

• ISO 9001 (Quality Management): Ensures consistent product quality and process efficiency.
• ISO 14001 (Environmental Management): Governs environmental sustainability initiatives.
• ISO 45001 (Occupational Health and Safety): Focuses on workplace safety and risk management.
• EPA Clean Air Act: U.S. regulations reducing air pollution and emissions.
• General Data Protection Regulation (GDPR): Governs the handling of personal data for manufacturers operating in or serving Europe.
• REACH (Registration, Evaluation, Authorization, and Restriction of Chemicals): European Union regulations for chemical safety.
• RoHS (Restriction of Hazardous Substances): EU standards for reducing hazardous materials in electronics manufacturing.
• CFR Title 21 (FDA): Governs industries like medical devices, food production, and pharmaceuticals.

With the rate of regulatory change across the globe, KPMG recently noted that “2025 will be the Year of Regulatory Shift fueled by a new Administration, agency leadership changes, and expanded regulatory divergence.” For manufacturers doing global business, this reality means a broad regulatory shift from stricter environmental policies in Europe to more relaxed domestic regulations in the United States.

The cost of non-compliance and internal audit’s role in navigating regulations

Non-compliance in manufacturing can have devastating consequences. For example, if a manufacturer violates an OSHA regulation, this could lead to fines, increase costs of operations due to work stoppage, and irreparable reputational damage. Similarly, a failure to meet ISO 14001 environmental standards might lead to sanctions, loss of contracts, and eroded stakeholder trust.

Imagine a manufacturer as an orchestra performing a symphony. Each regulation is a different instrument, and internal audit serves as the conductor, ensuring every part of the orchestra works in harmony. Every regulation is a separate instrument, and even if one instrument is out of tune, such as a safety inspection not completed or an inadequate environmental report, the entire performance is at risk.

1. Proactive compliance audits: Focus on high-risk areas like workplace safety, emissions reporting, and product labeling to prevent costly fines and improve trust.
2. Leverage technology: Platforms like AuditBoard automate workflows, track regulatory changes, and generate real-time compliance reports, reducing manual effort and error.
3. Collaborate across functions: Work with legal, compliance, and operations teams to align on evolving standards and regulatory priorities.

Finally, internal audit should leverage technology to manage compliance workflows and align the organization with evolving global standards like ISO 45001 and OSHA.

2. Supply chain vulnerabilities are increasing risk exposure

Global supply chains are under pressure from geopolitical instability, logistical disruptions, and ethical sourcing demands. According to RSM, “manufacturers must adopt more agile supply chain strategies to address evolving risks and ensure continuity.”

For manufacturers, the stakes are high. In addition to production delays and cost increases, reputational damage of a supply chain gone wrong is significant, especially when ethical sourcing and/or sustainability are in question.

How internal audit can strengthen supply chain resilience

• Conduct vendor risk assessments to evaluate supplier compliance with contractual obligations, ethical sourcing standards, and sustainability goals.
• Use real-time vendor monitoring tools to track supplier performance and identify potential risks before they escalate.
• Collaborate with procurement teams to develop contingency plans for mitigating disruptions caused by geopolitical events, natural disasters, or trade policy changes.

By proactively managing supply chain risks, internal auditors can help organizations build resilience and maintain operational continuity.

3. Tariff and trade volatility are disrupting supply chains

Global supply chains are critical to manufacturing, but current and ongoing tariff disputes and trade tensions have created considerable risk. Tariffs on imported goods increase the costs of raw materials and components, force the disruption of supply chains, and require companies to rethink sourcing strategies.

Think of the supply chain as a spider’s web — when you disrupt one strand, whether it is with tariffs, geopolitics, or logistical issues, the tension spreads throughout the web. Internal audit helps maintain the structure by finding weak points in the web and then reinforcing them before the web breaks, as recent examples of tariff impacts demonstrate.

• U.S.-China trade tensions: Ongoing disputes have led to increased costs for electronics, metals, and other imported goods, forcing manufacturers to shift sourcing to alternative markets like Vietnam or Mexico.
• European trading diversification: The European Union (EU) is not only looking to exit its long-standing trading partnership with the U.S. but also to strengthen its existing relationships with trading partners such as China, which has experienced significant increases in EU trade.

Internal audit’s response to tariff risks

1. Reassess supply chain strategies: Evaluate vendor relationships and sourcing decisions to identify vulnerabilities. For example, consider nearshoring or dual sourcing to reduce dependency on high-risk regions.
2. Monitor trade compliance: Ensure compliance with customs regulations, duty requirements, and trade agreements across all jurisdictions.
3. Scenario planning: Develop contingency plans for sudden tariff changes or trade policy shifts.

Internal audit plays a critical role in building resilient supply chains by identifying risks, reinforcing weak points, and ensuring compliance.

4. Workforce shortages require creative solutions

Manufacturers are facing a larger talent gap as they try to attract and retain workers. Manufacturing's inability to attract and retain workers is among the top challenges faced by manufacturers, as noted by Deloitte, nearly 60% of manufacturers surveyed by the National Association of Manufacturers (NAM) in 2024 identified labor shortages. This problem is worsened by an ageing workforce, a lack of new entrants into skilled trades, and the increasing demand for tech-savvy employees in automated environments.

A manufacturing workforce is like the engine of a vehicle. When well looked after it will move the operation in the right direction; however, if not, it may cause the system to completely stall. Internal audit is there to help make sure that the routine and needed maintenance is happening by identifying instances where workforce planning is lacking, and through monitoring employee engagement.

How internal audit can address workforce challenges:

1. Audit workforce planning: Evaluate whether workforce strategies align with operational goals and future needs.
2. Monitor training programs: Ensure employees are receiving the training necessary to operate advanced machinery and adapt to digitized processes.
3. Assess employee retention: Review data on turnover rates, engagement metrics, and exit interviews to identify potential improvements.

Internal auditors can help manufacturers address workforce challenges by ensuring training, retention, and workforce planning strategies are aligned with long-term operational goals.

5. Sustainability and ESG are now business imperatives

Sustainability is no longer optional for manufacturers — it’s a core expectation from consumers, regulators, and stakeholders. Environmental, Social, and Governance (ESG) initiatives are now influencing business and operational decisions, and internal audit needs to be engaged in associated activities to ensure their organizations remain compliant and at the forefront of their organizational initiatives.

For a moment, think of sustainability as a garden. For this garden to flourish and grow, each part of the ecosystem must align — operations, supply chain, and policies must work together in harmony to realize sustainability over the long term. Internal audit should be engaging with all the gardeners—ensuring each part of the ecosystem is contributing towards the overall sustainability objective while eliminating risk elements, such as non-compliance and inefficiencies. This includes addressing key sustainability and ESG trends in manufacturing.

• Carbon emissions tracking: Global regulatory frameworks, like the EU’s Corporate Sustainability Reporting Directive (CSRD), require manufacturers to disclose their carbon footprints and demonstrate efforts to reduce emissions.
• Ethical sourcing: Customers and regulators demand transparent supply chains free from unethical practices, such as forced labor or environmental exploitation.
• Sustainability in product design: Manufacturers are incorporating circular economy principles, such as recycling and energy efficiency, into product development.

How internal audit supports sustainability and ESG goals

1. Auditing carbon emissions tracking: Ensure the organization accurately measures and reports emissions data, meeting regulatory and stakeholder expectations.
2. Evaluating ESG reporting accuracy: Review disclosures to ensure they align with ESG goals and regulatory frameworks.
3. Assessing Supplier alignment: Verify that supply chain partners adhere to the organization’s ESG standards, reducing reputational and regulatory risks.

Internal audit can and should play a role in ensuring sustainability goals are met through accurate reporting, ethical sourcing, and supplier accountability.

6. Technology investments are transforming internal audit

Technology is no longer just a tool — it’s the driving force behind modern internal audit. By leveraging advanced technology solutions, internal audit teams can better manage risks, enhance productivity, and create greater strategic value for their organizations.

Manufacturers are making record investments in technology and infrastructure to modernize operations. Deloitte reports that “construction spending in manufacturing reached a new record of $238 billion in June 2024.” While these investments are critical to staying competitive, they also introduce new risks related to implementation, oversight, and operational integration.

How technology addresses manufacturing risks

1. Automating compliance monitoring: Technology platforms like AuditBoard automate routine compliance tasks, such as control testing, documentation, and reporting. This allows auditors to focus on higher-value activities like strategic risk assessments.
2. Predictive analytics for risk management: Predictive analytics acts as a crystal ball for auditors, enabling them to identify potential equipment failures, operational inefficiencies, and compliance gaps before they occur.
3. Strengthening supply chain transparency: Blockchain technology offers a tamper-proof record of supply chain data, ensuring supplier accountability and reducing the risk of unethical practices.
4. Digital twins for manufacturing risks: Digital twin technology creates virtual replicas of manufacturing systems, allowing auditors to simulate risks and evaluate potential process improvements without disrupting operations.
5. Centralized audit workflows: Technology platforms centralize data, facilitate team collaboration, and streamline audit workflows, reducing inefficiencies and improving overall outcomes.

Technology as a strategic enabler

Imagine technology as the GPS for internal auditors. It doesn’t just provide directions—it recalculates when obstacles arise, ensuring the organization stays on course. For manufacturers, adopting the right technology solutions can mean the difference between reacting to risks and proactively mitigating them. As RSM emphasizes, “manufacturers that embrace advanced technologies will be better positioned to navigate risks and capitalize on opportunities.”

Platforms like AuditBoard help auditors:

• Automate repetitive tasks and compliance checks.
• Generate real-time insights to identify risks across operations and supply chains.
• Provide predictive analytics to shift from reactive to proactive risk management.

By embracing technology solutions like AuditBoard, internal auditors can enhance efficiency, reduce costs, and focus on strategic initiatives that drive value for the organization.

Driving strategic value in manufacturing

Just as Henry Ford’s assembly line transformed manufacturing, today’s internal auditors have the opportunity to revolutionize how organizations manage risk, compliance, and operational excellence. By focusing on regulatory compliance, supply chain risks, workforce optimization, and technology adoption, internal auditors can position themselves as trusted strategic partners in driving resilience and long-term success. From ensuring compliance with ever-changing regulatory frameworks to addressing workforce challenges, mitigating supply chain risks, and embracing sustainability, internal audit teams play a pivotal role in driving operational excellence and organizational resilience.

The future of manufacturing depends on agility, innovation, and collaboration. Internal auditors must not only keep pace with these changes but also anticipate and adapt to new challenges—whether that’s leveraging predictive analytics to foresee risks, ensuring ethical sourcing in the supply chain, or implementing advanced ESG audits to meet stakeholder expectations. The ability to combine technology-driven insights with strategic foresight will define the success of internal audit functions in the years to come.

Internal audit teams must embrace innovation, recalibrate risk strategies, and foster collaboration to drive operational excellence and resilience in a rapidly evolving manufacturing landscape. By doing so, they can position themselves as trusted partners, capable of delivering both compliance and strategic value.