What Are Procurement Risks?
Procurement risks occur when the process of purchasing or sourcing products, services or resources becomes unreliable. For many businesses, the COVID-19 pandemic has reminded them of the impact these risks can have on business performance.
In business, procurement risk needs to be appropriately managed in your supply chain since it can affect the health and revenue of your business. What would happen if you put in a purchase order for the raw materials you need to produce your widgets, but the goods never arrived?
Your business may also face risks associated with the procurement process from a vendor or partner, which may be out of their control.
In this article, we will review what exactly procurement risk is, how it happens, and how to set up a risk management process and procurement solutions for your company.
Need more transparency around procurement risk in your supply chain? Consider Exiger’s supply chain risk management software that can help surface all risks that might be hiding deep within your supply chain.
6 Common Procurement Risks
There are 6 common procurement risks.
Any of these potential risks can and will negatively impact your business if they are not dealt with and planned for with a robust risk assessment and management plan.
1. Inaccurate Needs Analysis
The procurement process begins with a needs analysis. You need to figure out what you need, when you need it, and at what cost, in order to run your company.
Forecasting is one of the tools and techniques used to help businesses develop a better procurement strategy, and it can assist in avoiding problems due to supply chain issues.
For example, if you buy too much or too little of a product, this can start a cascade of unfortunate events that will impact your business negatively. Buying too much leads to a surplus in inventory, which may require additional storage costs and lead to potential inventory damage or obsolescence. Buying too little may cause you to run out of inventory, which impacts your ability to deliver for your end customer. Losing customers will affect your business’s overall profitability.
You need to spot potential risks in the forecasting aspect of your procurement planning process early on in order to mitigate any damages that may cause to your business.
2. Inadequate Vendor Management & Sourcing
Picking an inadequate vendor and making sourcing mistakes can also prove to be costly. Just because you have a contract in place does not guarantee that things will go smoothly.
Your business depends on good quality products or services and consistent pricing and availability from your vendor. So an important part of your risk analysis is to evaluate your supplier and the entire relevant supply chain workflow.
Here are some tips on how to pick the right vendor/supplier:
- Understand the business importance of the good or service being purchased in terms of its criticality, and apply extra due diligence, since a failure here may have a big impact on profitability.
- Conduct due diligence to ensure the vendor is financially stable and continue to monitor this.
- Ensure vendors have appropriate ESG standards in place.
- Evaluate each vendor from a Foreign Ownership, Control or Influence (FOCI) perspective and for any negative media.
- Obtain references and visit the relevant facility to be used for the provision of your goods/service where possible.
- Confirm with the vendor that they will be able to deliver on what was agreed upon, in line with the specs you provided them.
- Weigh the risks associated with the relevant supplier facility or relevant supply chain.
- Work with the vendor to define and agree on appropriate KPIs, the contract, and its ongoing management.
3. No Supply Chain Risk Management
To state the obvious, supply chain risk management is critical for businesses because suppliers rely on their supply chains to deliver for you. The annual Business Continuity Institute Supply Chain Resilience Report has shown that around 40% of disruptions occur below your direct supplier. And yet, according to a recent State of Retail Supply Chain Report, 61% of businesses are using Excel as their supply chain planning solution, and 85.9% of companies don’t use any analytic system to reduce risk.
If you’re constantly dealing with disruptions in your supply chain, you can’t focus on optimizing it or taking a proactive posture to minimize risk.
You may have limited resources on your procurement team and require that technology help fill those gaps. Exiger provides a one-click software that analyzes your entire supply chain infrastructure from a risk perspective.
4. Underdeveloped Contract Management Processes
Having underdeveloped contract management processes is a common procurement risk.
Without defined contract management processes and subject matter expertise, you may create a contract that inadvertently breaks a law, enters a legal gray area, or has inadequate or unclear KPIs and review processes.
Without having the proper contracts with vendors that address potential risks, including those associated with incorrect, incomplete and outdated data, your business’s risk exposure is increased. One way to spot and address more of these risks is through Exiger’s single-click supply chain risk detection SaaS platform.
5. Lack of Automation
Anything that requires human intervention can be a potential bottleneck and source of errors. Automation can prevent these bottlenecks and lead to fewer delays and errors. Consider where templates can be added to help automate troublesome parts of the process.
Additionally, you’ll want to standardize your procurement strategies to streamline your business. When it comes to automation, there is an increasing range of SaaS tools to support the whole sourcing and supplier management process.
Setting up good processes and workflows can prevent supply chain disruptions—and that’s something that shouldn’t be ignored.
6. Poor Procurement Planning
There are many consequences to poor procurement planning. As the saying goes, “If you fail to plan, you are planning to fail.” If your business runs out of stock or materials, it impacts your ability to compete in the marketplace and can cause costly mistakes, like lost profitability and reputational damage. That’s why, as your business scales, having procurement risk solutions in place is essential to optimize business performance.
What You Can Do to Mitigate Procurement Risks
Risk is a part of being in business. However, managing procurement and supply chain risk is critical to optimizing overall business performance.
The following is a list of strategies where Exiger can help you mitigate procurement and supply chain risk in dealing with your suppliers, and help you focus on the core of your business —what you do best.
Strengthen Supplier Relationships
Without good supplier relationships, you risk supply chain disruptions and supply chain issues.
Fostering these relationships is key to any business. Using supplier management tools and procurement technology to improve communication and supplier performance is a win-win for all parties involved.
Through procurement technology, businesses are able to streamline communication and feedback loops with their vendors, making it easier to purchase and avoiding unnecessary delays in the vendor supply chain. Using automation to improve communication gives you more time to focus on added value activities.
Streamline and Automate Procurement and Supply Chain Risk Processes
Procurement risk management that relies on manual processes or inadequate software is time-consuming and costly. Appropriate automation can save time and alleviate common errors. It should also be complemented by comprehensive risk datasets and support resources.
Mitigate Procurement Risk and Supply Chain Risk with Exiger
Managing risk will always be part of the business. With Exiger’s Supply Chain Explorer, you can circumvent issues, streamline your processes and improve communication with your vendors and suppliers.