Procurement risk mitigation practices will include; tracking and analyzing procurement expenditure patterns, vendor testing & evaluation, and making contract administration simple.
As a result of geopolitical and economic changes, comprehensive risk management is required to guarantee dependable supplies. The continuing coronavirus pandemic is an excellent illustration of the need for proactive and systematic risk management in interconnected supply chains.
Procurement is one of the most important functions of a company to obtain goods and services at a cost-effective price. It is widely accepted in business that procurement must be dependable and secure. The mitigation of risks is critical to maintaining this high level of security.
Procurement risk management is designed to anticipate dangers and protect businesses from disruptions during the procurement process. There are several critical aspects to consider at each purchase: product quality, vendor dependability, buyer satisfaction, corporate reputation, and more. To avoid all sorts of procurement risks, you should keep an eye on all of these.
Purchasing risk management strategies can help your company save money and avoid unpleasant surprises. It will ensure that your business’s procurement procedure is efficient and effective.
Every procurement professional knows that risk is inherent in the procurement process. However, risk can be managed and mitigated through best practices and careful planning. This blog post will explore some of the best ways to manage and mitigate procurement risk. We’ll discuss strategies for assessing and mitigating risk, as well as techniques for keeping your project on track despite potential disruptions. By following these tips, you can minimize the impact of risk on your next procurement project.
Current Procurement Trends
Procurement has advanced from a basic cost-cutting procedure to an integrated approach used to increase an organization’s bottom line in today’s competitive business environment. Risk management in procurement has a more significant bearing on a company’s future success, and reputation as enterprises adapt to an epidemic.
The rapid transition of the procurement function from the back office to the boardroom has demonstrated that procurement goals extend far beyond cost reduction. Procurement is an essential element of strategically integrating a company’s values while also managing the supply chain. “Now more than ever, businesses are turning to procurement to manage supply chain risk and continuity.”
As procurement becomes increasingly complex, companies are looking for guidance on how to improve their organization’s performance through procurement. From strategic sourcing and MRO commodity management to supplier relationship management, there is an increasing demand for guidance that helps organizations bridge the gaps between functional requests and solution delivery.
Traditional procurement has been dominated by a culture of “buying stuff” and is not considered a strategic driver for business growth. However, thinking of the procurement function as a purchaser of goods and services has shifted to recognizing how new initiatives can add value to the organization. In an environment where smaller businesses are becoming more dynamic players globally, procurement is increasingly viewed as a strategic business enabler.
“More and more, businesses are turning to their procurement department for guidance on how to improve performance through the purchasing process,” said Greg Doyle, president &CEO of APQC for Supply Chain Matters. “While traditional procurement was focused on buying stuff, new initiatives have been added that add value to the organization. These initiatives include strategic sourcing, MRO commodity management and supplier relationship management.”
Types of Procurement Risks
Below are some of the key procurement risks that you need to be aware of if you want to improve your decisions and avoid the problems.
Inability to obtain necessary resources.
Knowing your demands when they arise and how you’ll meet them is crucial to the success of any supply chain. For example, if your requirements are overly or understatedly estimated if you’re on an excessively tight timetable, or working with an inadequate budget as the procurement process begins, there are several spots where difficulties may develop. When setting a budget for purchasing material goods, you must consider all of the above factors. These can have negative consequences and waste time and money. Furthermore, linking real spending to accurate budgets will be difficult.
Spending money without a specific plan for its use can be wasteful. To combat this, you must set out to define your purchasing strategies. This is the first step when developing Your procurement process or evaluating what procurement forms are suitable for your company. Ensure that every product has an explicit purpose and a way to measure its success.
The problem with using a purchasing strategy that isn’t compatible with your business is often a waste of money and an overall failure of the project being done by the company. For example, if you have a company that needs expensive supplies to create the product they provide but don’t have enough budget for essential purchases.
Unpredictable changes in the market or customer needs
This can lead to unforeseen losses for a business. Understanding the potential risks and keeping an eye on your business health as a whole can help to mitigate those risks as much as possible. You can’t predict the future, but you’ll know what’s going on and how to deal with issues that might arise.
Suppose a company does not have a straightforward, readily accessible procedure for evaluating vendors and a clearly defined method for making purchases, requests, authorizations, and payments that have been thoroughly audited. In that case, it will quickly reveal poor supply chain management. In this example, maverick spending may go and drain a firm’s finances. Inefficient supply chain management can also cause the significant time to be lost looking for bills or conditions and conditions.
Failure of a key supplier, vendor, or partner.
Lack of a backup plan of suppliers on instances of supply disruptions will be detrimental to the organization. Contracts are frequently seen as simply an agreement to buy in the contemporary business world. However, if contracts are taken seriously and ultimately, they offer the potential for mutually beneficial partnerships between your firm and vendors, reducing risks while saving money. Because vendors are constantly moving, a business’s requirements can go unmet, and projects might be delayed. A lack of risk assessment and mitigation
Risk is the potential for adverse consequences resulting from an organization’s business process or system. In contrast, uncertainty represents those aspects of risk that cannot be quantified and reduced to a minimum through planning and management actions.
Slow response time to requests for information and quotes from suppliers/vendors due to internal staff shortages, lack of technology capacity
Failure to comply with standard operating procedures due to lack of training, insufficient supervision, and inadequate personnel resources.Inadequate/Delayed Monthly Activity Reporting due to limited IT support and limited ability to monitor and report daily activities.
Excessive collateral is required from dealers results in no participation by smaller or undercapitalized firms in the dealer channel. These delays will broadly impact the business’s operations and may fail to maintain the required collateral levels.
Failure to establish and enforce established credit and risk management policies and procedures, such as excessive length of credit terms offered to customers (i.e., offering 120 days when the legal limit is 30 days), delayed billing cycles (i.e., invoices not mailed out until the end of the month or at 30 days), and poor credit monitoring (i.e., not checking bank accounts on a timely basis).
Mitigation Procurement Risks
Tracking and analyzing procurement expenditure patterns
Purchase software with modern automation technology that allows you to automate your purchasing processes and avoid misinterpreting your company’s needs or employing budgets that don’t match actual spending habits. A good procurement management software package allows you to follow and analyze purchase data and examine usage patterns for each transaction. This can help you understand how to improve and optimize your procurement strategy. The modernization of procurement has already begun in many industries, while others are just starting to adopt new technology that will allow them to monitor their purchase orders and analyze data closely. Here are some examples of how companies use the modern features in the latest software packages.
– Tracking vendors
Companies often change service providers or switch from local suppliers to international ones. The procurement manager needs to be able to easily and quickly identify and switch to new providers without interrupting existing workflows or increasing the risk for errors.
– Exporting data
The procurement department is often interested in analyzing purchase order costs, such as how prices change over time or seeing which supplier provides the best service (price vs. quality). The updated software can provide all this information in an instant.
– Automating processes
Modernization of purchase orders includes electronic catalogs, which are cheaper and easier to maintain than paper files. Many systems offer pre-defined templates for specific products, so you don’t have to create your catalog from scratch or rely on a manual data entry process.
– Tracking repair and maintenance costs
Repair and maintenance costs can be substantial, so you need a software solution that will allow you to manage this expense better. The new systems have reporting functions, so you can analyze where all of your company’s equipment is located and which items are in the best condition.
Vendor testing & evaluation
Automated procurement software allowed for the easy creation of a vendor portal and simplified, fully automated vendor evaluation and management, which aids in the reduction of supply chain risk.
Purchasing software also can prevent or eliminate maverick spending by defining and assigning roles for each stage of the procurement process: requests, approvals, and purchases. You may also anticipate more efficient strategic sourcing to get better terms from suppliers due to such implementation.
Using a strategic sourcing platform can cut costs with optimized services and access to tenders and catalogs in real-time. Also, an online marketplace can source from thousands of suppliers quickly, thus saving you money on unnecessary delays in research.
As you begin to implement a purchasing system, the first thing that stands out is enhancing an internal buying group. If employees can buy what they need more quickly and efficiently, it gives them more time to focus on company priorities rather than administrative concerns.
Making contract administration simple
Contract management software can help you save time and money. If you want to keep track of your contracts, investing in a contract management system that allows for central document storage is essential. It’s easy to access the contracts for each of your approved suppliers and complete transactional data with a centralized document library in a procurement software solution.
Many organizations are beginning to realize just how critical procurement is becoming, and risk mitigation is essential throughout the process. There’s no doubt that technological progress and process automation can significantly impact lowering risk. Given the unpredictability of today’s economy, a good procurement software program may benefit many organizations by reducing expenditures and improving efficiency and transparency.
The most important thing is to ensure that you are getting the most out of your contract administration software. Here are some tips on how to go about it:
- Have a centralized system for contracts and documents – ensure all of your arrangements are easily accessible through one central location, whether it’s online or on-premise. This will ensure that all employees and third parties have instant access to the most up-to-date contact information.
- Remote access – make sure your contract management system allows for remote access, so you don’t need to be in front of a computer to retrieve the most current documentation on any given supplier or product contract.
- Ongoing compliance checks – regular ongoing compliance checks are often required for all suppliers to ensure that they continue to meet the terms of their contracts. This ensures that you get the most impact out of your contract administration software by ensuring that supplier performance is monitored at all times.
- Maintain clear audit trails – show the history of every transaction, which information. You can also make a master index of all your suppliers and services to avoid searching for the same information repeatedly.
- Use templates wherever possible – take advantage of pre-approved contract clauses, boilerplate language, and recommended addendums from the government or other organizations that you’re working with. This will save time and reduce risk when negotiating contracts.
- Make use of alerts – some contract management software can be configured to send you alerts based on specific criteria, such as a contractor’s breach of a particular clause or automatic notices when specific dates are coming up.
Procurement risk mitigations practices are important to guarantee dependable supplies. The continuing coronavirus pandemic illustrates the need for proactive and systematic risk management in interconnected supply chains. Our team of procurement experts can help you identify which risks may be a threat to your organization, as well as provide any necessary mitigation strategies that will keep you safe from harm. We’re ready and waiting – contact us today!
Chris Ekai is a Risk Management expert with over 10 years of experience in the field. He has a Master’s(MSc) degree in Risk Management from University of Portsmouth and is a CPA and Finance professional. He currently works as a Content Manager at Risk Publishing, writing about Enterprise Risk Management, Business Continuity Management and Project Management.