Five Most Common Procurement Risks and How to Manage Them
Last updated Jun 30, 2022 - 8 min read
- Table of Content
Every procurement professional wants to mitigate as many procurement risks as possible, but before taking the risks head-on, you need to understand what you are up against. We have identified and put together a list of the top 5 procurement risks that all procurement professionals should be aware of.
All procurement activities are prone to risks, and any procurement professional knows the value of the art of juggling these risks. Because, at the end of the day, it's all about safeguarding your organization from any problem that can arise during the procurement process. This article will discuss the significance of controlling procurement risks and how those risks can be prevented, identified, and controlled.
What are Procurement Risks
Procurement risks are best understood as opportunities for something to go wrong or not happen as planned. Risks are essentially events that are uncertain in terms of their occurrence or impact on an organization's ability to achieve its goals and objectives. They also include events that have already happened but haven't had enough time to play out yet (known as "delayed consequences").
In other words, risks are anything that can happen in an organization that will negatively affect its ability to achieve its goals or objectives—and there are many ways these risks can manifest themselves: late deliveries; quality issues; difficulty recruiting qualified staff; negative publicity; litigation costs; etc.
What Does Risk Management in Procurement Mean
In procurement, every purchase is infused with numerous risks. There are issues related to quality, supplier reliability, customer expectations, cost, delivery, and more. Sometimes the risks are generic, but they can also be specific to a sector, geography, or industry. Risk management refers to closely monitoring and circumventing these risks.
When there are so many variables, the propensity for failure is also high. That's why having a clear and sought-after risk management strategy in place will not just help you save cost but also avert unwanted setbacks.
Why It's Important to Manage Risks in Procurement
Present-day procurement isn't the same as it was a few years back. Blissfully, procurement has changed its stance from being just a cost-cutting process to a strategically significant one that directly impacts the bottom line.
The evolution of procurement was gradual and still ongoing, the pace of which was accentuated by the global pandemic. From the back office to the board room, from a tactical function to a strategic dam breaker, this splendid transformation also demands robust risk management capabilities to ensure the future success and capabilities of the business.
Managing risks across the procurement process can help provide the following key benefits:
- Proper and responsible use of resources
- Enhanced service
- Improved supplier and client relationships
- Increased appetite for innovation
- Better customer service
- A data-driven culture that puts business-altering insights at your reach
Five Most Common Procurement Risks
1. Inadequate Needs Analysis
Having a clear understanding of your needs, when and why you need them, and how you will source them is critical to the success of any procurement organization. So, before starting the need analysis process, document the reasons like:
- who needs the goods or services
- how the goods or services you plan to buy will benefit the people you are buying them for
- when these goods or services are needed
- geographical locations that need the goods or services
Throughout the need analysis process, ask your stakeholders, customers, clients, and suppliers the relevant questions. Go through your existing contracts to detect anything similar you are doing to get the information you need. Check if your needs are stated accurately and within a realistic schedule and budget.
2. Inefficient Contract Management
When it comes to contract management, we've all heard the horror stories. The contracts that get lost in translation, the ones that never get executed and the ones that are never followed up on. It's frustrating, but it's also preventable.
Technically, contract management should be smooth; you tell the supplier what you want, and they do it. But, in reality, contracts don't always go as planned. Poor contract management bears this blame. Efficient contract management amalgamates many skills like management, relationship and communication skills to work in harmony with the suppliers and avoid contract killers.
Contracts aren't just agreements for purchasing; they are meant to foster mutually beneficial relationships, mitigate risks, and reduce costs. A deficit of dependable vendors and poorly constructed contractual procedures can wreak havoc. The only way to avoid such a scenario is to regularly audit the contract management process for inefficiencies and subsequent failures.
3. Poor Supplier Selection
Selecting the right suppliers is one of the most critical aspects for the success or failure of any procurement organization. Not just that, any imprecision in the supplier selection process paves the way for supply chain disruptions, poor supplier performance, and ultimately, business process inefficiencies.
That said, the impact of the supplier selection process, if flawed is profound. To overcome such issues, businesses can follow a transparent and easily accessible supplier evaluation method and couple it with a straightforward, carefully audited process for purchasing, approvals, and payments.
If you don't have a robust supplier selection process in place, you're at risk from a host of environmental, social and governance (ESG) issues.
Procurement processes are changing in the wake of this pressure, so it's important to make sure you're ahead of the curve when it comes to ESG considerations.
ESG considerations affect the economy and all industries, from manufacturing and mining to IT and government. And no business is too small to be affected by this upsurge in ESG consideration.
A good example of this is a supplier that cannot guarantee fair labour practices could get you into trouble with the authorities and disrupt your production processes.
In order to avoid such risks, you need to:
- Carefully examine and select your suppliers
- Understand how ESG affects your business processes
- Review your current supply chain practices
- Look for ways to embed ESG throughout your organisation
- Manage potential risks identified during this process.
If you're interested in learning more about sustainable procurement or how to evaluate your suppliers, you can check out the following resources: "Sustainability Made Easy" or "Supplier Evaluation and Assessment: The What, How, and Why"
4. Unorganized Supplier Relationship Management
Supplier management is a big responsibility for any procurement organization; after all, the most looked-through relationship in a business is the one with its vendors. If a company wants to deliver quality services, it must have a streamlined vendor evaluation and management in place.
While it's easy to keep a close watch on your internal processes, dealing with third parties isn't that simple. No matter how diligent you are, numerous gaps and shortfalls keep surfacing every now and then.
Did you know, businesses on average, face a regular delay of 48-72 hours while expecting shipments, but the panic button is pressed when the frequency and span of this gap increases.
The cause of errors can be anything, but understanding and rectifying them is necessary to remove frictions from processes.
Below are some of the common supplier relationship management flaws to look upon:
- Not going through supplier's past and current projects track records
- Communication problems or gaps that lead to the supplier not understanding your strategic objectives
- Not considering or overlooking the supplier industry's business culture
- Lack of transparency
- Failing to maintain relationship harmony at critical times
- Inefficient supplier training and relationship nurturing
- Unfavorable contract terms and resulting conflicts
When it comes to supplier relationship management, cloud-based tools can help you gain a good understanding of the reliability of your suppliers, any conflicts of interest, commitments to sustainable procurement, and most importantly, whether their work ethics match yours.
5. Supply Chain Disruptions
The supply chain is the beating heart of our global economy. It's what makes it possible for us to buy a pair of shoes and have them delivered to our door in ten days or less. And right now, it's being disrupted by all sorts of things.
The logistics and transportation sector has been hit hard in recent months by everything from paralyzed ports to difficulties in logistics.
The challenges are coming from all sides: labor shortages mean companies are struggling to find workers with the skills they need; transport networks are under strain due to increased freight volumes; and there's an increasing reliance on electronic components which makes manufacturing more complex than ever before.
It's easy to think of supply chain vulnerabilities as “unexpected” — but in reality, disruptions are inevitable. The real problem lies in our inability to plan for and respond to these disruptions.
In short, you need to be able to respond quickly and intelligently to such disruptions—and technology can play a big role in helping you do just that.
What you should look for is how to gain a better understanding of your supply chain, get granular visibility across not just your own suppliers but all the suppliers further upstream, and an ability to map all this information to determine the best way to fulfill your supply needs.
Super Charge Your Procurement With Reduced Risks
You've probably heard the old adage: "What you don't know can't hurt you." But, in the world of procurement, that's not always true. In fact, ignorance can lead to big problems—especially when it comes to managing your spend and mitigating risks.
Quite clearly, technology is a harbinger of good change and a risk-free environment in procurement. By leveraging a spend management tool like Ignite Procurement, your procurement teams can make data-driven due diligence a usual and effortless part of your procurement process. Our interactive dashboards and reporting help you stay well-informed of any risks. At the same time, our contract management and supplier relationship management services deliver the powerful insights you need to mitigate risks and elevate your procurement efforts to the next level.
By leveraging our solution, you can:
- Make data-driven due diligence part of your procurement process.
- Uncover every dollar you spent and where it went.
- Manage and ensure healthy relations with suppliers, and choose them carefully.
- Communicate pressing issues and ESG policies with your suppliers and make sustainability a part of your procurement practice.
- Stay well-informed of any risks through interactive dashboards and reporting.
- Analyse spend patterns and create reports.
- Deliver the powerful insights you need to mitigate risks and elevate your procurement efforts to the next level.
It's easier than ever to reduce procurement risks and uncertainties for your organization. Want to learn more about how our solutions can help your organization achieve this objectives! Try Ignite with your data for free – it's the fastest, most effective way to quickly discover insights about your data.