Five Most Common Procurement Risks and How to Manage Them

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.

five-most-common-procurement-risks

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 is 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 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 is 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 is Important to Manage Risks in Procurement

Present-day procurement is not 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

 

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

Technically, contract management should be smooth; you tell the supplier what you want, and they do it. But, in reality, contracts do not always go as planned, and 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 are not 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.

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 is easy to keep a close watch on your internal processes, dealing with third parties is not 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. Corruption and Fraud

Not all the risks can be attributed to process and data inefficiencies; some, unfortunately, are intentional. The incidences of fraud and corruption in procurement are way too common. Here again, technology can be your savior. With centralized information set up and transparency, spend management tools help you identify the red flags and manage fraud risks in ways that more traditional approaches can not.

Super Charge Your Procurement With Reduced 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.

For more information on our services and how we can help you keep browsing Ignite Procurement, or head to our contact page to get in touch with our procurement experts.

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