In the contemporary business landscape, procurement operations are growing in complexity due to globalization and interconnectivity. This complexity poses various risks to organizations. Effective risk management within procurement is pivotal to guarantee seamless supply chain operations, uphold cost-effectiveness, safeguard organizational reputation, and ensure adherence to legal and regulatory standards.
Through proactive identification, assessment, and mitigation of procurement risks, enterprises can protect their interests, improve operational efficacy, and foster sustainable development. This article explores various aspects of risk management in procurement, beginning with understanding of procurement risk and its various types. The article also discusses the common techniques leveraged by the procurement teams in risk management. Technology is enabling rapid deployment of active risk management measures today, and thus at the end, the article briefly delves into the different types of technology solutions available in the market today to implement the risk management agenda.
Understanding procurement risks
Common risks associated with the procurement process include:
- Supplier-related Risks- This includes:
- Financial instability of suppliers, e.g., You may remember how the collapse of construction giant Carillion in 2017 triggered a rise in the number of construction companies going bust as subcontractors in its supply chain missed out on payment
- Supplier capacity issues, e.g., Post covid era, has made this a regular feature across industries
- Geopolitical and regulatory risks in supplier locations, e.g., the growing tariff on China imported goods in the US because of the growing geopolitical tensions
- Market Risks- This includes:
- Fluctuations in commodity prices
- Market demand variations
- Currency exchange rate volatility
- Operational Risks- This includes:
- Disruptions in the supply chain
- Quality and performance issues with products or services
- Technology failures affecting procurement processes
- Contractual and Legal Risks- This includes:
- Inadequate contract terms and conditions
- Non-compliance with legal and regulatory requirements
- Intellectual property and data security issues
While above list covers the most encountered risks, there are more that can be added to build a complete list. But hopefully the above list already explains why risk mitigation is an important subject for procurement professionals.
Techniques for risk management
Given the importance of the subject, Procurement teams deploy significant energy on deploying mitigation mechanisms to effectively counter the typical risks. Leading teams apply a range of techniques including:
- Supplier Diversification– Engaging with a diverse pool of suppliers to minimize dependency on a single source. This helps mitigate risks associated with supplier-related challenges.
- Contingency Planning- Developing contingency plans for identified risks. This includes having alternative suppliers, emergency stock, or backup plans in place to respond swiftly if a risk materializes.
- Robust Supplier Evaluation during selection process– Conducting thorough assessments of potential suppliers, considering financial stability, past performance, and adherence to ethical and environmental standards.
- Understanding the supply chain map– Understanding and mapping the entire supply chain helps to identify vulnerabilities. This allows for the implementation of strategies to address and mitigate risks at different points in the supply chain.
- Well defined Contracts– Developing well-defined contracts with clear terms and conditions. Include clauses that address potential risks, penalties for non-compliance, and dispute resolution mechanisms.
- Risk Transfer through Insurance– Transferring certain risks to suppliers through insurance requirements. This can include liability insurance or coverage for disruptions in the supply chain.
- Extensive stakeholder engagement – Fostering effective communication and collaboration with internal stakeholders, suppliers, and other relevant parties. This ensures that everyone is aware of potential risks and can contribute to mitigation efforts.
- Continuous Monitoring and Performance Management– Regularly monitor supplier performance to identify early warning signs of potential issues. Establish key performance indicators (KPIs) and conduct regular assessments.
Technology available to procurement
As the understanding around the supply chain has gained significant traction over the last decade, there are a number of advanced procurement and supply chain management software available today to enhance visibility, analytics, and real-time monitoring of potential risks. The technologies in this space can be broadly bucketed into the following areas:
- Supplier risk assessment tools- These tools analyse factors like financial stability, operational capabilities, and compliance history. Typically, they leverage data from diverse sources such as credit ratings, supplier questionnaires, and third-party audits. Automation of the risk assessment process enables organizations to swiftly pinpoint high-risk suppliers, allowing them to prioritize and streamline their risk management efforts efficiently.
- Supply chain mapping tools- These tools empower organizations to visualize their network and detect potential vulnerabilities. They commonly include features such as geo-location tracking, supplier profiles, and real-time risk alerts. Through obtaining a comprehensive understanding of their supply chain, organizations can proactively tackle risks and institute strategies to fortify the resilience of their supply chain.
- Contract management tools– These tools assist organizations in optimizing the entire contract lifecycle, encompassing creation, negotiation, execution, and monitoring. These tools further streamline the tracking of essential contract milestones and provide automated alerts to organizations, notifying them of potential risks, such as non-compliance or impending contract expiration.
- Procurement analytics and reporting tools– These tools help in tracking and analysing procurement data to uncover patterns, trends, and potential risks. These tools offer insights into supplier performance, spending patterns, and market conditions, empowering organizations to make informed decisions and address emerging risks. Leveraging advanced analytics capabilities, these tools also enable organizations to forecast potential risks and model the impact of various risk mitigation strategies.
- Compliance and regulation tracking tools– These tools help organizations stay abreast with about relevant legal and regulatory changes in the regions they operate.
Are you considering bolstering your procurement risk management practice?
At Enabling Procurement, we have helped several clients strengthen their supply chain. As the challenges faced by each organisation are unique, our approach includes starting with an assess phase where we review current policies, processes, and tools, to identify areas for improvement. We then work with you to understand the risk thresholds and accordingly prioritise the risk mitigation measures as may be best applicable to your organisation. Get in touch if you would like to know more.
