Methods for Managing Procurement Risks

In an increasingly global marketplace, supply chains are being tested to their maximum capacity. Any form of procurement faces risks and whilst a little risk in our own lives is seen as character inspiring, it’s not so good for our supply chains.

Procurement professionals understand that managing risk is part of the role. In this guide, we are going to take a closer look at managing procurement risks, what some of the more common procurement risks look like and how to manage these risks.

eXceeding is a procurement consultancy that was founded on the principle of providing impartial, best practice, procurement advice to organisations of all shapes and sizes. Working with both the public and private sector, eXceeding has years of experience in delivering procurement solutions to the marketplace.

What are Procurement Risks?

Procurement risk is the potential for a procurement process to fail in the purchase of goods, works or services. Risks can include fraud, cost, quality and delivery.

We are going to take a look at the common types of procurement risks and identify how they can impact businesses.

Common Procurement Risks

There are many types of procurement risks and being able to identify these will help organisations get a better understanding of what they need to look out for and implement procurement risk mitigation strategies to avoid getting caught up in these issues.

There are many different forms of procurement risks but we are going to look at seven of the more common types.

1. Inadequate needs analysis
   This is when a department or an organisation needs a particular product or service. The risks here are; not accurately understanding how much of that product or service you require, timescales to deliver, budget restraints and poorly designed needs.The issue lies that if there is an error at this stage, the knock-on effects can be multiple. From spending too much, having too much or too little stock, or being unable to pay for the goods because you haven’t met demand.
2. Poor supplier selection
   Dependable suppliers are required in a good procurement process. They ensure that you have high quality products, meet requirements on time, uphold ethical standards and be compliant to change of needs at any given moment.The opposite can be said of poor suppliers. Having poor suppliers means that you can’t fulfil your obligations – resulting in a myriad of issues including not being able to sell your services or goods.
3. Poor supply chain management
   How do you communicate with your suppliers? What’s your relationship like over the full contract period? How are you ordering/managing your orders?If you have antiquated systems or poor relationships with your suppliers this can lead to delays, issues not being resolved, and so on. Automation can help with a lot of these issues.
4. Poor contract management
   Contract management is about fulfilling the obligations set out at the very beginning of the relationship. An inability to do this can lead to mass delays, payment problems as well as fines and penalties for these issues.
5. Error prone processes
   Manual inputting of data can lead to many issues, potentially affecting the supply chain further down the road. Paper copies can be lost, handwriting can be mis-interpreted/mis-read. Automating this process mitigates these kinds of errors/risks.
6. Procurement delays
   The more mistakes made in the procurement process the more delays caused, and the more time spent by your team fixing these issues. From searching for documentation to manually inputting orders, these can all add to time spent away from moving the procurement process along.
7. Procurement talent shortfalls
   Like any other successful department, procurement needs to attract and recruit the right people and the best talents. Talent shortages can result in understaffing which slows down the procurement process, high salary demands over and beyond a competitive market rate and unqualified staff making mistakes.

Procurement Risk Management

Being able to mitigate the above identified risks is essential and this is where procurement risk management is the focus. Risk management in procurement is important as it balances having what you need at the right time, in the right place, with risk and reward, in order to generate both savings and added value.

From widgets to aeroplanes, every transaction has a series of variables exposed to risk including vendor reliability, product quality, legal and financial compliance, customer satisfaction and company reputation.

• Risk identification
  From the possibility of bankruptcy to someone in the team moving role, identify the necessary risk it poses to your organisation.

• Risk analysis/assessment
  Analyse each identified risk under two criteria: impact and likelihood.

• Risk impact assessment
  Use a matrix to assess just how risky it is. Multiply impact by likelihood to identify all the risks as a chart and outline what you can do to mitigate risk to your organisation.

• Risk mitigation
  Create strategies based on this risk and have a ranking of the most urgent ones to address.

• Risk monitoring
  Constantly monitor the risks and change their values if their risk has changed to your needs/requirements. Risk assessments should always be kept up-to-date for your organisation and your internal stakeholders.

How to Manage Procurement Risks

There are different methods to manage procurement risks. Here are some examples:

• Inadequate needs analysis requires that you make sure that all needs are fully and accurately assessed before placing any orders. Improving communications and standardising the procurement process is a way to make this less risky.

• By automating many of the processes involved in procurement, you can avoid error prone issues like manually entering data or raising purchase orders. This small optimisation tactic can save hundreds of hours of time and minimise risk considerably.

• Selecting more supply chain options by diversifying your suppliers will lower the risk when it comes to poor supply chain management, and equally, for avoiding mass delays to complete works or even start them.

• If you want to avoid procurement talent shortfalls, anticipate skills requirements and provide training as well as recruitment. This is not only a short-term solution but a long-term investment in the organisation leaving you better equipped to understand issues in the supply chain and mitigate risk for years to come.

In Summary

Procurement risk is the potential for a procurement process to fail in the purchase of goods, works or services. Risks can include fraud, cost, quality and delivery.

Being able to understand the common risk factors that a business can face in procurement means that better mitigation strategies can be implemented to avoid issues across the supply chain.

At eXceeding we can help organisations get to grips with their procurement processes and create a strategy that suits them to deliver not only cost savings but also a streamlined process, saving time and reducing human error in this field. With over a decade of experience and helping global brands such as Aspall, WorldRemit and UNICEF improve their procurement strategies, why not drop us a line to see how we can help you achieve your goals.

Check out our procurement ebook for more information about procurement and how we can help deliver value to your business.