Procurement Risk – Everything a Procurement Professional Should Know

The Importanceof Risk Management

The procurement nowadays is absolutely different from the procurement we had a few years ago. The development of procurement is gradually increasing and it has become popular due to the pandemic. 

The transformation of procurement requires strong risk management capabilities to ensure the success of every company in mitigating its risks. 

Every movement in procurement involves decision-making. This activity affects every organization, especially if your decision did not consider different factors. 

Conducting an efficient proper risk analysis can mitigate the effects of risks and minimizes the disruption in your supply chain. 

You can acquire the following benefits if you properly manage the risks across your procurement process:

• Responsible use of materials
• Better customer service
• Enhances supplier and client relationships
• Improves production
• Adapts innovation

The Most Common Riskin Procurement

1. Poor analysis of the organization’s needs

If you do not know the needed materials, when these materials are needed, and the time of delivery can put your supply chain in danger. If you had assessed poorly the needs of your organization, you might end up buying too much or an insufficient amount of goods.

Both the procurement strategy and financial plan will be severely affected if you do not check your spending analysis. 

You need to check if the needs of the organization are stated accurately when sourcing materials or services. Also, this includes a realistic budget and delivery schedule when negotiating with your preferred suppliers.

2. Inefficient contract management

Many organizations have stories to tell when talking about inefficient contract management. Some contracts failed due to misunderstandings and contracts that have never got the chance to be executed. It is disappointing but it can be prevented.

Obviously, the contract should easily communicate its needs. However, it does not apply in reality because of poor contract management. 

A contract is not just a document that has been born from your agreements. It is meant to develop your relationship with your supplier to lessen risks and reduce costs. 

3. Poor supplier selection process

Selecting a supplier is one of the critical processes that dictate the success or failure of procurement in any organization.

Without reliable suppliers and strong supplier management systems, the procurement department spends more time fixing the problems instead of doing their responsibilities in the organization. 

The risk of poor supplier selection includes low-quality of products, unreliability, delayed deliveries, compromised ethical standards, and non-compliance with your requirements. 

4. Ineffective supplier relationship

Every one of us knows how important it is to have a robust supplier relationship. After all, they are the ones who provide for the needs of the organization. 

No matter how hard-working you are, there will be gaps that will occur now and then. Miscommunication is a popular issue when it comes to supplier relationships.

When you fail to negotiate and build a relationship with your preferred supplier, then expect unfavorable contract terms and lack of transparency.

5. Dependency on the manual process

The dependence of an organization on the manual process is inefficient. It is prone to errors and even fraud. Many businesses still rely on the manual process without noticing that they are wasting a lot of time and money on it. 

Manual processes make it difficult to acquire transparency. It opens a lot of errors and the lack of real-time reports make it easy to miss any indication of approaching risks. 

Tips to MitigateProcurement Risks

1. Automate your procurement process

Times have changed so much that the modern procurement process requires the usage of modern tools. 

A large business may use SAP procurement to streamline its process but it comes at a high price. Moreover, the effectiveness of the software greatly defeats its high price. 

A procurement automation solution can solve the blockage in the procurement process for everyday businesses. 

When you automate your process, the procedures become faster and errors due to manual processes are eliminated. This will allow your team to focus on their actual roles rather than wasting time fixing incorrect paperwork. 

2. Employ a standard process in your procurement

Your team should know your plan for the indirect procurement process. This will allow them to know the protocols to follow in ensuring that all data is updated, accurate, and complete.

If everyone in your procurement team follows a standard process, then it will become easy to identify delays in the system. 

3. Develop supplier relationship

You need to build a real and collaborative relationship with your supplier to iron out any discrepancies in your negotiation. Also, this will allow you to rely on them in critical times as they will do anything it takes to support and meet your demand.