Written by Marijn Overvest | Reviewed by Sjoed Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Risk Management in Procurement — Process + Examples
As taught in the Risk Management in Procurement Course / ★★★★★ 4.9 rating
What is risk management in procurement?
- Risk management in procurement is about spotting risks early and planning ways to deal with them effectively.
- Strong risk management builds trust with suppliers and allows you to check supplier reliability.
- Businesses can handle sudden disruptions and turn them to their advantage by staying proactive.
What is RiskManagement in Procurement?
Risk management in procurement involves identifying, assessing, and mitigating potential risks that could impact the procurement process.
These risks can come from various sources such as suppliers, market fluctuations, regulatory changes, and even internal factors in your company.
The ultimate goal is to create a proactive strategy to minimize the negative consequences of these risks.
Why is Risk Managementin Procurement Important?
Risk management in procurement ensures that potential risks involved with the purchase of products are identified, evaluated, and mitigated so that negative consequences are minimized. In that way, your objectives are achieved effectively.
If procurement risk management (PRM) is maintained, achieving the goals of the entire procurement process comes naturally. In addition, it guarantees you proactive decision-making that avoids undesirable outcomes.
Here are four reasons why risk management in procurement is important:
1. Guards Financial Health
Procurement-related risks, if left unchecked, become financial burdens. Unforeseen challenges that may stem from supplier issues and market fluctuations can strain budgets and hinder your business’s growth. Thus, maintaining good risk management ensures better financial preparedness by anticipating potential costs and implementing strategies to mitigate them.
2. Ensures Business Continuity
Unanticipated risks in the procurement process can disrupt the entire supply chain. Whether it’s a sudden supplier failure or regulatory changes, such interferences can cause production delays and even halt operations. Fortunately, risk management in procurement aids in devising contingency plans that can ensure the continuity of your business operations and overall progression.
3. Maintains Supplier Relationships
A successful procurement process is built on healthy relationships with suppliers. Effective risk management fosters trust in both parties by demonstrating a commitment to mutual success. In turn, this can lead to preferential treatment, reliable partnerships, and better negotiation outcomes.
4. Preserves Brand Reputation
In today’s age of instant communication and social media, any procurement-related mishap can quickly tarnish your reputation. We don’t want that, and surely, you avoid that at all costs. So, by mitigating risks like quality issues and supply chain breakdowns, you can avoid scenarios that lead to negative customer perception and maintain your brand’s image.
Common Procurement Risksand How to Avoid Them
We have identified 10 common procurement risks to look out for but be reminded that there will always be more. Make sure to be prepared and have call-to-action solutions on the fly.
1. Supplier Reliability
Your suppliers are essential to your business’s success. You should be able to rely on them in terms of quality products, consistent deliveries, good communication, and collaboration. However, when they become unreliable, it strains your business operations and impacts your customers’ satisfaction. To put it more simply: it can be a huge headache.
The solution: Diversify your supplier base and establish clear performance metrics in contracts. To add to that, make sure to assess their performance and compare them from time to time.
2. Corruption
Believe it or not, corruption is rampant in all businesses, especially in procurement where a huge amount of budget is allocated for purchasing. It can start as small as producing inaccurate invoices and can end in huge cases of embezzlement. Thus, when this occurs, you are more prone to huge financial burdens.
The solution: Steer clear from manual procurement processes and adopt automated ones for more accountability and transparency in purchasing.
3. Market Volatility
The economy is very unstable and there will always be rapid price changes and other market fluctuations. This leads to a risk of financial instability as well.
The solution: Stay updated on market trends and maintain more flexible procurement plans. You may also want to consider long-term contracts to lock in prices and avoid inflation rates.
4. Quality Control
This may stem from less productive suppliers where you receive products that don’t meet your quality standards.
The solution: Implement regular supplier audits and clarify requirements in contracts.
5. Data Security
Procurement processes are very sensitive which means they are vulnerable to data breaches. Without proper security measures, you may end up compromising sensitive procurement information and risk your credibility as a company.
The solution: Implement robust cybersecurity measures and secure communication channels. You may also restrict access to only a few of your procurement professionals, preferably high-ranking ones, confidential data.
6. Capacity Constraints
Peak seasons welcome challenges, especially to delivery schedules and the number of expected products. A poor relationship with your suppliers may inhibit this risk.
The solution: You must make sure to work closely with your suppliers to anticipate demand so that you can plan ahead of time and explore alternate sources if needed.
7. Supply Chain Disruptions
There are several factors to supply chain disruptions–may it be natural disasters, political unrest, and other unforeseen events. The recent COVID-19 pandemic is an example of how huge these unanticipated circumstances can affect businesses.
The solution: Develop comprehensive contingency plans to respond to such events and diversify suppliers across regions or even countries.
8. Technology Integration
Adapting to technological advancement is a must in the business world, however, it might be difficult to integrate new procurement technologies smoothly.
The solution: Invest in user-friendly procurement tools and have a dedicated support system. In addition, you must also train your employees in adapting to technological change so that they can better augment their skills.
9. Evolving Work Environment
During the pandemic, most if not all businesses adopted remote work. It’s new for everybody and it welcomed more challenges like missed deadlines and ignored demands. In contrast, in an on-site setting, you would have no trouble in following up on requirements.
The solution: Make use of a centralized platform of communication (like Slack), establish clear procedures for sharing progress, and emphasize deadline schedules.
10. Old and Traditional Procurement Process
If you are still relying on manual procurement processes, you are prone to data entry errors and lack of transparency. You may also be stuck in endless work that may lead to delays.
The solution: Make use of advanced technology and adopt automated procurement platforms. They can save you time and labor costs, while also keeping your data insights accurate.
Risk Management in Procurement Process
Let’s explore the five steps to manage risks in your procurement processes:
1. Identification
Begin the process by identifying potential risks. Take a look at your supplier relationships, market trends, economic factors, and regulatory changes that might affect your procurement process.
2. Assessment
Based on its potential impact and likelihood of occurrence, evaluation of the identified probable risks can help you prioritize which needs immediate call-to-action solutions.
3. Mitigation Planning
This step is where you develop strategies to minimize the impact of identified risks. This involves diversifying your suppliers, negotiating favorable contracts, and implementing contingency plans.
4. Monitoring
Keep a close watch on the risks you have identified. Frequently assess their status and adapt your mitigation strategies when necessary.
5. Response Planning
Think ahead and prepare for the worst-case scenarios. Make sure to have predefined action plans in place for each identified risk that outlines the steps you need to take if ever it materializes.
Pro Tip: Don’t just create response plans—test them. Run mock risk scenarios quarterly to ensure your team knows exactly what to do when a real disruption strikes.
⭢ Learn how to build, test, and evolve your procurement risk strategy in our Risk Management in Procurement Course.
Risk Management in Procurement — Examples
1. Consumer Goods Industry – CPG Company and Climate Change Risk
Problem: A CPG company producing food items containing fresh vegetables sources primarily from Southern Europe, becoming vulnerable to climate change effects such as rising temperatures and reduced rainfall. These climatic shifts threaten supplier reliability, vegetable availability, and could significantly impact costs and production schedules.
Procurement Risk Management Solution: The procurement team proactively conducted scenario planning, outlining multiple potential futures—from sustainable agricultural innovations that stabilize supply to severe disruptions caused by worsening climate conditions. They identified solutions including sourcing from alternative countries, cooperating with farmers to develop climate-resilient agricultural practices, collaborating with other industry buyers, and reformulating products by replacing fresh vegetables with dried alternatives to ensure continuous supply.
2. Banking Industry – Human Oversight in Sustainability Certification
Problem: A bank was close to achieving ISO certification due to excellent sustainability practices, including recycling initiatives and waste management systems. However, human oversight nearly caused a compliance breach, as the responsible employee overlooked new legislation requiring the reporting of building waste, unaware that recent office expansions generated significant amounts.
Procurement Risk Management Solution: The bank had established processes and tools to monitor legal changes, which eventually alerted them to this oversight. By quickly identifying and rectifying the mistake—reporting building waste just in time—they avoided penalties and ensured successful ISO certification, highlighting the critical importance of human awareness alongside robust monitoring processes.
3. Banking Industry – Supplier Liquidity and Cash Flow
Problem: Companies are exposed to financial risks due to supplier-related cash flow issues. If suppliers face liquidity problems, it negatively impacts the company’s own financial stability by affecting critical metrics like Days Payable Outstanding (DPO).
Procurement Risk Management Solution: Procurement teams mitigate this risk by negotiating favorable payment terms to optimize DPO, while also managing Days Inventory on Hold (DIOH) through practices such as vendor-managed inventory and just-in-time deliveries. Additionally, procurement regularly assesses suppliers’ financial stability to proactively avoid potential disruptions.
Conclusion
In a nutshell, successful procurement requires a vigilant eye on potential risks. Risk management in procurement safeguards its processes from any disruptions. By efficiently following the steps of risk identification, assessment, mitigation planning, monitoring, and response planning, you can ensure a smooth and seamless procurement journey.
The importance of risk management also relies more on strong supplier relationships because they can help you save money, guarantee your business continuity, and keep your reputation good.
Remember: precaution is better than cure. So, you should be vigilant about common procurement risks and employ strategies to avoid them. That way, you can ensure that your procurement processes remain effective to keep your business afloat and top of the line.
Learn to safeguard your supply chain against uncertainties and protect your bottom line! Dive into our comprehensive Risk Management in Procurement Course, where you’ll master practical strategies for identifying, assessing, and mitigating procurement risks.
Frequentlyasked questions
What is risk management in procurement?
Essentially, risk management in procurement is just identifying risks and making strategies to mitigate them.
How to do risk management?
There are 5 steps: Identify, Assess, Plan mitigation strategies, Monitor, and Plan response actions.
Why is it important to mitigate risks in procurement?
It is important to mitigate risks as early as possible in procurement so that you can avoid them from ballooning and becoming a bigger problem later on as you move forward in your supply chain.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
