Top 5 examples of procurement risks and how to mitigate them

October 27, 2021

Procurement is an essential yet challenging aspect of any business, filled with potential risks and obstacles that could easily cause significant disruptions to your operations. Knowing these and adopting a robust risk management process can empower your procurement teams to do an even better job.

What does procurement look like today?

In the past, many businesses essentially employed procurement teams to get everything at the lowest possible cost. They might have worked with stakeholders to identify vendors and give approvals for purchase orders, but in terms of your wider business, they may not have had much of a role.

Things have changed.

Today, procurement is increasingly strategic, with businesses increasingly having a clear procurement strategy designed to do far more than achieve a healthy bottom line. Moreover, the COVID-19 pandemic helped further crystallise the role procurement professionals had to play in everything from strategic sourcing to business continuity and, of course, risk identification and analysis.

Why is it essential to manage procurement risks?

In any industry, businesses must deal with specific risks around their supply chain. By conducting proper risk analysis and having robust procurement systems in place, you can take actions towards mitigating risk and minimising disruption to your operations.

You may decide to manage these via risk assessments or real-time monitoring of your procurement functions and supply chains using KPIs. What are the most significant risks on which you should focus?

1. Inaccurate internal needs analysis

This is always the most significant risk to your procurement process because, if you don't get it right, it kicks off a sequence of expensive, poor decisions made on the back of inaccurate data and forecasting.

However, it's vital to recognise that poor communication between internal stakeholders can also lead you basing your procurement on inaccuracies.

Poor needs analysis processes might lead to:

  • Over or understating what you need, later leaving you either with products you can't sell or unhappy customers when you sell out
  • Unrealistic timeframes, which can have a knock-on effect on vendor selection, supplier relationships, and customer satisfaction
  • Inadequate budgeting, leading to either a significant overspend or being unable to deliver something at all
  • Poor outcomes overall, as it may not be clear what you want to achieve from a specific procurement project

2. Poor contract management standards

If you work in, or you're part of a supply chain that provides goods or services to, the public sector, then you will likely need to consider procurement legislation when drawing up and executing contracts. Adherence to these can mitigate a significant amount of procurement risk.

However, even if you work wholly in the private sector and procurement legislation doesn't apply to you, you should still aim high with your contract management standards.

Poor contract management can lead to:

  • Fines and penalties for non-compliance on your side
  • Not being able to seek redress from vendors who let you down
  • Data protection issues if consumer data is involved
  • Your needs going unfulfilled
  • Projects being delayed
  • Your bottom line suffering due to missed sales opportunities

3. Inadequate supplier selection processes

In high-performing businesses, the days of procurement meaning "choose the cheapest available option" have long gone. Things have also progressed beyond the notion of ensuring procurement teams get "value for money."

If this is still what your procurement process looks like, you're leaving yourself open to significant, potentially brand-damaging risks.

Today, your supplier selection needs to focus as much on supply chain sustainability as it does on cost. What looks like a great deal won't seem so great if it turns out your suppliers turn out to be guilty of human rights infringements and are environmentally irresponsible.

4. Ineffective supplier and supply chain management

If you're going to do a significant volume of work to find amazing suppliers and build a robust supply chain, it stands to reason that you should subsequently manage and strengthen those links. Failing to do so could you see you lose partnerships, leading to your procurement teams needing to start the vendor sourcing process all over again.

This will also have a knock-on effect on your wider operations, especially if you're reliant on various products from several upstream suppliers.

5. Reliance on manual processes

Relying on manual processes is not only inefficient, it is one of the most significant procurement risks you face. While many businesses continue to rely on manual processing because "that's how we've always done it," they're also wasting time and money on things like:

  • Correcting error-strewn documents - or paying the price if they didn't notice an error-filled contract had been signed
  • Chasing lost paperwork and data
  • Manually filing documentation
  • Chasing delays in the approval process, such as getting a purchase order

5 actions for robust risk mitigation

1. Visualise your supply chains

Procurement, and specifically your supply chain, have a lot of moving parts, so it can be challenging to keep on top of the most significant risks to your operations.

By introducing better visibility into your supply chain, you will find it easier to choose suppliers, manage relationships, and have a consistent overview of where the biggest risks are at any one time. This will subsequently enable you to plan and react better to events outside of your control, whether that's a natural disaster, pandemic, or bad PR for your direct or upstream suppliers.

2. Introduce automation wherever you can

Procurement processes will always require some human input. However, by automating as many processes as you can, you'll save time that you can then dedicate to improving your supplier relationships, and reduce human error in things like your contracts.

Knowing how your supply chains are performing will get easier, too, as you can automate reporting and dashboards so you always have a comprehensive overview of everything related to procurement.

3. Create a robust vendor sourcing strategy

What do you want from your vendors? The easiest way to mitigate risk is to develop a clear set of standards that you require vendors to meet before you'll work with them. Your sourcing strategy and required standards can incorporate commercial elements as well as environmental and social governance (ESG) aspects like supply chain sustainability.

If vendors don't tick every box, you don't work with them.

This removes any ambiguity and reduces room for error in sourcing, and ensures your procurement teams are working to and holding all potential vendors to consistent standards.

4. Develop metrics for measuring supplier performance

If you're going to invest time in fostering a strong relationship with your suppliers, you should ensure you have a means of measuring their performance, too.

Decide what metrics are most critical for your procurement teams to measure in your suppliers, then use your procurement software and other automation tools to measure it. Remember to balance commercial metrics with those looking at supply chain sustainability and ESG so you can take action and work with those suppliers whose standards begin to slip.

5. Create a supply chain risk management strategy

Perhaps the biggest way you can mitigate risk is knowing what your strategy is to mitigate it in the first place.

While the points in this guide will help you develop yours, you should also look beyond these and consider the things you cannot control. For example, what are your contingency plans if a supplier suddenly goes out of business or otherwise cannot fulfil an order or project? A vital element of mitigating risk is accepting that some things may be out of your hands. Deal directly with the risks you can control, but have a plan to minimise any disruption resulting from those you cannot.

Ensuring your procurement risk management is as great as it should be

What risks do you recognise as being relevant to your procurement processes? One of the things about procurement risks is that, no matter how well you mitigate and manage them, they'll always exist.

Whether you need to commit extra time towards developing strong supplier relationships, want to embrace e-procurement platforms for the first time, or are simply looking for ways to improve your wider business processes, managing your procurement risks is a great place to start.

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