Managing procurement risk is a continuous journey.
Procurement risks happen when the process of purchasing products, resources, or services becomes unreliable. Given the importance that any disruption to the supply chain can have on a business, procurement risk needs to be appropriately managed as it could have a significant impact on an organisation’s overall performance.
In truth, every acquisition comes with risks. But the important component is that these are managed correctly. Procurement risks could be related to cost, delivery, quality, customer expectations and supplier reliability, among others. Risks could be generic, but they can also be specific to a sector, geography or industry. Risk management revolves around closely monitoring and mitigating these risks in order to avoid disruption.
In this article, CPOstrategy uncovers five tactics to managing procurement risk both in the short and long term.
Identify procurement risks
The first task on a CPO’s agenda should be working out where an organisation’s issues are. This should include assessing both internal and external risks throughout the entirety of the supply chain. The reliability of an organisation’s vendors and any risks they are exposed to should be carefully considered as a business is only as robust as the companies it engages with.
As has been clear over the past few years, the next ‘black swan’ event could be just around the corner. As such, it is important to determine weak spots before they become problems and to stay as alert as possible to potential risks. Being able to respond quickly to disruption could be the difference between winning and losing in challenging situations.
Work with the supply chain closely
In an ever-increasing globalised business world with complex supply chains, procurement professionals face their fair share of challenges. CPOs should seek to develop strong risk management processes to ensure that their teams understand their responsibilities to mitigate risk and ensure operations are secure now and in the future.
Ultimately, success in the supply chain relies on a company’s ability to maintain constant communications with the partners it receives items from as well as those it delivers to.
Supplier Relationship Management
Establishing and maintaining a strong relationship with suppliers is important but it does take work. Managing suppliers effectively can help mitigate disruptions in the supply chain such as bad quality products or late deliveries. As a result, this has led to the importance of supplier management software and online inventory management as tools to help track suppliers to readily check supplier information, detect possible supply risks and measure performance. The information gathered from performance tracking will also help to avoid poor supplier selection in the future, unethical sourcing and deal with potential problems.
Spend analysis
Spend analysis is essential to ensuring a CPO has visibility over where an organisation’s money is going. When analysing spend data, valuable information can be obtained which reveals procurement spend, such as unidentified payments, redundancies, double invoices, rogue spending and certain suppliers who may be open to re-negotiation.
It is also important to diversify a supplier base as relying on a single supplier for vital goods and services is a significant risk. Should this supplier be delayed for any reason, a company’s entire supply chain could go down. Spend analysis helps work out if too much money is being spent on specific suppliers or if there is an overreliance on any particular ones too.
Compliance
Government regulations can often change which means it is essential to be agile and adaptable to the latest rules. Risk management in procurement includes introducing procedures to maintain compliance with ever-evolving regulatory requirements. Failure to do so could result in penalties and even more disruption to the supply chain.
Contract compliance is also a key area and should be reviewed often. This will help work out how well suppliers are keeping to pre-set terms and conditions such as efficient delivery of quality goods.