Risk management in procurement is one of the most important areas to get right.
All procurement functions are prone to risks and industry leaders need to be aware of what they are in order to safeguard their organisations. This has only been amplified as a result of the COVID-19 pandemic five years ago. Following that disruption, the procurement and supply chain function rose and became a strategic enabler for businesses.
Against the backdrop of the likes of digital transformation and the sustainability agenda, today’s Chief Procurement Officer is spinning many plates. However, risk management should not be overlooked. Procurement risks need to be appropriately managed within the supply chain as they can have a major impact on the long-term viability of a company. And it might not even be the fault of your own company, risks could involve unreliable suppliers, which could have a knock-on effect.
With this in mind, CPOstrategy explores five of the biggest risks in procurement today.
Inaccurate needs analysis
Every procurement process starts with needs analysis. It’s key because procurement functions must first understand what is required, when it is and at what cost in order to make the company operate. This is also where the importance of forecasting comes in. Implementing real-time tracking and visibility is key in order to spot potential issues within the supply chain and get ahead of unfortunate events that could impact a company’s bottom line. Understanding how much of a product you have and what you need more of is key to ensuring business continuity and avoiding disruption.
Supply chain disruptions
Staying with the disruption theme, the necessity of a plan B has become clear over the past few years. The likes of political instability, pandemics, natural disasters and geopolitical events have all taken their respective toll on procurement and supply chain and the industry still has the scars to show for it. However, lessons have been learned and procurement and those within it have bounced back stronger by incorporating a ‘just-in-case mindset’. Keeping a finger on the pulse and being agile is at the heart of achieving long-term success.
Poor supplier selection
Success is impossible to achieve without collaboration. Selecting the right suppliers is a key piece of the puzzle of any procurement function because suppliers can make or break an organisation. Supplier relationships should act as a mutually beneficial partnership where both sides get value. When it comes to items on the agenda such as sustainability and digital transformation, alignment is vital. If a supplier cannot guarantee fair labour practices then subsequently it could lead to your own organisation getting into trouble and production process disruption.
Inefficient contract management
Poor contract management can happen when contracts are left unmonitored after they have been signed. Contracts are not only agreements for purchasing, they allow for the development of mutually beneficial relationships, risk mitigation and a reduction in costs. If a company is armed with dependable vendors and poorly constructed contractual procedures, it could spell trouble for an organisation. This means that getting ahead of a scenario and regularly conducting an audit for the contract management process for inefficiencies and subsequent failures.
Lack of automation
The acceleration of new digital tools has had a major impact on how procurement functions operate. Automation can prevent bottlenecks and lead to fewer delays and errors. Many tasks can take up a lot of time but have little impact on important KPIs. As a result, this can lead to lower employee productivity, lengthy processes and more room for miscalculations and incorrect data entry. In today’s market, there are an ever-increasing number of SaaS tools to support the entire sourcing and supplier management process. Implementing good processes and workflows is essential to preventing supply chain disruptions.