The procurement process encompasses a number of steps - including sourcing, negotiating with suppliers, purchasing, and management of inventory. While procurement largely refers to the acquisition of raw materials for manufacturing use, it also includes the acquisition of other non-production needs such as the sourcing of external vendors and purchasing of office supplies.
Procurement is only a part of the supply chain - which is the end-to-end movement of goods and services from the acquisition of raw materials to the delivery of the final product to the customer. The risks in this process can be minimized through proper evaluation and supply chain optimization, lowering the chances of issues like fraud, poor product quality, delivery delays, cost overruns, and more.
In this article, we will delve into procurement risks by focusing on how your enterprise can mitigate them with management strategies and business data.
Top 5 Procurement Risk Factors
1. Outdated Technology
Technology is evolving at a rapid pace and plays a crucial role in the supply chain. The over-reliance on outdated methods can expose your organisation to inefficiencies and errors in your procurement process.
New technologies such as automation and real-time visibility offer significant advantages and can ensure your workflow is streamlined by taking issues such as human errors out of the equation entirely. Work that requires human intervention can be a potential source of bottleneck, so automating as much of the procurement process as possible will be a time- and cost-saving investment.
Conversely, with the increased adoption of digital solutions, cybersecurity threats pose a substantial risk as well. Ransomware attacks, data breaches and so on are common and can compromise sensitive information and disrupt operations.
2. Market Volatility and Economic Risk
The state of the world economy is always changing, which can have an effect on supplier relationships and purchasing decisions. Rapid changes in currency exchange rates, inflation, trade rules, and geopolitical conflicts can affect essential material prices and supply. These uncertainties might make it difficult for companies to stay within limited budgets, maintain inventory, and meet customer demands.
3. Incomplete needs analysis
The procurement process begins with an assessment of needs. Before making any purchases, you must first determine what you need, when you need it, and how much it will cost. Forecasting is one of the tools and methods used to aid companies in creating a better procurement plan, and it can help prevent complications brought on by weak supply chains.
For instance, buying too much or too little of a product can be a catalyst for bigger problems with detrimental effects on your operations. A surplus in your inventory due to overbuying would be an unnecessary spend which will also increase storage costs or increase the likelihood of damage to your materials. Meanwhile, not buying enough might cause production delays or you might run out of stock and potentially lose out on sales.
4. Supplier Risk
As reliable supply of raw materials is crucial for business operations, it is important to cultivate healthy supplier relationships. The financial health of your suppliers could also potentially affect your business in the event that they suddenly go into bankruptcy or are unable to fulfil their contractual obligations due to cashflow issues.
On that note, if your supplier lacks the necessary production capabilities or were affected by unforeseen circumstances such as natural disasters, you might face shortages, quality control issues, or delayed shipments as a result. For these reasons, it is risky to be dependent on a single supplier. If you do not have alternative sources of supply, you are highly susceptible to supply shortages.
5. Lack of Supply Chain Risk Management
Without a comprehensive risk management plan that has a focus on identifying and mitigating supply chain risks, decisions made at the procurement stage may prioritise lower cost over supplier reliability, inadvertently creating certain vulnerabilities in your operations.
Building a resilient supply chain means having a risk-aware mindset, as well as having contingency plans for fluctuations in market conditions that are adaptable to unforeseen geopolitical risks and natural disasters. As we have experienced with global COVID-19 lockdowns, supply chains were severely impacted and pushed enterprises to innovate and adapt, which in turn made their operations more resilient.
Procurement Risk Assessment and Management
At the procurement stage, your risks can be reduced by running a thorough needs analysis frequently and taking into account external factors such as changing market conditions, regulatory requirements, and even the emergence of new technologies.
It is also worthwhile to invest in modern procurement technologies and software platforms that can streamline procurement processes, enhance data accuracy, and provide actionable insights. It is also important to implement robust cybersecurity measures, such as encryption, firewalls, and regular security assessments, to safeguard your digital infrastructure. Today, no-code tools and easy form-builders are poised to change the way industries work, as customized solutions can now be developed by anyone.
External factors might be harder to predict but can impact your business nonetheless. To combat market volatility and currency risk, consider using tactics like forward contracting, where you make price agreements with suppliers in advance. Those procuring materials across borders will benefit from forward contracting, which is one way to hedge on currency to mitigate losses from exchange rate fluctuations.
Another helpful strategy is to include an escape clause in contracts in which a certain threshold in currency movements is acceptable. If it exceeds this threshold, you retain the right to opt out of the agreement. This means that you will not be bound to an agreement if the currency rates increased to the point where it no longer benefits you. This is a contract clause that is usually included for repeat purchases.
In order to foresee potential effects on procurement costs and supply chain stability, it is important to regularly evaluate the overall economic climate and engage in scenario planning. You may better position your company to navigate and adjust to market changes by keeping an eye on economic developments and expanding your source possibilities.
In your day-to-day operations, supplier risk might be the single most significant risk that you will assume. To safeguard against this risk, you can conduct your due diligence on your suppliers’ financial health and quality control processes, and put a contingency plan in place for the worst-case scenario where your regular suppliers are unable to fulfil their commitments to you. Services such as Coface Monitoring can take care of this task for you, sending alerts whenever there’s a significant change so you always stay informed.
One way to start building a robust plan is to foster collaborations between relevant internal departments to develop a holistic risk management plan together. Existing risks that have been identified in the procurement stage should undergo continuous monitoring and any new information can be used to update your risk management strategies.
Minimizing Procurement Risks With Technology and Data
As procurement decisions can have a direct impact on a company’s bottom line, the minimisation of risks at this stage is crucial. The integration of advanced technologies including artificial intelligence (AI), automation, and data analytics can empower your organisation to significantly reduce a lot of risks associated with more traditional, labour-intensive procurement processes.
Leveraging real-time data and predictive analytics, organisations would not only be able to make informed purchasing decisions, but they can also enhance their overall efficiency and rechannel their personnel to other work.
A key aspect of risk management is staying a step ahead of it, and this includes having accurate, up-to-date information about suppliers’ financial health while keeping abreast of regional geopolitics and economics. This also means having to do the necessary research so you understand where your business’s supply chain and its associated risks are positioned in relation to the regional economic climate.
Contact Coface Now
ICON by Coface is a risk management platform that was developed with cross-border trade in mind and offers innovative solutions to help organisations navigate these challenges.
Our risk management solutions offer continuous monitoring of debtor and country risk profiles, making it easy for you to always remain up-to-date on your assumed risks.
The ICON platform also offers data insights, giving you a unique look into the outlook of the economy and access to Coface’s extensive database of companies worldwide.
Our team of experts at Coface is here to help you navigate the intricate landscape of risk management and design a risk mitigation plan.
Don’t leave the financial health of your business up to chance - reach out to us today and embark on a journey towards sustainable and resilient business growth.
Contact us now to schedule your consultation today for a risk-protected future!