Procurement plays an important function when organizations are trying to buy goods and services in the most efficient manner. Procurement risk management is the mitigation of any foreseen or unforeseen problems in the acquisition of goods and services for the organization. Risk management requires sufficient analysis of the internal and external business environment to sufficiently address weaknesses and threats. Here are some common procurement risks and tools to manage them.
When an organization handles products, whose prices are volatile, it is likely that price movements will affect their production volumes and selling prices too. High prices eat into margins when the demand for a firm’s product is highly elastic. Products whose prices are volatile include oil and petroleum products, fresh produce, and valuable commodities such as gold.
To address price volatility as a procurement risk, organizations need to have a fund to cover such price movements instead of passing the cost to final consumers. In addition, developing a good relationship with suppliers might help earn long-term supply contracts with fixed prices. This takes away the volatility and also helps with long-term planning.
Fraud In Procurement
There is a risk that people entrusted to make procurement decisions within an organization might act in their own interests instead of that of the organization. The organization might acquire goods that are not required or at prices higher than true market prices. This can be avoided by having elaborate internal controls. All procurement should begin with a purchase requisition being subjected to a review to ascertain need for the product and availability of funds. It’s also crucial that responsibility is clearly assigned to avoid uncertainties on persons responsible for all acquisitions.
Lack of Proper Needs Assessment
Organizations should carry out a proper assessment of all their procurement needs, preferably before the onset of each budget period. This ensures that a budget is prepared with proper knowledge of what’s required. Past knowledge and a review of changing circumstances will help predict what the organization needs in the current period. Thus, a needs assessment is paramount. It will help avoid the acquisition of unnecessary or obsolete products. It can also prevent departments from acquiring similar products when common procurement would be more prudent.
Improper Contract Management
Contract management refers to all the processes involved from the creation of an agreement with a supplier up to the termination of the contract. Most of the contract management work involves performance analysis against the contract terms. Contract management can get quite complicated for big projects where multiple suppliers are involved and a professional is required to check the standard of work. A lot of paperwork is also likely to complicate management.
The optimal solution for contract management is contract management software. It’s among the best tools for supply chain risk management. The software has a repository where all correspondence can be stored, amendments made and tracked, and notifications set for important project milestones. Contract management software makes it easier to know when a breach of the contract terms happens.
Poor Supplier Performance
Poor supplier performance is a risk that is present in virtually all sectors. However, this risk reduces as the relationship between the procuring party and the vendor grows. When working with new suppliers, it is prudent to request proof of past work performed. Sometimes, before issuing a big contract, some firms conduct a pre-contract capacity assessment or competition between several suppliers. Their performance then informs the decision on whom to award the contract.
When an organization is not in a position to properly perform vetting of suppliers, it’s possible to hire a consultant for the process.
Slow Internal Process
Slow internal processes will hurt procurement efforts due to the inherent problems created. First, slow processing of purchase requisitions might lead to delays in production or other important tasks due to stockouts or shortages. Slow invoice processing might lead to missing out on early payment discounts from suppliers. Worse, it could sour relationships with suppliers when their invoices take too long to be honored.
Automation of menial internal processes might help improve the speed and accuracy of internal processes. Automated invoice processing software can conduct a three-way match for hundreds of documents and flag suspicious or erroneous invoices for investigation. It’s a way of improving internal controls for your procurement process too.
The current nature of global supply chains makes procurement skills to be highly sought after. This means that an organization can find itself facing high staff turnover if working conditions do not incentivize them to stay. Organizations need to develop alternative ways to convince staff to stay besides high salaries. Very high salaries may be unsustainable because procurement costs could become too inflated. Proper working conditions and other non-monetary benefits are more sustainable.
Organizations also need to figure out how to create a knowledge bank internally so that the loss of talented staff doesn’t cripple operations.
Forecasting demand, supply, and other external business factors is an important endeavor for any organization. Accurate predictions can help take advantage of increases in demand or avoid costs of delayed shipping. The best way to make accurate forecasts is to rely on real-time data if possible. Organizations that generate enough data on their sales can use AI modeling to make forecasts. These models can take in multiple variables or data points which makes them highly dependable.
Procurement Risk Management Tools
If your organization would like help in managing its procurement risk, check out ProcurePort’s e-procurement tools. Our tools help companies manage contracts better, conduct spend analysis, and other activities that help manage risk better.