Key Steps to Enhance Procurement Risk Management

Procurement

Don’t we all rely on it?

Having the right supplier at the right time with the best quality is what makes or breaks the journey of any business. 

That’s the idea at least 

But when it comes to our current reality, some things can put you in a tricky position, supply chain challenges, for example, are a common problem these days, and what about those unexpected market changes?

Yeah, you better be prepared for that. 

How?

Well, it’s not a bad idea to start with some solid procurement risk management strategies

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What’s Procurement Risk Management?

Just like the phrase itself points it, procurement risk management is a series of practices designed to identify, analyze, and mitigate all the potential risks that could affect your procurement operations. 

The danger could come from within your company, like not having sufficient visibility in your processes. 

Or it could be something from the outside, like a sudden natural disaster closing your supply chain logistics.

Managing these risks is one of the most secure ways to prevent any issues from disrupting your operations.

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Types of Procurement Risks

• Internal: Just like the example above, these risks originate in your business, it could be something in your operations, a security breach in your staff, or a new project.
• External: Probably, the threats you usually think about when the word risk is mentioned, considering they come from the external world, they are more diverse, from geopolitical conflicts to climate change. 

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Most Common Categories of Procurement Risks

Suppliers

We don’t need to tell you how important suppliers are for your business, without them, you won’t be able to do….well, almost nothing.  Necessary as they are, if not managed correctly suppliers can represent a source of risk. 

Why?

Unfortunately, there isn’t a single reason, it could be a problem with the quality they provide to your business, an ethical issue with their practices or financial instability from their side. 

Before panicking, there are some easy steps to take to prevent such scenarios.

• Set your selection criteria, what’s necessary for your business and what’s non-negotiable.
• Conduct thorough supplier evaluations before entering into a contract.
• Monitor supplier performance regularly.
• Diversify your supplier base to avoid over-reliance on a single vendor.

Market

Since the COVID-19 pandemic, many things have changed, including the markets. Volatility is now part of their nature. Economic shifts, geopolitical events, or natural disasters can change overnight market conditions, affecting your company's availability and cost of goods and services.

So how can you manage it?

• Stay informed about market trends and developments.
• Establish long-term contracts with suppliers to lock in prices.
• Create contingency plans for supply chain disruptions, you can use what-ifs scenarios for this one.

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Operational

Remember what we mentioned about internal risks? Well, they fall under this category, perhaps something in your procurement processes is affecting your end operations, or maybe there’s a problem with your systems, whatever the reason if it's linked to your own procedures, you can bet that it’ll be hurting your efficiency.

What can you do?

• Standardize procurement processes to reduce errors.
• Invest in procurement technology to automate and streamline operations.
• Train employees on best practices and risk management techniques.

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Financial

This is a case where the problem could come from your side, like not having sufficient liquidity, or it could be something related to your suppliers. Imagine that you mostly worked with a single supplier and suddenly you learn that they have filed for bankruptcy. Wouldn’t that disrupt your procurement activities?

To be as prepared as possible consider these points:

• Monitor the financial health of your suppliers.
• Use spend analysis so you can be fully aware of where your money is going.
• Maintain a buffer in your budget for unexpected expenses.

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How to Reduce Procurement Risks?

Identify your risks 

The earlier you identify potential risks, the better you can manage them. Conduct a risk assessment at the beginning of each procurement project to pinpoint potential threats.  You can start by mapping out your procurement process and identifying risk points that could cause disruptions. Engage stakeholders from different departments to gather diverse perspectives, this way no risk goes unnoticed. 

To make things easier, it’s a good idea to rely on assessment tools or software.

Develop a plan

Don’t you feel better when you know you are following a plan? 

A well-designed risk management plan outlines how you’ll address each identified risk. Here you’ll include strategies for mitigation, contingency measures, and clear communication protocols. 

Begin by prioritizing risks based on their potential impact and likelihood of occurring. Assign responsibility for managing each risk to specific team members who can take appropriate actions. Once all of this is done make it a habit to regularly review and update your risk management plan according to the circumstances. 

Connect with your suppliers 

That’s right, just like suppliers are the foundation of procurement, they can also play a tremendous role in your risk management strategy. Collaborate with your suppliers to address potential issues and enhance supply chain resilience. From the beginning, don’t hesitate in communicate your risk management expectations to suppliers, because how else could they understand their role in mitigating risks? Work together to develop joint risk mitigation strategies that align with your organizational goals. Establish open lines of communication to facilitate quick issue resolution and maintain a strong, mutually beneficial partnership.

Monitor 

Just like the risks for procurement evolve, your risk management strategy should do the same. If you create a plan that’s not ready to change as needed, you could be left behind.  To prevent this from happening, set up key performance indicators to track important metrics and measure the effectiveness of your strategies. . Using procurement software can provide real-time visibility into your supply chain, helping you detect and respond to risks promptly.

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Future Trends in Procurement Risk Management 

Focus on sustainability

Sustainability is becoming an essential factor in procurement, suddenly from your stakeholders to your clients, everyone demands environmentally and socially responsible practices. You’ll need to manage risks related to environmental impact, ethical sourcing, and compliance with sustainability regulations. Partnering with suppliers who prioritize sustainability can reduce your environmental footprint. The bonus for your company? 

You’ll keep your clients happier and more loyal to your brand. 

Artificial Intelligence 

AI is transforming procurement risk management by enhancing risk identification, prediction, and mitigation. AI tools  can analyze data to detect patterns and provide real-time insights, allowing you to anticipate and address potential risks more accurately.  By automating routine tasks, AI also frees up your team to focus on those activities that matter to your businesses. 

Supplier diversity

If you’ve paid attention to what we’ve been saying up till now, suppliers indeed are a critical part of risk management so it makes sense to see more companies sticking with diversity in their quest to find suppliers.  A diverse supplier base fosters innovation, strengthens supply chain resilience, and demonstrates your commitment to social responsibility. Integrating diversity into your procurement strategy can help mitigate risks and create a more adaptable supply chain.

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Final Thoughts 

And that is it 

If there’s a lesson you need to take away from this topic is that procurement risk management is essential for maintaining a secure and resilient supply chain. By understanding common risks, implementing effective mitigation strategies, and leveraging technology, you can protect your organization from potential disruptions and achieve better procurement outcomes.

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