Procurement delays can impact your entire supply chain. And if those delays reach your customers, they could go elsewhere for their needs. So what are the significant procurement risks, and how can you mitigate them?
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What Are Procurement Risks?
Procurement risks are potential obstacles to your regular purchasing and sourcing processes, whether for products, services or materials. These risks happen when one or more parts of your supply chain become undependable.
Alternatively, procurement risk management is the process of mitigating those risks, so you can do everything in your power to keep your supply chain running smoothly and your customers happy.
Procurement risks stem from internal and external factors — so there will always be conditions out of your control. But that doesn’t mean you can’t do anything to minimize and prepare for them.
Before jumping into mitigation strategies, though, let’s look at some of the most common procurement risks.
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Common Risks
You can’t start drawing up risk management plans if you don’t know what pitfalls you’re facing. Here are some common procurement risks to keep an eye on:
Imprecise Needs Analysis
Needs analysis risks include:
- Excess or lacking inventory
- Missed sales
- Increased storage fees
- Lost customers
- Sunken costs
Needs analysis and planning is the crucial first stage of your procurement process. Here you’ll determine the products, services or materials you need, when you need them, and what cost you’re willing to pay.
Demand forecasting is a common method of determining those needs, providing insight into customer expectations and preparing to meet them.
Errors here can set the tone for your entire procurement process, causing further risks down the line. Under or overestimating customer demand can negatively impact your reputation, hinder profitability and throw off your supply chain.
For example, let’s say you’re unprepared to meet customer expectations. You’ll miss out on sales that customers were otherwise ready to come to you for. It could also steer them toward other companies, who were prepared this time around, for their future needs.
On the other hand, if you over-prepare, you may wind up with excess inventory, which can lead to additional storage fees and sunken costs as products become obsolete.
Poor Planning
Planning risks include:
- Delayed order fulfillment
- Damaged reputation
- Hindered profits
- Poor positioning to compete in your market
After evaluating your needs, you can begin planning how to meet them. But planning, like your needs analysis, comes with its own risks during the early stages of procurement.
Planning to meet your procurement needs isn’t enough — you also have to create a mitigation blueprint for potential upcoming supply chain risks. If you aren’t prepared, you could wind up with serious supply chain management issues.
We all know how the pandemic affected global supply chains. Now, we’re not saying you need to prepare for supply chain disruptions at that level at all times, but you do need to prepare for regular issues.
It doesn’t take a pandemic to find yourself overwhelmed with orders. And hey, it’s a good problem to have, but you still need to fulfill orders as efficiently as possible to maintain your reputation and bring in repeat customers.
Not preparing for future fluctuations, disruptions and future risks can affect your ability to compete in the marketplace, turn a profit and create a strong reputation.
Mismanaged Vendors & Sourcing
Vendor and sourcing risks include:
- Unmet promises
- Price fluctuations
- Delayed deliveries
- Mismatched ethical standards
- Poor product quality
Next in your procurement process comes selecting a vendor. Vendor management and sourcing are particularly risk-heavy factors, as you can only control who you work with, not how they work. You have to trust the vendor(s) you choose, so don’t take it lightly.
Use SAP Ariba’s supplier management to track vendor information and metrics. Source
Say a vendor quotes you unbelievable prices or delivery times. There’s a chance it could be legit, and that’s great! Or it could wind up being as unreal as it sounds, leaving you stuck in a contract with a vendor who can’t deliver.
When it comes down to it, the biggest vendor and sourcing risks lie in the reliability of who you choose to work with.
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Improper Contract Management
Contract management risks include:
- Unexpected legal infractions or gray areas
- Inadequate KPIs
- Non-compliant processes
- Potential fines
Now you’ve determined your needs, plans and the vendors you want to work with. Next, you need to draw up contracts.
Legalities are always tricky, so improper contract management is a major procurement risk.
If you don’t have the right expertise or processes in place, you could find yourself breaking procurement laws, skirting gray areas or just plainly lacking the KPIs and fulfillment you need from vendors.
Proper contract management combines procurement and law expertise so you know your deals are binding while meeting your supply chain needs.
Lacking Automation
Manual processes (aka no automation) risks include:
- Error-prone manual entry
- Unauthorized purchases
- Duplicate purchases
- Bottlenecked procurement
Now that you’ve crossed your Ts and dotted your Is with vendors, it’s time to consider automating your procurement — for several reasons.
Strictly using manual processes can slow down procurement and lead to potentially costly errors.
For example, let’s say you have a team of procurement professionals tracking inventory and creating purchase orders, but they’re relying on manual processes. In their effort to keep up with demand, two employees put in for the same order of products or materials.
Now, you have twice as much as you need, and who knows how long the excess inventory will sit around your warehouse.
And that’s just one of the procurement risks you face if you rely solely on manual processes.
Disrupted Supply Chains
Supply chain disruption risks include:
- Lost sales
- Delayed vendor delivery
- Scarce resources
- Fickle consumer demand
- Disastrous events
- Fluid economics
Not addressing and planning for the previously mentioned risks can put you in even greater danger.
Mistakes and errors at any procurement stage, from planning to delivery, can cause drastic disruptions in your supply chain.
Imagine you have a duplicate order’s worth of inventory sitting in your warehouse, like in the example we mentioned above. You’re not just sitting on excess inventory — you’re also taking up valuable space that you could otherwise stock with items.
And that’s just on your end. If you don’t prepare iron-clad contracts and plan for outside factors, you could run into supply chain disruptions on a vendor’s end without a contingency.
For example, if one of your vendors can’t meet demand in terms of product or delivery capabilities, you could miss out on sales. You need to make a backup plan to keep moving if a vendor can’t follow through.
Finally, there are factors outside of your and your vendors’ control that could cause supply chain disruptions.
Such external factors can include, but aren’t limited to:
- Natural disasters
- Economic influencers
- Technology advancement
- Resource scarcity
- Demand shifts
While you may not be able to predict these factors, you need to stay agile so you can adapt when necessary.
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Risk Mitigation Strategies
Understanding common procurement risks is the first step. Next is planning how to minimize those hazards. Here are some mitigation strategies you can implement today:
Vet New Vendors & Strengthen Existing Relationships
Your relationships with suppliers should be mutually beneficial endeavors. You need someone who wants you to succeed, if only because it means success for them as well!
Make sure you vet vendors thoroughly before entering into a contract. Reaching out to your industry contacts who work with a particular vendor, or have in the past, is a great place to start.
Here are some additional risk-mitigation strategies for your supplier selection journey:
- Due Diligence: Perform due diligence on any vendors you plan to work with. Use public records, such as financial reports, to compare their long-term numbers with their competitors to determine the viability of a profitable relationship.
- ESG Standards: Consider a company’s ESG standards ahead of time. While less likely to be a direct threat to your procurement processes, finding out your vendors don’t meet the standards you expect from business partners can throw a wrench in your supply chain while you search for new suppliers who do.
- FOCI: If you’re planning to work with international suppliers, consider their image through a foreign ownership, control or influence (FOCI) lens. Look for any negative media attention or prior incidents causing scrutiny.
- References: Ask vendors for references, including their current and past clients. Reach out to industry contacts to see if they can back the vendor’s reputation.
- KPIs: Carefully outline the KPIs you’ll measure vendors by. Make sure it’s clear what you expect from them to maintain strong, continuous relationships.
In addition to vetting new vendors, you have to foster the relationships you already have.
Using procurement software to streamline your communication and reduce errors on your end — which we’ll talk about more next — can help you keep things professional and boost your image.
Implement Automation Software
Implementing software can help you minimize risks through automation for various responsibilities throughout your supply chain.
Procurement software and eProcurement software help you plan and manage procurement from forecasting through product sales — part of which involves addressing interruptions as they arise.
View purchase order information, including requester, ship to user, order date, supplier and more, in Coupa’s purchase order management dashboard. Source
Systems such as SAP Ariba and Oracle Services Procurement host various features to help you automate your procurement and reduce risks. Some notable areas eProcurement products assist with are:
- Approval workflows
- Three-way matching
- Strategic sourcing
- Procurement RFPs
- Purchasing
- Vendor management
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Standardize Processes
Another major risk reduction strategy is process standardization. Clearly defining SOPs, budgets, employee responsibilities and approval procedures helps keep your team on the same and data accurate.
Procurement systems can play a huge role in standardizing processes as well. Procurement solutions include tools for customized approval workflows and purchase requests.
Approval Workflows
Customizable approval workflows can provide your staff with a clear depiction of who can sign off on purchases based on purchase type, dollar amount, department or any other criteria you set.
You can make them as detailed as you want, depicting the chain of authority based on the type of purchase someone is requesting.
An example workflow from Procurify’s approval workflow tool, showcasing approvals based on purchase type and dollar amount. Source
Purchase Requests
Purchase request tools in procurement applications help you track requests, manage approvals and trace accountability.
Standardizing purchase requests within an application helps you ensure the right people approve orders by providing a clear audit trail. You can squash improper purchasing habits as they arise.
Better yet, you can use approval workflows to automatically send requests to the appropriate employee or team for approval based on the parameters set for the purchase request.
Implementing these standardized practices can limit manual errors, improper requests, missed requests and more!
Review purchase request details, such as item, quantity, price, attachments, notes and more, to approve or reject using Precoro. Source
Improve Communication
Finally, improve communication across your organization. It sounds simple, but it’s one of the most effective strategies for reducing procurement risks. And it applies to internal and vendor communications.
Let’s consider internal communication first. You can automate and standardize a ton. But there’ll always be exceptional cases that don’t fall under your typical procedures. Open lines of communication — upward and downward — are essential.
On the one hand, you need to keep employees informed of changes, exceptional purchasing cases and any other news so they can limit procurement risks.
On the other hand, they need to be able to come to you or managers for various reasons. For example, some atypical situations that may require some discussion include:
- Facing unusually high prices for products and services.
- Needing to find alternative suppliers when your vendors can’t meet demand.
- Requesting one-off purchases you don’t typically make.
Then there’s vendor communication. This aspect ties back into strengthening vendor relationships.
A strong working relationship with suppliers can be the difference between open communication when vendors have a problem on their end vs. frustration stemming from delayed or incorrect orders without explanation.
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Next Steps
Identifying and mitigating procurement risks is vital to a successful supply chain. But it can be challenging, especially without procurement software for support.
Are you looking for ways to automate your procurement processes and minimize risks? Check out our comparison report for an in-depth look at some of the top procurement systems available today.
What other procurement risks or mitigation strategies would you comment on? Let us know in the comments below!