5 Strategies to Manage Procurement Risk

Mohammed Kafil 


June 13, 2022

supply chain procurement process

An efficient procurement process provides consistent and dependable connections with suppliers, staff and consumers. But a smooth-running process is hard to maintain as procurement managers have to deal with multiple risks at every step of the supply chain.

Some of the most common procurement risks faced include inaccurate internal need analysis, overspending, poor supplier selection and management, non-compliance, inadequate contract management, and error-prone human manual processing.

Procurement risk management aims to foresee potential problems and protect firms from risk during the procurement process. Each transaction involves many important considerations, including product quality, vendor dependability, customer satisfaction, and corporate reputation, all of which must be monitored to avoid any problems.

Procurement leaders should explore new technologies and strategies to handle core functions of the supply chain. A good procurement risk management plan can help your organization save money, avoid setbacks, and run smoothly and efficiently. The following are five strategies that can help your organization mitigate risks associated with procurement.

1. Spend Analysis

Simply put, spend analysis reveals what is going on with your company's money. While analyzing your spend data, you can obtain valuable information regarding your procurement spend, such as unidentified payments, redundancies, double invoices, rogue or maverick spending, and specific suppliers that may be open to re-negotiation.

Looking at previous expenditures can also help you avoid risks like inadequate internal need analysis. For example, you can find out if your needs are overstated or understated, if you are working on a limited timeframe, or if you are working with an insufficient budget.

If you depend on a single supplier for critical goods and services, this might be a huge risk. If they fail to deliver on time, your entire supply chain might get disrupted. Spend analysis can help you identify whether you are spending too much on specific suppliers or are relying on very few suppliers.

2. Enable Procurement Transparency

By implementing a transparent procurement policy, you may reduce the duplication of purchased products. In addition, due to the increased visibility, duplicate requests will be closely monitored and, as a result, avoided.

Moreover, if all the processes are transparent, you can follow any transaction's digital trail, which can stop individuals from dark purchasing and rogue spending. The more transparency you have into who is buying or authorizing, the more savings and efficiency you will be able to find.

It will also be a lot simpler for you to identify who tends to break corporate policies, understand why this occurs, and then devise ways to deal with the identified issues.

3. Supplier Consolidation

Having multiple suppliers for single or related products is challenging, as it gets difficult to keep track of each supplier. If you have fewer suppliers your organization can better focus on safeguarding risks such as price instability that can affect your company's financial health.

Through effective supplier consolidation, procurement teams can avoid risks like overspending. Your organization can get better rates for a product by assigning more products to fewer suppliers. Overall, the cost of freight, handling and other relevant shipping expenses will also be reduced.

It should be noted, however, that for key products and services that are crucial for your business, you must have more than one supplier. In this case, multiple suppliers are better because you are not dependent on only one supplier that can make or break your business.

Having multiple suppliers for your key products also ensures that no bottlenecks are created when demand peaks. Moreover, it gives you more flexibility to cope up with unexpected events.

4. Supplier Relationship Management

Having a strong relationship with suppliers goes a long way. Managing your suppliers effectively can avoid any disruptions in the supply chain, such as late deliveries or bad-quality products. In addition, increasing visibility aids in identifying and mitigating possible hazards.

Supplier management software and online inventory management can help you track suppliers to readily check supplier information, detect possible supply risks, and measure performance. The information gathered from performance tracking will also help to avoid poor supplier selection in the future, unethical sourcing, and identify any potential problems.

5. Compliance

Contract compliance is an important area and should be reviewed regularly. This will assist you in determining how effectively suppliers adhere to the pre-set terms and conditions, such as timely delivery of quality goods.

This indicator shows the percentage of contracts that have been completely fulfilled and whether all agreed-upon requirements are met. Fulfilling these helps increase vendor communication, enforce noncompliance regulations, and follow up on concerns promptly.

Moreover, a focus on compliance also helps keep internal processes in check and regulate spending in the organization, thus eliminating overspending by internal stakeholders. The higher your compliance rate, the less waste your purchase process generates.

Mohammed Kafil is a certified procurement consultant who coaches companies to establish resilient digital procurement operating models. He also works with procurement software provider Kissflow Procurement Cloud to help medium and large enterprises with their digital transformation projects.