Procurement Risks and Ways to Mitigate Them

In today's world, business operations are exposed to many types of risks, and procurement is no exception. As organizations strive to secure necessary materials, products, and services from suppliers, they are confronted with a range of challenges that have the potential to profoundly impact their bottom line. From supplier bankruptcies to delivery delays and quality issues, there’s a lot to keep an eye on. The procurement landscape is further complicated by supply chain disruptions, price instability, and geopolitical uncertainties.

Fortunately, knowledge is power, and being well-informed can make all the difference. In this newsletter, we will arm you with vital information about the potential risks associated with procurement and how they can be mitigated to ensure long-term success.

Internal Factors

Financial Risks

Financial risks are probably the ones that many organizations care about the most, and they can manifest themselves in different ways. There are a lot of sources of financial risk, but when it comes to procurement operations, one of the main financial risks is fraud. This can occur at any stage of the purchasing process, from the initial request for proposal to the final payment. Fraudulent activity can take many forms, including bid rigging, kickbacks, and false invoicing.

Another financial risk in procurement is the mismanagement of funds. This can occur when teams do not follow proper procedures for purchasing, invoicing, and/or payment. For example, they may purchase goods or services without obtaining proper approval, leading to budget overruns or unauthorized spending.

Solely relying on lengthy spreadsheets to collect and organize data makes it challenging to make well-informed spending decisions, and can lead to delays and inefficiencies in the overall financial management process. The absence of automation in document management not only complicates expense tracking but also heightens the risk of errors and discrepancies within the organization.

?What to do about it: Establish policies and procedures that clearly define procurement processes, including authorization levels, segregation of duties, and approval mechanisms. Implementing a centralized procurement system can also greatly enhance monitoring capabilities for purchasing activities. For example, a platform like Precoro provides real-time data visibility into order status, enables tracking of audit trails, and offers a document revision history. Moreover, Precoro allows for proper authorization of purchases through customizable approval workflows and helps prevent overspending by facilitating easy budget tracking.

Strategic Risks

Strategic risks cover a wide range of potential issues that can arise from decisions made by senior management. These issues include selecting the wrong products or services to procure, incorrect assessment and management of risks associated with suppliers, inaccurate demand forecasting and market analysis, etc.

Such problems often stem from a lack of process visibility and chaotic procurement processes that hinder data collection and analysis. Consequently, businesses miss out on opportunities for cost reduction, workflow improvements, and overall business development.

What to do about it: Centralize all procurement data and make it easily accessible. This will enable efficient decision-making and accurate forecasting. By leveraging automation solutions such as Precoro, you get accurate information on historical purchase data, vendor performance, and contract renewals. Precoro also allows users to view interactive dashboards with real-time data and to create unique reports with more than 20 filters and 120 custom fields.

Supplier Risks

Suppliers are vital to an organization's success as they contribute to the availability of resources, cost efficiency, product quality, and overall long-term sustainability. However, what if the wrong supplier was sourced? Or perhaps a vendor was initially decent but their performance deteriorated over time? In such scenarios, the consequences can be detrimental to the organization:

• Increased costs: If a supplier is unable to deliver goods on time or according to the expected quality, the purchasing company may end up paying additional expenses to find a replacement supplier, fix defects, or deal with customer complaints.
• Decreased customer satisfaction: If a company's vendors consistently underperform, it might struggle to meet customer demands. Dissatisfied clients may choose to take their business elsewhere, resulting in lost revenue and damage to the company's reputation.
• Supply chain disruption: Poor supplier performance can disrupt an organization’s supply chain, causing delays in production and missed deadlines.
• Damaged reputation: Damaged reputation can make it difficult to attract new customers and retain existing ones. Negative feedback can spread quickly, both online and by word of mouth.

What to do about it: Create a clear supplier selection framework and establish performance metrics and expectations for vendors. Invest in a system to help you keep all the supplier data in one place and monitor their performance. Look for a software solution that simplifies onboarding, has a supplier approval feature, and enables teams to easily create POs and track invoice statuses. At the same time, make sure you maintain regular communication with vendors. For instance, Precoro has a Supplier portal where vendors are able to receive POs, send invoices for received orders, attach additional documents and notes, and engage in the RFP process.

Legal and Compliance Risks

It’s not a secret that procurement is a complex process with multiple stages that can potentially expose the procuring entity to legal liabilities. The risks can be related to disputes or different interpretations of contractual obligations or from not meeting the requirements included in the terms and conditions, all of which can lead to the supplier suing for breach of contract.?

In addition to contractual risks, there is also the concern of intellectual property infringement during procurement. Copying or using a supplier’s trademark, patent, or copyright without permission can lead to legal challenges and potential reputational damages. Likewise, failure to protect bidders' personal data can result in legal consequences.

Moreover, the global market is a dynamic environment that continuously introduces new laws and regulations. Keeping track of changes, particularly when it comes to labor, environmental, and healthcare laws, is essential. Non-compliance with evolving regulations can result in severe penalties, damage to reputation, and even loss of business.

What to do about it: To mitigate legal risks effectively, procurement professionals must ensure they possess a comprehensive understanding of all relevant laws and regulations applicable to their organization's procurement activities. This encompasses familiarity with local, state, and federal laws, as well as industry-specific regulations. At the same time, it is important to develop risk mitigation strategies like conducting regular audits, implementing policies, and training staff on compliance issues.

External Factors

Economic Risks

According to a survey conducted by McKinsey & Company, geopolitical conflicts continue to be the top-cited risk, with inflation remaining a significant concern for businesses domestically.?

Unfortunately, 2022 was a challenging year for procurement due in part to the global energy crisis and rising prices of materials – and the economic outlook for 2023 is not much better, given a possible looming recession in the US and Europe. The Covid fallout and supply chain disruptions have further contributed to the inflationary pressures faced by businesses.?

Consequently, we are witnessing higher prices for energy, fuel, raw materials, and other resources, leading to an impact on the overall cost of procured goods and services. At the same time, many procurement teams are experiencing budget constraints due to reduced company sales. Geopolitical conflicts and supply chain disruptions can also restrict the pool of available suppliers. Thus, procurement professionals will find it difficult to diversify their supplier base or find suitable alternatives. Limited vendor options can increase dependence on a few suppliers, making procurement vulnerable to risks such as supplier failures or price manipulation.

What to do about it: Closely monitor and analyze market trends to prepare for any potential risks early on. Consider implementing hedging techniques as a means to protect your company from price changes. Conduct thorough evaluations of potential suppliers and establish long-term contracts to ensure stability. Always have contingency plans in place, including alternative suppliers who can swiftly deliver goods if the primary supplier encounters any issues. Additionally, investing in new technologies such as automation and digitalization can help increase efficiency, reduce costs, and improve overall procurement performance.

Environmental Risks

Recently, the earthquake in Turkey and Syria has served as a stark reminder of the importance for businesses to be prepared for supply chain disruptions caused by natural disasters. The earthquake inflicted significant damage to transportation infrastructure in the surrounding areas, leading to delays and interruptions in the supply chain.?

With the approach of summer, organizations should also anticipate a rise in wildfires in the United States and other parts of the world. A report by United Nations Environment Programme (UNEP) suggests that by 2030 we could witness a surge of up to 14 percent in extreme fires, followed by a staggering 30 percent increase by the end of 2050. Currently, there are 11 active wildfires in the US, with 980 acres burned in Missouri and 808 acres in Kansas.

The escalating impacts of global climate change have intensified the occurrence of natural disasters such as storms, floods, and more. These challenges not only disrupt procurement but also lead to supply chain delays, shortages, increased costs, and numerous inventory management difficulties.

What to do about it: Prioritize sourcing raw materials from reclamation centers where possible. Ensure all reclaimed products adhere to appropriate ISO standards and avoid unnecessary waste disposal that could be recycled. Conduct regular risk assessments and foster collaboration with suppliers and stakeholders to ensure a resilient and eco-friendly supply chain.

Educational Materials

For an in-depth guide on sustainable procurement, check out this resource.

To learn about supply chain risks, hit the link to our blog or this newsletter.

If you want to learn the 6 benefits of procurement automation, click here.

To learn how to conduct spend analysis, follow the link to our blog.

If you want to find out how to overcome supply chain disruptions, click here.

For a complete guide on supplier onboarding, check out this material.

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