Predicting and avoiding risks are hallmarks of effective Procurement departments and is essential if you want to create value as well as reduce costs for your company. While the most visible role of the procurement function is to obtain goods and services for an organization, that’s just the “what” of procurement.
The “why”—striking a critical balance between risk and reward in order to generate both savings and added value—is where risk management comes into the picture.
Every purchase, from pencils to equipment, trails behind it a string of transactional data, and carries on its shoulders a set of variables exposed to risk, including vendor reliability, product quality, legal and financial compliance as well as customer satisfaction and reputation. Because it involves decision-making at all levels and can affects every part of the organization, procurement strategy must prioritize risk mitigation in order to
Common Types of Procurement Risk
- Inadequate Needs Analysis
Procurement needs to have visibility of what you need, when you need it, or who will deliver it on time and at the best price. Otherwise, you may end up purchasing too much, not enough, or the wrong goods and
services altogether, at sub-optimal prices and without the benefit of discounts and economies of scale offered by well-negotiated contracts. Rogue spending will
likely be a major concern; both financial planning and your procurement strategy will be impacted. Linking budgets to actual purchasing behaviour will be difficult, and create an incomplete audit trail, exposing you to significant financial risk. This could damage both your profitability and your ability to achieve competitive advantage, as well as your reputation with your target audience if the quality and availability of the goods and services you offer are affected.
The use of data analytics in your procurement organisation can allow you to reduce your risk by analysing your transactional data for everything you buy, and allow you to identify patterns of usage and other information that make it easier both to develop smarter purchasing strategies and negotiate mutually beneficial contracts with your best suppliers.
- Poor Supply Chain in Management
Linked to inadequate needs analysis, if you don’t have a centralized, transparent, and easy-to-use vendor evaluation method, along with an equally accessible but fully vetted method for requests, approvals, purchases and payments, managing your supply chain will be tough. Rogue spending will be a given; you’ll be exposed to significant risk of false invoices and other risk by unscrupulous vendors, too. Your staff will likely spend too much of their valuable time chasing invoices or searching for terms & conditions, exposing you to the risk of late or duplicate payments. Furthermore, failing to vet your vendors using key performance indicators (KPIs) robs you of a wealth of information you can use to remove redundancies and form strategic partnerships with your best suppliers. You also won’t have contingencies in place for emergencies, and your suppliers won’t have access to the valuable information they need to offer you special incentives or discounts. This risk can be reduced through the use of a vendor portal for automated vendor evaluation and management. You can track vendor performance and issues, identify negotiation opportunities if your needs change, and reduce costs significantly by outsourcing part of your purchasing to trusted partners The system can eliminate rogue spending by defining and assigning roles for requests, approvals, and purchasing, and make sure you get the best possible price (including discounts) while paying your vendors on-time (or early).
Verified documents linking purchase orders to invoices and delivery notes will speed up the entire procure-to-pay (P2P) process thereby ensuring you don’t lose potential gains in value due to increased staffing resources.
- Inefficient Contract Management
Modern procurement practitioners regard contracts as much more than a simple agreement to buy. Contracts are a strategic opportunity to form mutually beneficial partnerships with vendors who share the ideals and goals of your organization—and without an effective way to manage them, you’re sacrificing both cost savings and opening your business to compliance issues. This risk can be reduced through a centralised document library with terms automatically linked to approved vendors and rich transactional data that can be turned into reports for finance, marketing, and senior management. It makes negotiations much simpler. Review and approval by your legal team means contract information is always accurate and up-to-date, and staff can create new contracts from pre-approved templates for easier review and approval.
Data analytics can provide insight into new opportunities for sourcing, and help ensure both you and your suppliers adhere to the terms and conditions of existing contracts while helping you plan for more favourable terms and conditions when it’s time to renew.
- Fraud and Corruption
While some risks are created by a lack of available data or unintentional inefficiencies, others are both intentional and malicious. The specific risks include invoice fraud, embezzlement, and theft via false record keeping. A decentralized and opaque procurement function robs hinders your ability to spot red flags that might otherwise arise during risk analysis.
This risk can be reduced through clear and automated procurement functions, limited catalogues from approved and preferred vendors, and complete transactional information with document cross-checking make it very hard for potential fraudsters to submit a fake invoice or conceal corruption. In addition, the full audit trail available for every transaction and a fully documented approval process increases your visibility of potential red flags.
Avoid business losses, reputational damage, and losing out to your competition by ensuring risk identification and mitigation is part of your procurement plan. Contact us today. Find Out How Minimize Risk. Maximize Value. With PLANERGY Managing Risk Is Easy.