All procurement activity presents risks and any procurement professional worth their salt knows that effectively managing risks in operations and supply chain is vital. In this article, we examine why procurement risk management is important and how the risks can be identified and controlled.
What is risk management in procurement and why is it important?
Risk management in procurement relates to the potential for failure within the procurement and supply chain process. Risks include fraud, quality, compliance, cost and delivery risks. Procurement risks can be generic across all sectors, or sector and business-specific.
Managing risks throughout every stage in the procurement process can help provide the following:
1. Reduction in waste.
2. Better use of resources.
3. Improved service delivery.
4. Improved supplier and client relationships.
5. Improved customer service.
6. More effective change management.
7. Increased innovation.
8. More informed decision making throughout the business and supply chain.
9. Better management of maintenance activities.
How to manage procurement risks
● Identify risks. The first and crucial step in managing risk in the procurement and supply chain is to identify the risks that your company is exposed to. This should include both internal and external risks, throughout every step of the supply chain. You should carefully consider the reliability of your vendors and any risks they are exposed to - your business is only as strong as your chain of suppliers, after all. You should also consider product quality, impact on business reputation and financial and legal compliance.
● Assess and document the risks you are exposed to. From the smallest to the most significant, every risk to your business should be documented and assigned a level of potential impact on the company and your supply chain. You should consider strategic risks, human risks, operational risks, compliance risks, legal risks, reputational risks and financial risks. Responsibility for managing these risks should be clearly defined and the document as a whole reviewed regularly, with legal input if possible.
● Manage your supplier relationships. If your business does not have a robust due diligence process in place, now is the time to act. This, alongside online insight tools and other research processes should help you gain a comprehensive understanding of the reliability of your suppliers, any conflicts of interest, commitment to sustainable procurement and more generally, whether their operations and ethics reflect those of your company. Find out more about why sustainable procurement is important.
No matter how you originally found your suppliers, make sure you can completely rely on their ability to deliver and are confident that they have strong contingencies in place if things go awry. Don’t forget that company statuses change all the time so it is a good idea to reassess suppliers regularly to ensure they continue not to pose a risk. Make sure you consider any risks presented in the sales process, too. It is a good idea to work alongside your sales team to identify and resolve any potential problems with processes, clients or suppliers.
● Maintain good quality assurance. There’s no use in making sure your products arrive on time if the standards aren’t what you and your customers need and want. Your quality monitoring processes should be as robust as those you have in place for your supply chain - at all times.
● Have your invoicing and payment systems in order. An obvious but very important point. Work with your finance team as much as possible to help ensure your payment terms reflect the needs of the company, that your anti-fraud processes are airtight, that you have excellent processes for chasing payments and that there’s no risk of invoices or payments slipping through the net.
● Understand your global markets. As businesses seek to grow, domestically and internationally, they must be able to adapt in agile way to new environments, laws, regulations, cultures and ways of working. All these things present new risks to businesses, ones that can only be mitigated with a good understanding of your global markets. Whether your insights come from local consultants or your own research, make sure you and your sales team know your markets and their customers inside and out.
● Work collaboratively with your supply chain. Procurement professionals are often placed in high-pressure situations where disputes can arise. Sometimes you will need to put your foot down but it is generally far better to try to come to an amicable arrangement where all parties are satisfied.
In an increasingly globalised business world, with evermore complex supply chains, procurement professionals are certainly facing some challenges. By developing and maintaining good risk management processes and making sure that your team are aware of their responsibilities in mitigating risk, you can help ensure your business operations, and bottom line, are secure, now and in the longterm.
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