Procurement risks are when the process of buying or sourcing products or services, or resources, becomes uncertain. The COVID-19 pandemic has reminded many businesses of the negative impact these risks can have on their business performance.
Procurement risk is a severe issue for businesses. It can harm your company’s health and revenue. What would happen if your purchase order was for raw materials to make your widgets, but it never arrives?
There are risks that your business might face when procuring goods or services from a partner or vendor. These risks may not be within their control.
This article will explain what procurement risk is and how it occurs. We also discuss how to create a procurement process and set up procurement solutions for your company.
Common Procurement Risks
1. Improper Contract Management
The contract management refers to all processes that occur from the initial creation of an agreement with a supplier to its termination. The majority of contract management involves performing analysis against the contract terms. Contract management can become complicated for large projects where many suppliers are involved. A professional is needed to verify the quality of work. A lot of paperwork can also complicate management.
Contract management software is the best solution for contract management. It is an excellent tool for managing supply chain risks. It has a repository that stores all correspondence, tracks amendments, and notifies you of important milestones. It is easier to find out when there has been a breach of contract terms.
2. Inaccurate Needs Analysis
A needs analysis is the first step in any procurement process. To run your business, you must determine what you need, when it is needed, and at what price.
Forecasting is one tool and technique that can be used to help companies develop a better procurement strategy. It can also help in avoiding supply chain problems.
Purchasing too many or too few products can lead to a series of unfavorable events that could negatively impact your business. Overbuying can lead to inventory surpluses, which can cause additional storage costs and inventory damage. You may run out of inventory if you buy too much. This can impact your ability to deliver to your customer. Your business’ overall profitability will be affected if you lose customers.
To minimize any potential risks associated with your procurement planning process, you need to identify them early.
3. Manual Procurement Process
Organizations that still rely heavily on manual procurement are at unnecessary risk. The lack of transparency in procurement is the main reason for most of the problems discussed. This transparency is impossible with manual procurement.
Your organization is vulnerable to costly data entry errors if manual data entry is not done correctly. It is easy to overlook the warning signs of a disaster if you don’t have real-time reporting. Data silos can lead to multiple, potentially inaccurate, pictures of the project’s progress.
These events can expose your company to unnecessary risk, making it more difficult for your procurement team to come up with solutions in the event of an emergency. Automate your procurement process using e-procurement platforms. These integrated systems offer the data tracking and real-time reporting you need to reduce the risks in your supply chain.
4. Underdeveloped Contract Management Processes
Common procurement risks include poorly developed contract management processes. You could create a contract without having a defined process for contract management and subject matter expertise.
Your business is more at risk if it doesn’t have the right contracts with vendors to address any potential risks, such as those related to incorrect, incomplete or outdated data.
5. Slow Internal Process
Due to the inherent problems created, slow internal processes could impact procurement efforts. Slow processing of purchase orders can lead to production delays or other critical tasks. This could be due to stock outs and shortages. Slow processing of invoices could result in suppliers not receiving early payment discounts. It could also lead to strained supplier relationships if invoices are not honored on time.
Automating menial internal processes can help increase speed and accuracy. The automated invoice processing software can perform a three-way match of hundreds of documents and flag suspicious invoices for investigation. This software can also improve your internal controls in the procurement process.
6. Talent Shortage
Procurement skills are highly in demand due to the current global supply chain. If working conditions don’t encourage staff to stay, an organization could have high staff turnover. Other than high salaries, organizations must find other ways to encourage staff to stay. High salaries can be too expensive, leading to high procurement costs. More sustainable are working conditions that promote good work and other benefits beyond money.
Also, organizations need to find a way to build a knowledge bank within their organization so that staff turnover doesn’t cause operational problems.
What are the risks you recognize as relevant to your procurement process? Procurement risks will always be there, regardless of how well you manage and mitigate them. Management of your procurement risks can be an excellent place to start, whether you are looking to build strong supplier relationships, embrace e-procurement platforms, or simply improve your business processes.