In life or in business, risk taking has benefits and may even be an essential ingredient of success. Quite the opposite when it comes to procurement – the last thing you want is risk. A smoothly functioning procurement process is standardized and dependable.
Why is it important to reduce procurement risk?
Procurement is no longer just about cost control. It’s now become a key strategic function aligned with broader corporate priorities. That’s because modern businesses must operate globally at a faster pace than ever before. They also serve customers whose purchasing priorities have changed. Problems in procurement have broad repercussions such as:
- Supply chain disruptions delay products and projects. What may have been a minor episode in the past can now drastically affect the stock price in minutes.
- Today’s consumers believe that a brand’s mission and reputation is just as important as its products. When procurement sources from unsustainable sources or unethical vendors, the resulting scandal quickly spreads and erodes trust e.g. Nike sourcing from sweatshops.
- Compliance is also a growing concern across the business landscape. Today, even small businesses source worldwide and it’s easy to run afoul of local laws such as anti-corruption statutes. The impact can be devastating both financially and in terms of reputation.
Obviously, a key business objective is to improve procurement’s efficiency. However, given the broad repercussions of procurement scandals, minimizing risk is at least as important a consideration.
The 6 Most Common Risks in Procurement
Here are some common challenges that businesses of all sizes must deal with:
1. Poor Internal Needs Analysis
When a department or business unit identifies the need for a product or service, it kicks off the procurement process. The risks here are somewhat obvious:
- Overstatement of the need
- Understatement of the need
- Unrealistic schedule
- Inadequate budget
- Poorly designed requirements
Obviously, any of these situations result in wasted time and/or unneeded expense. Far worse, they delay critical product rollouts or projects. These delays frustrate today’s impatient customers and, nowadays, they’ll discuss it with their friends. This customer dissatisfaction has an outsized negative impact on your brand.
2. Vendor Selection and Management
Procurement’s first task is to ensure a reliable and stable supply of the products and services your business needs. Without dependable vendors, needs go unfulfilled and projects are delayed even for big companies. As we’ve seen, the impact is outsized.
Globalization has further distributed supply chains across vast distances and timezones. As a result, one of procurement’s most important priorities is developing real relationships with suppliers. The most successful businesses are those that treat suppliers as partners and understand the benefits of truly collaborating with them.
According to a recent survey, almost 60% of companies have taken measures to strengthen the quality of their supplier relationships.
3. Corporate Social Responsibility
It has now clear that customers prefer to purchase from companies they perceive to be ethical. The loyalty and price premiums for doing so are real and companies that genuinely commit to corporate social responsibility programs enjoy the financial rewards for doing so.
Millennials are the big drivers behind the movement to champion ethical and environmentally conscious companies. As the proportion of these younger generations grows, they are flexing their financial muscles to promote their agenda.
As companies recognize that they will be held responsible for their products from sourcing to distribution, procurement plays a critical role. It must ensure that suppliers adhere to the social, ethical, environmental, and fairness standards that the business itself promotes. It must vet and monitor suppliers and work with those that promote diversity and inclusion, commit to sustainability,
4. Maverick Purchasing
Every company has to deal with purchases made outside the normal process. These purchases often incur extra costs but they also expose the organization to extra risks:
- Compliance risk from incomplete audit trails and an overall lack of control.
- Financial risk if this maverick purchasing overshoots budgets and reduces profitability.
- Competitive risk if the goods don’t meet standards and negatively impact the quality of your products.
- Brand reputation risk if customer expectations are not met.
5. Lengthy Processes & Inaccurate Data
It’s a business reality – products and services must sometimes be procured at the last minute in order to meet a deadline. Late projects are already a huge source of stress – the last thing you want is unnecessary internal bureaucracy that causes further delays and stress.
Errors and mistakes are another needless source of stress, delay and time waste. Inefficient processes also encourage maverick purchasing and the risks that entails.
As we’ve already seen, the downstream impacts such as slower product rollouts, quality issues, and brand damage are major concerns.
6. Talent Shortage
To succeed in the 21st century, a business must attract and retain world-class talent. The procurement department is no exception. In fact, a recent brief from DHL Research predicts severe talent shortages for supply chain professionals.
Yet the majority of companies have taken zero steps to develop a long-term strategy to shore up their talent. As a result, they risk being unable to execute even if they have a solid strategy.
Further, as procurement’s priorities evolve, the core job has changed. It’s harder to find people with the right mix of tactical and strategic skills. Companies who don’t have a long term plan risk having to deal with a significant skills gap.
How can you minimize procurement risks?
When it comes to addressing the challenges we’ve identified above, here are a few things to keep in mind:
1. Elevate procurement to a strategic level
First, recognize that procurement’s priorities have changed as the business landscape has dramatically changed. Companies must recognize that procurement is a strategic business function that goes well beyond cost-control and supply chain management.
Procurement decisions dramatically affect brand value, stock prices, customer loyalty and have enormous long-term consequences. Companies must truly think beyond the bottom line.
2. Improve User Communication
To ensure that you don’t misinterpret user needs and procure the wrong products, improve communication with end users. Emphasize the importance of solid functional requirements, obtain a clear statement of need, and work with users to create practical and realistic timelines that take into account lead time for procurement.
3. Build Legitimate Supplier Relationships
As we’ve seen, globalization carries intrinsic risk. However, the benefits are simply too large to ignore. That requires a mindset change – treat suppliers as partners and not as vendors who can be blamed when things go wrong. Foster real, collaborative relationships with them so you can genuinely work together when the inevitable kinks appear and minimize disruptions.
4. Embrace Corporate Social Responsibility (CSR)
Create a real CSR program and let procurement lead the way. Customers are paying extra attention to supply chains and their impact on the environment when it comes to choosing the products they purchase. Companies can no longer blame the supplier when exploitative labor practices, unsustainable sourcing or corruption scandals come to light. A responsible procurement program’s objectives encompass more than just the company to include customers, the environment, and society as a whole.
5. Deploy Modern Automation Technology
When it comes to Spreadsheets vs Software, there’s only one winner. A modern procurement process must use modern tools.
If you’re a large business or you process large transactional volumes, a full-fledged e-procurement system like SAP Ariba might be the right solution. These packaged solutions offer everything you need to digitize procurement, accelerate processes, and reduce delays and time wastage. One of the downsides is that a system like this requires you to adopt their way of doing things. Sure, you can customize but that’s really expensive and has the potential to lock you in.
For smaller businesses or those who have specific business requirements, a process automation solution makes the most sense. Modern, visual workflow software is affordable and easy enough for anyone to use.
You can easily digitize your procurement processes and continue to meet your specific business requirements.
In any case, make sure to analyze your workflows to derive insights into how you can optimize and improve them. Digital data and analytics is the forerunner of machine learning, artificial intelligence and the technologies of the future.
Procurement is a core function for every business – after all, you can’t create the products you sell unless you have the supplies you need to make them.
The business environment continues to accelerate, globalization’s hold on supply chains strengthens, consumers prefer and promote socially responsible companies, and talent scarcity remains a major concern.
In this landscape, you must understand the importance of strategic procurement, invest in automation and data analysis, and consider the greater good so that your business can reap commensurate financial dividends and prosper in the 21st century and beyond.