Have you ever been in an earthquake? You’re waking up, drinking your morning coffee, when you’re suddenly thrown off kilter (pun absolutely intended) by ear-piercing sirens. Things start to fly off shelves, the dog goes crazy, and you must react. You’ve walked through the scenario in your head and are prepared to confidently take action.
Procurement and supply chain risk management is a bit like earthquake preparedness in an active seismic zone. You live with the constant reality that disaster could strike unexpectedly, at any moment. When risks present themselves, you know what to do because you’ve thoughtfully planned ahead.
With so much disruption in the world today, preparing for and managing supply chain and procurement risk has never been more important. Below, we discuss nine high-priority risks procurement and supply chain teams may face in the coming years.
We’ll start with some basics for those who need a quick refresher on the ins and outs of risk management in procurement. But first, here’s a peek at our list in case you want to navigate directly to any of them:
- Agility and Preparedness for Global Health Crises
- Unexpected Natural Disasters
- Geopolitical and Economic Instability
- Sporadic Fluctuation of Global Energy Prices
- Trade Restrictions & Sanctions
- Urgent Need for Digital Procurement Transformation
- Growing Data Privacy and Security Concerns
- Supplier Relationships
- Balancing Inventory with Demand
What is procurement and supply chain risk management?
It’s a proactive, organizational approach to identifying, assessing, and managing risks related to purchasing goods or services. This includes identifying potential risks in the procurement process, such as cost overruns and miscommunications, as well as possible risks that could arise at any point in the supply chain.
Forward-thinking procurement leaders take time to ensure they have the right suppliers in place, that their sensitive data is secure, and that they can successfully deliver goods and services without interruptions.
Proactively developing risk management processes helps you identify threats before they become real crises. Early identification of potential risks facilitates the development of mitigation strategies that safeguard and future-proof your business.
9 Procurement Risks to Prepare for Today
Are you ready for a risky discussion? (OK, enough with the puns already!). Let’s dig into nine high-priority risks you can prepare for today. Here they are in no particular order:
1. Agility and Preparedness for Global Health Crises
There’s no disputing the fact that COVID-19 was a nightmare for procurement teams around the world. Now, a few years later, widespread perception is that the pandemic was a once-in-a-lifetime event. However, the risk of new spillover events (when an infectious virus mutates and jumps from one species to another–in this case to humans) is, in fact, steadily increasing.
In a 2021 event hosted by the Centre for Global Development, experts discussed the likelihood of another global pandemic. Predictive modeling indicated that the probability of a new pandemic, equal in magnitude to COVID-19, to be between 22% and 28% over the next 10 years. That range rose to 47% to 57% over the next 25 years.
If ever there was a time to embrace agility and preparedness as mechanisms to shield your business from the impact of a major global health event, it’s now.
2. Unexpected Natural Disasters
Climate disasters – such as floods, wildfires, droughts, tornados, etc. – greatly impact supply chain mobility and fluidity.
These events also cost businesses billions of dollars (USD) annually; in 2021, climate events cost the United States $145 billion (USD). Such events are on the rise (see chart below).
They represent a significant threat and central theme in procurement and supply chain risk management strategies. Be sure you have contingency plans for these types of incidents. As you can see, the benefits of being prepared far outweigh the costs of preparedness.
3. Geopolitical and Economic Instability
As the world becomes increasingly interconnected, geopolitical and economic instability are increasingly probable threats to your procurement efforts. This type of instability cause disruptions in transportation, increase the costs of goods, and lead to delays in production and delivery. It can also increase lead times, reduce the availability of goods, and lead to trade barriers and tariff hikes.
To ensure supply chain resilience, consider adopting strategies like diversifying suppliers, maintaining safety stock, developing contingency plans, monitoring geopolitical and economic events, and building strong relationships with suppliers.
Preparing for this risk requires specialized knowledge of global economics and geopolitics. But, again, the benefits of preparedness outweigh the costs. Be sure your team is kept up-to-date on these types of changes to minimize vulnerability in your supply chain.
4. Sporadic Fluctuation of Global Energy Prices
A handful of countries–such as China, the United States, and Russia–supply the majority of energy to global markets. Some regions rely on one or two specific countries for the majority of their energy.
When conflict arises in production countries, energy supplies can be cut off. Supply shortages lead to spikes in global energy prices.
It’s important to be prepared for fluctuations like this. The list of variables beyond our control, which can impact energy prices, is as long as a queue of cars waiting to fill their tanks with gas during a petroleum shortage.
And although we’re slowly increasing our reliance on renewable energy sources, fossil fuels will almost certainly drive global commerce for decades to come.
5. Trade Restrictions & Sanctions
As cross-border trade networks grow, we’ll likely see a rise in international sanctions and trade restrictions. These are aimed at imports, exports, investments, travel, and financial transactions carried out by national governments, private and public organizations, and individuals.
If any part of your supply chain involves a country or legal entity that receives sanctions, you’ll experience disruption. For example, trade restrictions imposed on Russia following its 2022 invasion of Ukraine caused procurement chaos around the world. Why?
Supply shortages sparked price hikes and inflation, while key trade routes were cut off indefinitely. For example, Russia and Ukraine are prolific agriculture producers. Together, they produce around 30% of the world’s wheat and 75% of its sunflower oil.
If you buy, sell, or transport either of those products, you probably felt the impact immediately. The same would have been true if any item you purchased needed to travel through that region.
To minimize the impact of trade restrictions and sanctions, consider diversifying your supplier network with alternative sources for essential items.
6. Urgent Need for Digital Procurement Transformation
Digital transformation is standard and expected in most industries today. Procurement, incidentally, is one of the last business functions to fully adopt a digital-first business model. Additionally, many confuse the implementation of digital automation software with digital transformation.
At the heart of full digitization are data and the insights they generate, which can drive intelligent business growth decisions.
However, many companies continue relying on manual, paper-based procurement processes, placing them at risk of significant financial and market share losses. If you haven’t undergone a digital procurement transformation, today is likely the best day to start.
7. Growing Data Privacy and Security Concerns
The amount of unstructured (vulnerable) data we store is expanding at lightspeed, and so is the volume and frequency of cybercriminal attacks.
Global cyberattacks increased by 38% in 2022, compared to 2021. The rise of advanced artificial intelligence apps will compound the risk of attacks in the coming years.
To minimize the risk of cybercrime, your procurement risk management strategy should prioritize encryption of all sensitive, unstructured data.
What is unstructured data? In the simplest terms, it’s information that’s not stored in a traditional row-column database. Examples include emails, internal memos, and strategy documents.
Steps to secure sensitive data include:
- Implementing strong authentication protocols for all data transfers
- Conducting routine audits of your systems and data to ensure compliance with industry standards like GDPR
- Coordinating recurring internal staff training on secure data handling practices.
8. Maintaining Healthy Supplier Relationships
When you work with a range of individual suppliers with distinct operating styles, maintaining healthy relationships with each one requires a thoughtful strategy.
Poor supplier relationship management can lead to ineffective supply chain oversight, lack of consistent quality control, and longer lead times. At the end of the day, your suppliers' actions are a reflection of your reliability--they directly impact your organization's reputation.
To mitigate the risk of negative impacts, we recommend you:
- Establish clear processes for onboarding new suppliers
- Maintain proper oversight of existing ones
- Set a cadence for routine supplier performance reviews
- Assess each supplier’s efficacy throughout the relationship lifecycle
9. Balancing Inventory with Demand
Successful inventory management can be challenging–especially for manufacturers, retailers, and those in the hospitality industry. Many companies stock hundreds of thousands of items and must accurately track stock levels for each one.
The stakes are even higher for healthcare procurement management teams, as maintaining sufficient supply volume can be a life-or-death situation.
Irrespective of the industry in question, low inventory levels can lead to backorders, delays, and administrative headaches. At the same time, an inventory surplus wastes resources and leaves you with outdated or irrelevant stock.
Neither of these scenarios is ideal so consider incorporating demand monitoring and assessing your ability to meet demand into your procurement risk management strategy.
Risk management is an essential component of successful procurement and supply-chain operations. By implementing a risk-based procurement approach, you can identify potential threats and develop strategies for mitigation.
With the ever-changing nature of the global economy and regulatory environments, it’s critical that you’re prepared for all potential disruptions you may face.
A proactive approach to managing procurement risk will help safeguard your business and generate a competitive advantage in today’s hyper-competitive landscape. It will also help to futureproof your business for any unexpected disruptions that will certainly arise.
The reality is that risk in procurement and supply chain management -- just like earthquakes -- are unpredictable and out of our control. What we can control is how prepared we are to react on instinct, keep calm, and carry on.