PROCUREMENT RISK MANAGEMENT GUIDE

PROCUREMENT RISK MANAGEMENT GUIDE

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. There’s no time to think, so hopefully you’ve thought through the scenario beforehand and are prepared to bolt out the door.

Procurement and supply chain risk management is a bit like earthquake preparedness in an active seismic zone (and I hope you’ve never experienced one–they suck). You live with the constant reality that disaster could strike unexpectedly, so you do your best to think of everything and be prepared just in case. Being prepared helps you stay calm and maintain your composure so you can focus on rapid solutions.

With so much disruption in the business world today, managing supply chain and procurement risk has never been more important to business survival. However, with a little preparedness and education, you can put safeguards in place to mitigate risks and focus on growth.

Below, we delve deeply into procurement and supply chain risk management. You’ll learn about 26 key risks to be aware of and prepare for over the next five years. We'll cover everything from economic and geopolitical risks to environmental and global health risks.

Agility is key and knowledge is power. With a little bit of wisdom and preparation under your belt, you can confidently face whatever challenges come your way in the future. We’ll start with some basics for those who need a quick refresher on the ins and outs of risk management and mitigation.

WHAT IS PROCUREMENT AND SUPPLY CHAIN RISK MANAGEMENT?

In short, 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 risks related to suppliers, such as supply chain disruptions. 

It also involves developing strategies for mitigating the associated risks, such as establishing a solid supplier vetting process, setting up contracts that minimize potential liabilities, and ensuring compliance with regulatory requirements. Risk management software can be used to assist with this process by automating certain tasks and tracking key performance indicators

WHY IS RISK MANAGEMENT A GROWING CONCERN?

In today’s unpredictable world, the importance of effective procurement risk management is tantamount to business success. Fallout from supply chain disruption caused by global health, economic, political, and climate-related events injects a huge dose of the unknown into what lies ahead.

Companies should ensure they have the right suppliers in place, that their supply chains are secure, and that they can successfully deliver goods and services without disruption. This requires proactive risk management processes that can accurately identify potential risks and develop strategies for addressing them so the business can remain competitive in an ever-changing environment. 

Additionally, with increased demands on businesses to stay compliant with regulations related to health and safety protocols, it is essential for procurement teams to have effective risk management processes in place to ensure compliance. And that’s just the tip of the proverbial iceberg.

Effectively Managing Risk Can Differentiate Your Business

Effective procurement risk management processes can help differentiate a business in its industry by increasing efficiency and reducing costs. 

When you accurately assess potential risks and develop strategies to mitigate them, businesses can streamline their operations, save time and money, and reduce potential fines and other penalties. 

By establishing protocols for vetting suppliers and ensuring compliance with regulations, businesses can develop trust among their customers. 

And preparedness for geopolitical risks to the supply chain, you show investors you’re running a mature procurement organization. This will instill trust and confidence in investors. 

Ultimately, managing procurement risks effectively–in a way that minimizes disruptions to business as usual – can be a powerful competitive advantage. 

26 High-Priority Risks to Consider Today

Are you ready to dig into a risky discussion? Let’s dig in with 26 risks to be aware of and prepared for over the next five years.

1. Growing Data Privacy and Security Concerns

The amount of unstructured (vulnerable) data we store is expanding at lightspeed, and so is the number and frequency of cybercriminal attacks.

‍Global cyberattacks increased 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 efforts 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 email and internal memos or 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.

2. Non-Compliance with Regulatory Requirements

It’s critically important to be aware of any and all regulations governing your procurement activities. Non-compliance can lead to fines, penalties, or even jail time in some cases.

Keeping up with constantly changing laws and staying ahead of the curve is an essential part of being a successful procurement team leader.

3. Global Trade Restrictions & Sanctions

As trading becomes more globalized, you’ll see increased risks associated with global trade restrictions and sanctions. These are imposed by organizations like the United Nations or individual countries. 

Any violations can severely impact your ability to procure certain products from certain regions at certain prices. That’s why is so important for procurement teams to be informed on emerging trends and government policies that will affect their operations

4. Poor Documentation Practices and Paper-based Processes

While paper-based processes may seem efficient in the short term, they can come back to haunt businesses if not properly documented—especially when negotiations between suppliers become complex or lengthy over time. Investing in modern documentation tools such as cloud storage solutions will help ensure compliance and reduce risk associated with these processes over the long run. 

5. Change Management for New Technologies or Processes

The introduction of new technologies (such as artificial intelligence) into existing supply chain networks can cause disruption and so must be properly managed.

Be sure you understand the potential impacts of introducing new tech onto existing structures before implementation. This will minimize disruption caused by unforeseen issues down the road. 

6. Unexpected Natural Disasters

The rise of unanticipated global climate events has increased the risk of supply chain interruptions caused by extreme weather and natural disasters. 

Be sure you have contingency plans for these types of incidents. They can cost businesses exorbitant amounts of money. Recent research estimates that climate events will cost businesses around $178 trillion (US) over the next 50 years.

7. Agility and Preparedness for Global Health Crises

Agility is perhaps the most important procurement risk management ability procurement teams must adopt moving forward. 

Anything could come your way so being prepared for and and informed about potential global health crises is crucial to minimize the impact on procurement operations.

8. Overly Complex or Restrictive Governance Policies

Excessively complex or restrictive governance policies can lead to delays in supplier selection, increased costs, and missed opportunities. The depth and breadth of these policies is likely to grow in coming years, further increasing the associated risks.

9. Urgent Need for Digital Procurement Transformation

Digital procurement processes are table stakes today. To maintain a competitive edge, you must stay ahead of their competitors by embracing digital transformation.

This includes leveraging technology to automate manual processes and streamline supplier relationships, thereby reducing the risk of costly delays or processing errors. 

10. Instability of Global Energy Prices

Some countries–for example, Russia–supply specific regions of the world with the majority of their energy. When conflict arises in such a country, energy supplies can be cut off, causing sudden spikes in global energy prices due to unexpected drops in supply.

It’s important to be prepared for fluctuations like this.The list of events beyond our control that impact energy prices is as long as lines of cars waiting to fil up with gas during a petroleum shortage. And although we increasingly move towards heavier reliance on renewable energy sources, fossil fuels will be around for decades to come. 

11. Currency Exchange Fluctuations and Volatility

You should always be aware of the potential risks posed by fluctuations in currency exchange rates, particularly if they are dealing with international suppliers. A sudden shift in these markets can lead to unforeseen costs or reduced profits, so proper risk management must be put in place to prepare for these changes. 

12. Growing Demand for Transparency and Sustainability

Companies are increasingly looking to streamline their supply chains and focus on sustainability initiatives; procurement teams need to ensure that they have the right systems and processes in place to meet customer expectations while managing associated risks. This includes understanding local regulations, ethical sourcing practices, and supplier selection criteria that promote sustainable outcomes.

13. Lack of Top Talent with Specialized Skill Sets

As companies increasingly rely on specialized skills for procurement, a lack of access to these required talents may lead to inefficient or inadequate operations. Companies need to plan ahead and actively seek out the right talent with the necessary skills and experience in order to minimize procurement risks.

14. Environmental Impact from Supply Chain Partners

With growing concerns around sustainability and environmental impact, it is important that organizations assess their supply chain partners' practices regularly in order to ensure they are not contributing towards any negative environmental impacts. Companies should continually evaluate their suppliers’ processes, policies and products as part of an ongoing risk management strategy.

15. Using Advanced Procurement Analytics to Drive Strategy

With the increasing availability of data and advanced analytics tools, procurement teams have the ability to make more informed decisions when it comes to sourcing materials and services. 

Leveraging a data-driven procurement strategy has never been more vital to success. Keep in mind that no two businesses are identical. Invest in technology that enables your business to collect, analyze, and utilize the data you need remain competitive. 

When leveraged properly, procurement analytics can help you identify the best potential suppliers, negotiate better prices, manage relationships with vendors, and create a competitive edge over other organizations.

16. Supplier Relationship Management

As individual suppliers can become more diverse over time, managing varied relationships with each of them requires an effective strategy. 

Poor supplier relationship management can lead to ineffective supply chain oversight, lack of consistent quality control, and longer lead times. 

To mitigate this risk, procurement teams need to establish clear processes for onboarding new suppliers while also ensuring they have proper oversight on existing ones. 

Additionally, they should set regular performance reviews to assess each supplier’s efficacy throughout the relationship lifecycle.

17. Delays in Delivery of Goods or Services

Maintain a constant view into the potential for delays when working with suppliers, as this can have a serious impact on operations and cost overruns. 

It’s also important to ensure that contracts are negotiated in such a way that any potential delays can be mitigated or managed effectively. 

18. Non-compliance with Supplier Contracts

Compliance issues can arise at any stage in the procurement process and so must always be taken into account. This includes ensuring that all relevant legislation is adhered to, that contracts contain appropriate terms and conditions, and that supplier performance is properly monitored and assessed regularly.

19. Rising Costs of Raw Materials and Other Resources

As the world population and demand for resources continues to rise, procurement will face the risk of ever-increasing costs of raw materials and other resources.

This could lead to budget overruns or supply disruptions, which could have serious consequences for their projects and organizations. Procurement teams must regularly monitor the cost of materials, plan for long-term price inflation, and consider alternate sources of supply if possible.

20. Excessive Cost Variance

Even a small deviation from project budgets can have significant impacts on project timelines and outcomes. 

Overruns can cause significant delays in projects as teams scramble to find additional funds, while underspends can lead to substandard results as corners are cut to save money. 

To minimize this risk, procurement teams must ensure that budgets are realistic and transparently managed through strong fiscal controls such as fixed-price contracts whenever possible.

21. Geopolitical and Economic Instability

As the world becomes increasingly interconnected, geopolitical and economic instability become more prominent factors to consider when engaging in public-sector procurement. 

Governments may suddenly change policies or regulations can vary drastically from one region to another, leaving procurement teams vulnerable to sudden shifts in their operations. 

Procurement teams must be nimble and remain up to date on changes in order to best manage their risks.

22. Misunderstanding of Legalese During Negotiations

An often overlooked but highly important risk faced by procurement teams is the lack of understanding of legal terms and conditions during negotiations.

Negotiating contracts can be a complex process, with each party having different interpretations of what is agreed upon. 

Without proper diligence, you could find yourself in unforeseen legal liabilities due to oversight or misunderstanding of key components and should take extra care to ensure they understand the terms they are signing up for.

23. Difficulty Tracking and Evaluating External Partners

Be prepared to track, evaluate, and optimize the performance of external partners over long periods due to the complexity of supplier agreements in this day and age. 

This process can be difficult, as it involves monitoring a variety of data points and metrics. Vendor management software can help ensure that suppliers are providing the best service possible without running afoul with contractual obligations. 

24. Unexpected Changes in Taxation Laws & Regulations

New tax laws and regulations are popping up at increasing velocity. Like it or not, you must be prepared to continually adjust internal policies to remain compliant. 

This is especially challenging for teams with suppliers across the globe. Many tax codes are constantly changing and some may not seem to make sense. It doesn’t matter; you have to abide. Be sure to regularly review tax laws to minimize the risk of accidentally breaking code.

25. Impact of Vendor or Supplier Fraud:

Losses due to vendor fraud can be detrimental and are left unchecked. Examples of vendor fraud include false invoices, kickbacks, bribes, etc. 

To mitigate this risk, implement rigorous due diligence processes to ensure your suppliers are compliant with regulations, ethical guidelines, and industry best practices.

Additionally, consider taking proactive steps to monitor supplier performance on an ongoing basis, in order to quickly identify any issues before they become serious problems.

26. Balancing Inventory with Demand

Successful inventory management can be challenging–especially for manufacturers and those in the hospitality industry. Some companies may have hundreds of thousands of items to keep track of.

Moreover, maintaining sufficient supply volume can be a life-or-death situation for healthcare providers. So, make a point to always be aware of what and how much is being sold. Anticipate demand fluctuations but be careful not to overstock.

Too little inventory can lead to backorders and an inadequate customer experience. At the same time, an inventory surplus wastes resources and leaves you with outdated or irrelevant stock. None of these scenarios is ideal so be sure to constantly monitor inventory levels.

Risk-Based Procurement Approach & Strategy

The risks listed above don’t all apply to you and your business. Regardless, procurement and supply chain risk management isn’t something to take lightly.

For the most peace of mind, we recommend adopting a risk-based procurement approach and strategy. But what does that even mean?

A risk-based procurement approach is mostly what is sounds like. It’s an approach to procurement and supply chain operations that takes into account potential risks associated with external factors you can’t control.

Taking this approach helps you identify areas for improvement in order to effectively manage your procurement operations. And it allows you to do so while also mitigating potential risks that might impact your business.

Interested in establishing this approach in your organization? Let’s walk through the process at a high level.

Key Steps to Implementing Risk-Based Procurement

To truly future-proof your business against the majority of potential risks you might face, we suggest prioritizing the action items below.

Establishing Clear Goals and Objectives

Outline the specific goals and objectives of the procurement process before you start. This will help guide decision-making throughout the process.

Be sure to clearly define your desired results in terms of cost savings, delivery timelines or quality standards. You should also set measurable benchmarks that can be used to assess progress as you move forward.

Assess Existing Procurement Processes

Review existing procedures to identify areas for improvement that can help ensure compliance with industry standards as well as any new regulations or changes in circumstances. 

Consider reviewing records related to past procurements, getting feedback from stakeholders, conducting audits of current systems, and utilizing risk assessment tools when available. 

Identify and Prioritize Potential Risks

Consider both external factors such as economic instability or changes in customer demand patterns. Don’t forget internal risks related to human error or fraud that could impact the procurement operation. 

And make a point to assess both non-financial risks (e.g., damage to brand reputation or loss of customer loyalty) and financial losses that may occur if certain scenarios were to unfold.

Document Strategies and Train Employees

You’ll need documented strategies for mitigating these identified risks and should educate staff on proper protocols. They can then serve as a reference for new hires or a refresher for existing staff.

Moreover, we recommend establishing policies that promote accountability, utilizing technology solutions to minimize human error, and regularly reviewing contracts and records for accuracy and compliance.

Monitor Processes and Update them Regularly

Stay informed about any changes in the geopolitical landscape or global health conditions that could potentially disrupt supply chains. 

Consider conducting periodic reviews of existing processes to ensure they are still meeting expectations. It’s key to ensure you’re always ready to respond appropriately to new developments or regulatory updates. Carrying out necessary adjustments where required helps achieve that.

Closing Thoughts

Risk management is an essential component of successful procurement and supply-chain operations. By implementing a risk-based procurement approach, you can identify potential risks and develop strategies for mitigation. 

With the ever-changing nature of the global economy and regulatory environments, it is more important now than ever before to be prepared for any potential disruptions that could arise in the future. 

A proactive approach to risk management will help businesses safeguard their investments, protect their customers and maximize their chances of success in today’s competitive landscape.