Procurement, like every other part of a business, involves risk.
Whether it’s along the lines of sourcing, managing vendors, processing invoices and payments, there’s a lot that can go wrong in managing procurement.
That’s where procurement risk management comes into play.
Risk management in procurement refers to the efforts made to mitigate procurement risk, solve issues arising with the procurement process, and prevent further problems from arising.
In this article, we’ll explore procurement risk management, covering:
- The essence of procurement risk management
- Common types of procurement risk
- A five-step process for managing procurement risk, and
- Why Kissflow Procurement Cloud is the ultimate procurement risk management tool
Why is managing procurement risk essential?
The essence of managing risk is to enable your procurement process to function optimally.
Removing blockers that may come up streamlines the process of sourcing for supplies, managing vendors, invoices, internal processes, and maintaining high supply standards.
Streamlined vendor management
Vendors are your primary partners in the procurement journey. They are the direct link to the supplies you need to run your business and they communicate market information you can leverage to change your strategy.
But managing vendors can bring about risks such as poor supply quality, billing fraud, untimely supplies, etc.
Procurement risk management empowers you to hold your vendors to higher standards and easily identify and penalize or even remove defaulting suppliers.
Contract management efficiency
Contracts are the soul of your relationship with your suppliers since they lay out the terms under which you’ll exchange supplies for cash.
Procurement risk management enables you to identify potential problem areas in your relationship with each vendor, such as in the contract clauses, minimum order quantities, pricing, and special provisions.
As a result, you can avoid potentially risky situations with suppliers before they occur.
Predictable spending patterns
Procurement risk management also entails keeping an eye on historical spending data to determine just how much budget to dedicate to specific items you need.
Common types of procurement risk
Poor supply chain management
Beyond the list of supplies you need to run your internal operations, you also need up-to-date information on how much each supply you need costs and how its prices change, in order to plan ahead effectively.
If, for example, you notice that a particular supply you need for your production process goes scarce and gets costlier over the holidays, you can stock up with your reserve cash and stay operational when the market starts witnessing friction.
But in a situation where you don’t manage your supply chain efficiently, you’ll always be a step behind, resulting in higher supply prices, lower quality, and unpredictable supply cycles that may hurt your business.
Inadequate analysis
Before you head to the market, it always helps if you take a paper and write out what you’re going to buy.
Simple enough, right?
But as simple as it sounds, many organizations simply jump into making impulse purchases without taking a holistic view of what their needs are. This results in employees spending lots of money outside the procurement budget, purchasing unstandardized supplies, and employees making maverick purchases that are not planned for.
Inadequate needs analysis creates a situation where a lot of time, money, and effort gets wasted trying to solve a procurement challenge before you realize the problem had a less complicated solution than you’d envisioned.
Internal fraud
Fraud eats into your budget and can be a huge procurement risk.
Whether it’s from vendors trying to pass off fraudulent invoices as genuine, or employees using procurement funds to furnish their needs, fraud puts a burden on your procurement operations.
In fact, research by the Association of Certified Fraud Examiners details that organizations across the US lose up to 7% of their annual revenue to fraud—most of which never gets discovered until it’s too late—or never.
Manage your procurement risk in five steps
With a clear understanding of the risks associated with procurement, how do you manage and mitigate those risks to secure your procurement operations?
Here’s the five-step process required to manage procurement risk and build more efficiency into the procurement process.
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Risk identification
Before you can get started mitigating risk, you must first identify what risk you have on your hands and where it’s arisen from.
Maybe it’s from your vendor management, your sourcing process, your invoicing and payments processing, or maybe some other smaller sub-process within the procurement umbrella. Identifying existing risks is the first step of managing them.
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Risk analysis
Once you’ve identified the procurement risk, the next step is to break it down into its components to understand why it arose, what factors contributed to it, and what efforts could be adopted to mitigate the risk. Risk analysis is simply making a concerted effort to understand just how significant the risk is and what can be done about it.
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Risk prioritization
There are lots of opportunities for risks to arise in procurement, and consequently, you will discover quite a number of them.
Now, you may have limited internal resources or bandwidth to handle them all at once. As a result, the best approach is to rank these risks in order of how much danger they pose to your procurement operations.
This risk-ranking process makes it easier to channel your efforts and manage risks with limited resources.
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Risk mitigation
Once you’ve ranked all the risks you’re currently facing, the next step is to start working on mitigating them.
- What improvement can you make to reduce the risk each factor poses to your operations? Can you automate some of the risk management?
- How can you reduce your exposure to the risk element?
- Where do you need to apply effort to reduce risk?
Risk mitigation involves taking steps to reduce your exposure and limit the chances of a risk becoming a full-blown catastrophe.
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Risk registering
When you’ve completed the initial risk mitigation efforts, your work isn’t yet done. It’s essential to create a record of the risk elements you’re exposed to, document any insights into what causes them, and any best practices to avoid them for the future.
Registering risk items is a way of keeping a record so everyone watches out for potential risks and starts solving before a risk becomes a crisis.
Control your procurement risk with Kissflow
Now, it’s important to understand that risk itself isn’t a problem. But it is a possibility for things to go very wrong if you don’t plan ahead to close the gaps and leaks.
Kissflow Procurement Cloud is one tool you need in your procurement arsenal to mitigate procurement risks once and for all. It brings all your procurement into one source of truth where you can manage everything cohesively, discover what’s not working, and create your own tailored solution to meet your unique procurement needs. With Kissflow Procurement Cloud, there’s enhanced compliance, visibility into your process & spend, and improved supplier management. Request a free demo to learn more!
