Risk Management in Procurement - Identifying Risks and Developing Strategies

1. What does risk management mean in procurement?
2. What procurement risks are there?
3. What risk areas are there in procurement?
4. What are the causes of risk in procurement?
5. What strategies are there for risk limitation in procurement?
6. Practical example of risk management in procurement
7. What needs to be considered in order to establish risk management in the company?
8. What tools can be useful for risk management in procurement?
9. Conclusion

Risk management should be an integral part of procurement, as it significantly contributes to business success. It helps to identify, assess and mitigate potential risks in the procurement of goods and services. This article tells you everything you need to know about procurement risks, what strategies are available and how risk management can be incorporated in the company.

What does risk management mean in procurement?

Risk management in procurement refers to the process through which companies identify, assess and mitigate potential risks in their procurement processes. The objective is to reliably and punctually deliver products or services to customers and at the same time minimize overall costs in procurement. Effective risk management can help companies avoid problems and costs, reliably meet customer requirements, and ensure a smooth procurement process.

What procurement risks are there?

1. Economic Risks:

• Price fluctuations in raw materials that can lead to higher procurement costs.
• Economic recessions, which reduce demand and can lead to supply shortages.
• Inflation, which increases the cost of materials and services.
• Inaccurate predictions can lead to a lack of material availability, bottlenecks in the supply chain, and inefficient resource utilization.

2. Political Risks:

• Trade restrictions and tariffs that can increase the cost of international purchasing.
• Political unrest or conflicts that can disrupt the supply chain and cause delays.
• Changes in trade agreements or export regulations that can make procurement from certain countries more difficult.

3. Legal Risks:

• Contract breaches by suppliers that can lead to legal conflicts and financial losses.
• Violation of compliance and ethics standards by suppliers that can damage the company's reputation.
• Violation of intellectual property rights, such as patents or copyrights, in the procurement of products or services.

4. Technological Risks:

• Failure or disturbances of IT systems, which can hamper communication and information exchange with suppliers.
• Outdated or unreliable technologies at suppliers, which can affect the efficiency and quality of procurement.
• Cybersecurity risks, such as data leaks or hacking attacks, that can jeopardize confidential information and trade secrets.
• Complex projects that involve many unknown factors can lead to challenges in procurement of technologies and resources.

5. Sociocultural Risks:

• Differences in business practices and communication style between different cultures, which can affect collaboration and efficiency.
• Cultural norms or social expectations that contradict the company's ethical standards.
• Language barriers and cultural misunderstandings that can lead to communication problems and misinterpretations.

6. Geographical Risks:

• Natural disasters such as earthquakes, floods, or hurricanes, which can damage infrastructure and transport routes.
• Political instability or conflicts in certain regions, which can hinder procurement from these areas.
• Logistical challenges in sourcing from remote or difficult-to-access areas.

What risk areas are there in procurement?

1. Procurement Risks:

• Interruptions in production due to production bottlenecks.
• Agreed delivery dates and quantities are not met.
• A supplier delivers products with defects, which do not meet the agreed quality standards.
• A service does not meet the expected requirements and corrections have to be made.
• A supplier uses inferior materials, which degrade the quality of the produced products.

2. Price and Cost Risks:

• The price for a certain raw material component suddenly rises due to supply and demand, leading to increased procurement costs.
• A supplier increases the prices for their services due to increased operating costs.
• The price of oil rises, leading to higher transport costs for the import of goods.
• A weak national currency makes import costs higher.
• Exchange rate fluctuations lead to unforeseen costs when paying bills in foreign currency.
• The exchange rate changes during the contract period. This results in financial losses or gains.

3. Security and Compliance Risks:

• Employees of a supplier leak confidential information to competitors.
• A hacking attack on a supplier's IT systems results in the disclosure of sensitive corporate data.
• Unethical business practices such as bribery and corruption are uncovered at a supplier.

What are the causes of risk in procurement?

1. Supplier-related Risks:This includes knowledge deficits, for example, when information about potential suppliers is missing, as well as the dependence on a few suppliers, which can lead to supply shortages or price fluctuations.
2. Quality and Performance Risks:These include error rates and quality fluctuations in the delivered products or services, which can lead to complaints, additional costs and customer dissatisfaction.
3. Planning and Procurement Risks: Planning errors can lead to inefficient processes and insufficient material supply. Downtime can occur if deliveries are delayed or suppliers fail.
4. Staff-related Risks:These include a lack of motivation and qualification of purchasing staff, which can lead to misguided decisions or poor performance.

What strategies are there for risk limitation in procurement?

There are several strategies in procurement to limit risks:

1. Risk Avoidance:In this case, one tries to avoid risks from the outset, for example by changing processes or refraining from potentially risky business.
2. Risk Reduction:One tries to reduce the effects or probability of risks. This can, for example, be achieved through supplier diversity, quality controls or process optimizations.
3. Risk Acceptance:One accepts certain risks and is willing to bear the consequences if one can cope with the risks and the costs for risk reduction would be too high.
4. Risk Transfer:Risks are transferred to other partners, for example through insurances or contracts. As a result, the financial consequences of risks are shifted to them.

The choice of the right strategy depends on the individual risks and opportunities of the company. A careful consideration and analysis is important in order to establish effective risk management in procurement.

Practical example of risk management in procurement

As a buyer in an expanding online fashion business, you are responsible for sourcing goods from various international suppliers. In this role, you are confronted with risks such as delivery delays, quality problems or unexpected currency fluctuations. Good risk management is required to ensure a smooth process.

Together with your colleagues, you define the goal of delivering high-quality products on time and offering customers an outstanding customer experience. You collect ideas and discuss potential risks such as supplier failures, transport delays or quality deficiencies.

In the next step, you analyse the causes and effects of these risks and evaluate their probability and the potential damage to your company. You prioritize the risks and develop strategies for risk limitation for medium and high risks. This could, for example, mean considering alternative suppliers or making flexible delivery arrangements to better manage unforeseen situations.

What needs to be considered in order to establish risk management in the company?

1. Integration into the Organization:Risk management must be part of the corporate structure and define clear processes for identifying, assessing and dealing with risks.
2. Risk Awareness:All employees should be informed about risks and accordingly trained to create a risk culture in the company.
3. Ongoing risk monitoring:Risks must be continuously monitored to recognise changes and be able to respond appropriately. A risk report can help clearly depict the risk situation.
4. Roles and Responsibilities:Clear responsibilities should be defined for risk management.
5. Communication:Effective communication of risk information to those responsible is important to be able to act in a timely manner.

What tools can be useful for risk management in procurement?

Pleo

Pliant

finway

Moss

Spendesk

SAP Ariba

Soldo

You can find additional tools for risk management in procurement on OMR Reviews under the category Spend Management.

Conclusion

Risk management in procurement helps to identify potential risks early on and develop effective countermeasures. With a risk mitigation strategy, companies can prevent financial losses, ensure the smooth running of their procurement processes, and consolidate their competitive position.