Managing Risk in Procurement

Procurement is an important part of every business. However, there are quite a few risks associated with procurement. Thus, it is vital to be well aware of these in order to avoid constant mistakes for your organization. 

Throughout today’s guide, we will explore the most common risks businesses face in procurement, along with an actionable solution on how to fix these. Thus, if you are ready, let’s dive into it. 

What are Procurement Risks?

Procurement risks are possibilities that, in some scenarios, procurement activities can lead to unplanned results or costly consequences. The risks can emerge from different factors ranging from poor supplier selection and relationship management to inefficient contract management. 

In short, procurement risks refer to anything that can potentially happen and negatively impact the organization. 

Why managing procurement risks is important?  

Managing procurement risks is important for several reasons. So, let’s take a look at the main ones. 

• Good risk management will help to avoid costs and unnecessary expenses for your organization. 
• Cost savings. Proper risk management will avoid unplanned expenses and costs, resulting in cost savings for your organization. 
• Risk management will also improve operational efficiency and help reduce delays and inefficiencies. 
• A good strategy for risk mitigation and management helps organizations maintain a good business reputation. 
• Improved supplier relationships, leading to a reliable supply chain and proactive risk management. 

Finally, risk management helps to ensure regulatory compliance to the set terms, policies, and conditions within the organization, contracts, etc.

Top Most Common Procurement Risks 

There are a variety of risks associated with procurement, including failure to analyze an organization’s needs and poor supplier selection. 

Well, it is time to review the most common risks associated with procurement in more detail.  

Failure to Analyze Needs Properly

One of the most common risks occurs due to inadequate need analysis. When you are unclear on what the organization needs, how much of it needs, and so on, it will be impossible to ensure the organization’s success. 

So, start by conducting a detailed needs assessment and identify your organization’s needs. You can involve stakeholders, clients, and customers by asking relevant questions to identify the needs of the organization more accurately. 

Supply Chain Disruptions  

From manufacturing delays to labor shortages, anything can impact your supply chain and cause disruptions. Even weather and other factors can impact your company’s supply chain, such as in the case of winter storms that caused food shortages in Texas by cutting out food supply chains (February 2021). 

So, to ensure successful supply chain management, you should carefully plan and assess potential risks and create mitigation strategies. 

Poor Supplier Selection 

One more common risk organizations face is poor supplier selection. This can be caused by a variety of reasons, from inexperienced employees responsible for sourcing suppliers to fraudulent companies that masterfully pretend to be real. 

Poor supplier selection leads to supply chain disruptions, bad supplier performance, and overall inefficient business performance. In order to avoid risks emerging from poor supplier selection, you need to create a robust supplier selection process with certain policies and regulations that the procurement team will follow. 

For instance, it is a must to go through suppliers' records of past and current projects to understand their performance before signing contracts. 

Inefficient Supplier Relationship Management 

Inefficient supplier relationship management leads to late deliveries and low-quality partnerships that end up influencing your business reputation and disturbing supply chain operations. 

Thus, when it comes to suppliers, it is vital to track their performance and efficiently manage relationships by establishing real-time communication channels. Communication gaps are, in fact, the leading cause of poor supplier relationship management. For instance, in critical times, it is vital to assess risks and collaborate instead of playing the “blame game.” However, inefficient communication often leads to failure to maintain relationship harmony in critical times. 

Inefficient supplier relationship management also leads to unfavorable contract terms that can cause further disputes and disagreements. 

Thus, to ensure successful supplier relationship management, clear communication must be established, and real-time messaging/communication tools must be utilized with the suppliers. 

Inefficient Contract Management 

Inefficient contract management causes lost contracts, contracts that are never followed up upon, and so on. In order to avoid these risks that can become costly mistakes for your organization, it is vital to take timely measures and establish proper contract management procedures. 

For instance, the safest solution is to incorporate a software tool where you can store and access all the contracts from one database at any time. 

Manual Procurement Risks 

If your organization still uses manual procurement management processes, you must be aware of the increased risks it can face. These range anywhere from human error to loss of important documentation.

How to Improve Risk Management in Procurement? 

If you plan to minimize risks and improve overall risk management, the perfect solution would be to switch to complete digitized procurement. 

Benefits of E-Procurement Software for Risk Management 

E-procurement comes in handy with a variety of benefits. 

Improved Transparency 

E-procurement software improved risk management by providing more transparency in the process. For instance, you can track user activity and assign specific user roles and permissions. This will help to ensure that everyone complies with the set regulations. 

Enhanced Efficiency 

Procurement tools allow the automation of a variety of tasks in procurement and reduce the time employees spend on administrative work. This increases productivity within the organization, allowing the team to focus on more strategic business activities, such as better contract term negotiations. 

It also reduces costs associated with manual effort. Most importantly, it enhances efficiency and reduces manual work, contributing to the minimization of human error. 

Better Compliance 

Procurement software allows to ensure both employee and supplier compliance with the set regulations. This minimizes risks associated with fraud and poor performance, which can be costly for the business. 

Improved Collaboration 

One of the most significant benefits of e-procurement management is improved collaboration and communication with suppliers. Real-time messaging and other communication tools help you always stay on track.

By building stronger relationships, you can mitigate risks associated with low-quality supplier performance/delivered products and late deliveries. 

Improved Inventory Management 

Finally, it is worth mentioning that e-procurement tools will help with better inventory management. So, you will be able to avoid risks associated with stockouts or overstocking that can impact your business’s reputation and result in overspending. 

How to Choose an E-Procurement Software for Risk Management? 

As far as we are clear on the benefits that e-procurement software solutions offer, let’s take a brief look at how to choose a good software that will help you with risk management. 

First, make sure to assess your organization's needs and determine areas for improvement. Based on the needs, you can set clear goals and objectives for procurement and risk management. 

Afterward, choose a software solution that can help you meet all the determined objectives by offering enough functionality. The must-have features of procurement software include 

• Tracking & Analysis functionality to improve informed decision-making processes within the organization and enhance overall transparency of the processes by documenting each step. 
• Contract management tool to track contracts and documentation and ensure compliance with the set terms and conditions. Contract management tools will allow to mitigate risks associated with price fluctuations. 
• Supplier relationship management tool to track supplier performance and collaborate with the vendors in real time. This tool will help you to improve supplier relationships, choose top-performing suppliers based on data insights for further collaboration, and mitigate risks such as late/lost deliveries, duplicate invoices, etc. 
• Supplier sourcing tools to choose reliable vendors and avoid poor supplier selection consequences. 
• Supply chain management functionality to ensure smooth supply chain and inventory availability at all times. 

These are the must-have tools the procurement software of your choice must offer in order to mitigate risks in different areas of the procurement process. If you are looking for a software solution offering all of the above-mentioned and even more, then Tradogram is the perfect solution for you. 

Start Minimizing Procurement Risks Today 

If you want to start minimizing procurement risks and improve overall risk management, then you are in the right place. Tradogram is an all-in-one e-procurement software that will allow you to take care of every aspect of your procurement process. 

The platform offers features to handle everything from efficient contract and supplier management to workflow automation and inventory management. Schedule a demo and let  our team walk you through all the features we can offer for improved risk management.