Procurement is crucial for any business, but it comes with a host of challenges. From supplier management to payment processing, procurement departments face various obstacles.
In this guide, we'll explore common procurement challenges and provide actionable strategies to overcome them. Let’s get started!
Understanding Procurement Challenges
Procurement departments are responsible for ensuring the availability of materials needed for production and business operations. With expanding responsibilities—like supplier sourcing, vendor management, and cost optimization—come significant challenges such as risk management and unauthorized spending.
6 Most Common Procurement Challenges
Now that we have a clear understanding of the fundamental procurement challenges, let's examine the most common ones and discuss some actionable strategies to address them.
1. Risk Mitigation
One of the most common procurement challenges occurs when it comes to risk mitigation. Many risks are involved in the procurement process, ranging from market risks and potential frauds to late deliveries and other risks that can lead to supply chain disruptions.
The most common risks are associated with the suppliers and their ability to deliver the requested goods and services on time. For instance, in a scenario where one of the key suppliers goes bankrupt, your organization faces significant risks associated with stockouts, damaged business reputation, and lost profits.
This is a common risk; for instance, according to the survey conducted by QIMA back in 2023, 76% of US-based businesses altered their supplier base to diversify it and avoid risks associated with stockouts.
To avoid this risk, it is essential to diversify the supplier base. A diversified supplier base allows your organization to source necessary supplies from other vendors in case of an emergency.
2. Dark Purchasing
Another common challenge faced by procurement departments worldwide is dark purchasing. Well, dark purchasing is actually most commonly known as rouge or maverick spending. It is a term used to describe any type of unauthorized spending within the organization that occurred outside of the established processes.
Dark purchasing increases company costs and reduces visibility, as well as loss of negotiation leverage and non-compliance with internal procurement policies. It disturbs the procurement process and affects the organization's bottom line.
To address challenges related to dark purchasing and overall unauthorized purchasing in the organization, businesses need to incorporate several strategies. One of the most effective strategies is to incorporate a solution that will help improve transparency and visibility regarding business spending.
Also, you need to develop well-defined and concise internal policies regarding authorized and authorized purchasing, the overall procurement process, and other essential aspects. Such policies will help employees across the organization clearly understand what is allowed and what is not, reducing risks associated with dark purchasing.
3. Inaccurate Data
Inaccurate data can severely hinder decision-making and lead to missed opportunities. For instance, relying on outdated data can result in incorrect pricing agreements.
The amount of data companies need to analyze is overwhelming. Thus, it is only natural that errors and inefficiencies occur. However, the consequences of such can be quite severe. For instance, let’s review a common scenario with outdated data and how it can affect the involved parties.
Imagine a manufacturing company, X, relies on a critical supplier, Y. Due to a recent system error, all historical data between X and Y is lost, including past purchase orders, delivery timelines, pricing agreements, and quality assurance metrics.
As a result, X placed a new order based on outdated pricing, assuming a 10% bulk discount that was previously negotiated but is no longer being recorded. Y delivers the components, but the invoice reflects full pricing, leading to unexpected costs.
This is just one example of inefficiency that inaccurate data can cause; there are many other potential consequences. That is why it is important to mitigate risks associated with incorrect data. To do so, the most reasonable solution is to incorporate e-procurement software.
Digital procurement software and automated processes allow organizations to minimize manual effort and input, which automatically leads to less risk of human error. Technology will enable you to analyze vast amounts of data in seconds, providing actionable and accurate insights necessary for informed decision-making.
4. Lack of Internal Communication
Yet another procurement challenge is the lack of internal communication, which disturbs the smooth functioning of the organization. Poor communication among departments leads to misalignment of procurement goals with business objectives. This can have more severe consequences, such as lost opportunities.
Effective internal communication is one of the key elements of successful procurement. For instance, companies with effective communication generally tend to achieve 53% higher savings, unlike companies that lack internal communication.
To improve internal communication, you must first establish communication channels. You can start leveraging technology such as e-procurement software with built-in collaboration tools or dedicated communication tools such as Slack or Microsoft Teams.
5. Supply Chain Disruptions
Supply chain disruptions that result from events such as pandemics, natural disasters, and other geopolitical conflicts are major risks for companies. These disruptions have major consequences for production schedules and inventory management. Ultimately, these types of disruptions lead to a damaged business reputation and low customer satisfaction rates.
Supply chain disruptions can also be avoided by implementing strategies that allow diversifying the supply chain and sourcing the necessary components from different vendors. For instance, let’s break down this fictional case.
Company X, a mid-sized tech firm, relies heavily on Company Y, an Asian supplier, for essential microchips used in their flagship smartphones. Company Y has been the sole supplier for years, delivering quality products at low cost.
Suddenly, a natural disaster strikes the region and disturbs Company Y's production. Company X faces immediate delays in manufacturing, causing product shortages and missed launch deadlines. Customer complaints flood in, damaging Company X’s reputation.
Had Company X diversified its supply chain by sourcing from multiple suppliers, it could have quickly shifted to an alternate vendor, avoiding the disruption and keeping customers satisfied. This highlights the importance of supply chain diversity in reducing risk in times of crisis.
6. Contract Management
When discussing common procurement challenges, let’s not forget contract management. Contract management is quite a complex part of procurement that presents multiple challenges. Primarily, these are connected to the complexity and attention required to manage contracts across various suppliers and regions.
The businesses keep growing and expanding, meaning more deals, contracts, and suppliers must be managed. Without a centralized system, managing all the contracts becomes increasingly tricky.
The main challenges associated with contract management typically occur from a lack of visibility and control over contracts. This lack of control leads to missed opportunities and less cost savings. Sometimes, it can also damage supplier relationships, causing certain disputes.
The best way to address this challenge is to incorporate centralized contract management software that handles all aspects of contract management with ease and precision. A centralized tool will provide you with many benefits, including 100% visibility, increased transparency, and control. This will allow you to reduce errors and risks associated with fraud.
Mitigate Risks and Increase Procurement ROI with Tradogram
If you are looking for the perfect cloud-based procurement solution that will allow you to mitigate risks, improve procurement efficiency, and increase ROI, then you are in the right place. Tradogram is an all-in-one procurement software that comes in handy with all the necessary features for effective procurement process optimization.
With Tradogram, you can handle everything from risk mitigation and contract management to vendor management and spending analysis. All the platform features are designed and dedicated to helping procurement teams improve the procurement process by streamlining and automating operations and leveraging the power of robust analytics and built-in security measures.
To learn more about how Tradogram can help you overcome the most common challenges in procurement and increase ROI rates, contact us, and our team will be happy to consult you.
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