How to Manage Procurement’s Top Risks

Leadership is a privilege and a huge responsibility. If you are a leader, it is your job to guide your company and team to success. Part of that journey requires adopting appropriate risk management practices. Procurement is utilized to oversee risk management to manage top risks for businesses and also between departments.

This comprehensive guide will help you identify—and navigate—the main pitfalls associated with procurement and risk management. After all, it is just as American business leader (who served as the 11th Director of the National Economic Council) Gary Cohn said: “If you don’t invest in risk management, it doesn’t matter what business you’re in, it’s a risky business.”

Procurement does not like risky business.

What Is Risk Management in Procurement?

By definition, risk management is the process of identifying, understanding, and grading risks so they can be better managed and mitigated.

While the exact process may vary from company to company, a proper risk management process has several steps which are pretty common, if not universal. For procurement specifically, this risk management process would deal with those risks posed to procurement and the sourcing process, such as supply chain risks, vendor issues, etc. More on this later.

Why Is Risk Management Different in Procurement Today?

Over the past several months (upon months), companies across the globe have been thrown into unprecedented global scenarios—ones directly impacting the supply chain operations worldwide, and thus, procurement practices as a whole. You would not be accused of being overly dramatic to classify this as a chaotic situation, which is why today’s leadership must pivot to adapt.

And what does this adaptation look like? For the most part, following this season of tumult (and while still navigating a fast-evolving global situation), procurement has been called upon to bring stability to the table—a characteristic that has been lacking. To do this, we have seen risk management focus much of its efforts on stepping up its transformation efforts, turning to modern technology to provide innovative solutions, increasing its capability portfolio, and reassessing and appropriately adapting current operating models.

Top Procurement Risks Today

It is no secret that navigating the procurement world is challenging, especially the numerous potential risks constantly surrounding us—and our supply chain—on all sides. The good news is that with intelligent planning, good organization, and wise prioritizing, you can successfully lead your procurement team in managing the risks that come your way. That being said, here are some of the most common procurement risks that should be on your procurement team’s radar today.

1. Bad Vendor Selection

You have likely heard the famous saying that comes from the work of English poet John Donne, “No man is an island.” This is definitely true in procurement. You are dependent on your vendors, meaning that the choice of vendor can make or break you.

To keep your operations running smoothly, you must ensure you have selected only vendors that are reliable and can consistently provide you with a steady and stable stream of product supply and services.

After all, without reliable vendors and strong vendor management protocols in place, you and your entire procurement team will be destined to spend your days putting out fires versus focusing on your jobs, much less looking to expand and grow operations.

2. Manual Processes

Let’s talk about manual processing. There are many drawbacks to this old-school approach, the main two being that it is an error-prone and inefficient way of going about operations.

Manual work significantly increases supply chain risks since you are far more prone to making errors when filling out forms and inserting data by hand. Yet another pitfall? Losing papers amid the shuffle while documents are being passed from person to person for approval and further instructions, etc.

It also takes far more time to get things done when you rely on archaic paper trails that you have to chase down and complete before finishing a task. Going paperless is just smarter. Data even backs this assertion up, with a Work Market Insight Report revealing that half of all business leaders claimed their reasoning for switching to automated procurement processing as the reduction of errors.

3. Lack of Talent

To keep pace with competitors in today’s market, a company has to consistently attract world-class talent. This is no easy feat, as talent can be hard to come by. The reasons for this talent shortage include the high demand for niche procurement people, inflation of salaries that surpass your budget capacity, understaffing, and more.

The good news is that you can help improve your situation by putting robust hiring processes in place that streamline onboarding to make it easier to pinpoint—and procure—the best procurement candidates.

4. Lack of Visibility into End-to-End Process

Our current lack of visibility into the end-to-end process of supply chains goes back to when expensive data storage caused companies to adopt individual IT solutions—a choice that has resulted in our current predicament: separate, independent data silos. And what do these separate entities look like? In short, a mess.

Specifically, this looks like un-centralized data, KPIs that need to be tracked manually, lack of visibility into sub-tier suppliers, the inability to track ESG and diversity, and more.

Digital Transformation – The Key to Risk Management?

I’ve been saying it—and I will keep saying it: Companies need to go digital immediately. Why?

The main reason why digital transformation should be a priority for your organization is that digital transformation can create a system for gathering the right data and incorporating it fully for business intelligence at a higher level. In a nutshell, it allows different functional units to translate raw data into insights across various touchpoints.

How to Find a Solution to Help with Risk Management in Procurement

Not all solutions are created equal, and the last few years have proven that. We’ve seen many successes and just as many failures.

That being said, here are a few of my tips to try out. Align your stakeholders, and lay out all of your priorities. Also, identify your top 3 strategic goals across the industry, and tie those back to your risks. Doing this will show you where you need to put your immediate focus.

Finally, try out new solutions and see what integrates and works best for your organization. Our article on change management may help as you do this.

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