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Dan Hillier | 01 Nov 2021 | 7 min read
Procurement Risks to Manage in 2022
Procurement has emerged as a powerful voice in organisations in recent years, evolving from being a transactional function, where choices were made primarily with costs in mind, to being strategic. As the role of procurement has changed, so too have the risks that need to be considered.
This article covers the five major risks you should keep in mind as a procurement professional and how to best manage them.
Procurement Risks and Mitigation
The motto of procurement mitigation is ‘Foresee and prevent.’ Risks are inevitable, so the aim of procurement risk mitigation efforts is to foresee the risks and set in place plans to avoid them by identifying and analysing the hot spots and assigning appropriate actions.
To manage risks properly, companies should employ effective forecasting methods by using the available technology that helps you to monitor the process and to sort out problems before they mushroom out of control.
The Greatest Procurement Risks in 2022
Undeniably, 2020 and 2021 saw huge upheaval in many areas, and procurement was no exception. These are some of the procurement risk areas that are rising to the forefront this year that organisations need to note.
1. Ignoring ESG Considerations
Environment, Social and Governance (ESG) pressure is becoming a dominant theme in procurement circles and is changing the way procurement works.
This upsurge of ESG consideration affects the economy, particularly services and manufacturing industries, mining, IT and government. However, in truth no area is left untouched. Procurement departments need to intentionally evaluate how they are incorporating ESG factors into their procurement activities before the legislation catches up with them. No organisation can afford to be caught off guard as stricter ESG legislation could come quickly into force.
This is one area that could potentially harm any company caught napping. For example, a supplier that cannot guarantee fair labour practises may be in breach of legislation, leading to disruption in your company’s production.
Organisations have to look to their whole supply chain to expose unethical sourcing and production practices. Issues such as modern slavery, environmental damage, conflict minerals, human rights, bribery, corruption and sustainability all now come into play.
Governments are beginning to enforce positive ESG practices by putting into place certain tariffs and taxes, country-to-country trade agreements and country of origin disclosures, and these are becoming part of annual reporting requirements.
Not staying up to date with new regulations and the changes in how procurement and supply chains are managed can put every area of a business at risk.
To learn about sustainable procurement, read: “Sustainable Procurement: Everything You Need To Know” or “What is Social Procurement: Introducing ProcureForGood”.
2. Ongoing COVID-19 Disruption to Supply Chains
The ripple effect of COVID-19 on supply chains across the globe can be felt in every sector of the economy and supply chains that lack global resilience are feeling the pain the most.
The result is these disruptions are causing havoc with transportation logistics which means shortages in manufacturing components and delivery delays, which in turn affect prices along the chain.
This has forced companies to change the way they approach procurement and those that are agile enough to adapt have come out on top. It has exposed those that have no contingency plans and also those that are too rigid in their thinking.
Research done by EY found that as a result of COVID-19 disruption, "greater supply chain visibility, efficiency and resilience are top of mind" and a business "needs connected supply chain technologies across planning, procurement, manufacturing and logistics that work beyond the organization’s four walls." EY: "How COVID-19 impacted supply chains and what comes next"
3. Fraud and Corruption
This isn’t a new risk, but one that should still be at the forefront of everyone’s mind. The risk of fraud and corruption creeping into the procurement process is still as much a concern with such practices as bribery, fake invoices, embezzlement and collusion.
These are some of the risks that procurement professionals need to stay vigilant against. Fortunately, there are ways to help curtail this kind of illegal activity.
One of the measures is having proper authorisation processes in place for tender awards and financial approvals which can be managed digitally with workflows and eSignatures. If you get the right procurement management solution, it can provide you with transparency, automation and coded-in compliance. Other preventative actions include strict supplier screening, and tenders controlled by an auditable tender management system.
Advanced data analysis is effective in sifting out fraudulent activities and makes it harder for the perpetrator to hide. It searches for trends and anomalies to check for unusual and unexplained spending.
A good resource for fraud prevention can be found here on the IBAC (Independent Broad-Based Anti-Corruption Commission, Victoria) website.
4. Poor Procedural Systems
Poor procedural systems can introduce risks in a number of ways, such as:
Slack Supplier Management
Suppliers need to be carefully selected to prevent trouble down the line. You need to consider, for example, certifications, insurances, financial health and track record. Once a supplier is listed or appointed, they should be tracked/managed to prevent the risk of poor performance and inferior quality of goods and services.
Maverick spend is purchasing goods/services without following the set procurement rules. Without measures to monitor spending, rogue spending creeps in under the radar and adds up before you realise it. Also, not having proper solutions in place, and rigorous audit procedures, leaves room for corruption.
Inadequate Needs Analysis and Forecasting
The likelihood of overspending and going over deadlines is high if planning and analysis are not done correctly at the beginning of the procurement process. Establishing a thorough procurement plan by incorporating all parameters and risks sets you up for successful procurement activities - especially if the planning is done using a standardised method enabled by your procurement solution.
Bad Supply Chain Management
Supply chain management involves managing the movement of products, information and services between businesses, both globally and locally. This chain can become long and disconnected which leaves room for sloppy delivery, bad quality, unethical practises and financial misconduct. Poor supply chain management is made ever riskier without the appropriate technology to enable it.
5. A Lack of Technology
Modern procurement is underpinned by the right technology. Not having the right setup can introduce risks, such as:
Without the proper software, it is almost impossible to deliver a reliable procurement process every time in a busy environment with multiple buyers. The right solution that can integrate with other systems will also provide a centralised source of truth that eliminates the blind spots caused by siloed departments.
Not being Audit-Ready
It is one thing to boast of having transparent processes that are compliant, ethical and sustainable, but it is another to be able to prove it. With the advanced solutions now available, you can prove your claims as well as pass a rigorous audit of financial and compliance business practices.
How Can You Minimise Procurement Risks in General?
Here is a list of things you can do to start minimising the risks mentioned above.
Review your current procurement procedures and conduct regular reviews to identify internal and external risks all along the supply chain.
Manage and monitor your supplier relationships, and be vigilant in how you select suppliers.
Educate and communicate with suppliers and procurement staff about pressing issues and compliance policies.
Keep informed of new regulations.
Stay up to date with the technology available to standardise, digitise and automate procedures. Use secure tender portals to curb tender fraud/corruption.
Actively monitor the quality of goods and services in a standardised way.
Build into RFx requirements critical items such as government policies.
Build into your system digitised checks-and-balances and have automated approvals.
Analyse spend patterns with reporting tools.
How Can Procurement Software Help Reduce Procurement Risks?
Technology is becoming essential for managing compliance to the level that governments and corporates are demanding. When it comes to procurement risk, software can be incorporated into procurement solutions to help identify and mitigate risk factors.
Below are some of the ways procurement software can help with risk mitigation:
Identify and analyse risks through a digitised risk matrix and checklist. Risks can be identified at the beginning of the procurement process and plans set up accordingly.
The software provides a secure audit trail of actions taken.
It provides integration with other systems, e.g. financial platforms, reducing human errors.
It provides reporting and analysis tools.
It maintains approved supplier lists.
It allows for approvals, business rules and regulations to be encoded into the workflow.
It delivers secure electronic tenders.
It provides traceability, transparency and end-to-end visibility.
It enables strong data security.
Dedicated contract management software (CMS) can also help with reducing risk. To learn more, read this article: “The Ultimate Guide to Contract Management Software”
A Reward for Finishing This Article
Here’s a magic procurement risk management secret for getting all the way to the bottom.
Top tip: Have a dedicated C-Suite procurement and compliance role in your organisation.
James Leathem, CEO of Vendorpanel, said, “Procurement has become so strategically important to the way an organisation runs, especially in a global context, that we will see procurement professionals moving up into CEO positions.” In light of the way commerce is moving, a company should have a C-suite procurement specialist imparting vision at a foundational level.
Contact us today to learn how our solutions can help you manage your procurement risks with our Source-to-Pay suite of solutions.
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