10 Procurement Risks (And How You Avoid Them) (2023)

There are risks behind every purchase a business makes. They cannot be avoided. But, they can be managed. If you want to keep your supply chain intact and your business operational no matter what the world throws your way, you need to identify these 10 procurement risks and know how to navigate them successfully.

What Is Effective Risk Management

Procurement risk management is the process of identifying both internal and external risks to your supply chain. Effective risk management demands eliminating situations that put your organization at unnecessary, increased risk. It also involves finding solutions to mitigate both internal and external and external risks.

Effective risk management also requires risk analysis. In short, you need to map out potential risks, the likelihood of their occurrence, and whether or not you can effectively avoid those risks without disturbance to your supply chain.

Risk management is not a one-off event, either. Instead, your organization should conduct regular risk assessments to ensure you’re prepared for any disruptions. And you’ll need to identify possible courses of action.

These include:

  • Ignoring risks that pose no real threat
  • Reducing the likelihood of a risk occurring
  • Removing the possibility of a risk occurring
  • Managing risk potential with prepared solutions

Your procurement risk management process should also delegate which team members are responsible for handling certain types of risks. That way they’re ready for an organized, quick response.

The TL;DR of Procurement Risk Management: Identity, Analyze, Mitigate, Plan, and Monitor potential risks to your supply chain. This gives you the best chance to remain operational when something goes wrong.

What Risks Face Your Supply Chain?

Now that you know how to prepare for risks to your procurement process, you need to identify how risk enters your organization, what types of risks you face, and how to mitigate them.

Where Do Supply Chain Risks Come From?

There are two types of risks to your supply chain. Internal and external risks. Each type requires a different approach.

(Video) Top 10 Procurement Risks

  • Internal risks come from how your business operates, your employees, project demands, and your procurement processes.
  • External risks enter through your supply chain in the form of global events, political events, vendor relationships, and outside actors.

10 Supply Chain Risks and Solutions

You can mitigate internal and external risk by the types of risk management practices you have in place. However, you can never remove risk completely. You can only have the best procurement practices in place to help prevent them from happening.

Here are 10 major risks to your supply chain and how to avoid or reduce them.

10 Procurement Risks (And How You Avoid Them) (1)

1. Price Instability

Prices can fluctuate over time. Despite what your contract stipulates, some vendors need to increase costs due to certain factors. Other times, unexpected expenses occur.

The Solution: make sure you have the budget to cover any unexpected expenses. Don’t accept price increases without hesitation. And stand ready to negotiate any increased prices with your vendor directly.

2. Supply Chain Disruptions

Supply chain disruptions come in various forms. Most recently, we’ve seen how a pandemic can impact supply lines. Political unrest, economical changes, natural disasters, new technologies, and even a boat getting stuck in a canal can disrupt your supply chain.

The Solution: Assess your suppliers to understand which ones are most at risk for supply chain disruption. Diversify your suppliers and have secondary suppliers on standby.

10 Procurement Risks (And How You Avoid Them) (2)

3. Complex Projects

The more complicated a project is, the higher chance there is that something could go wrong. Complex projects have many unknowns, no matter how well they’re planned out.

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Each stage in the project also relies on previous stages and influences. As a result, minor issues can cascade into complex problems that drive a project to a sudden stop.

The Solution: Clear communication and evaluation of the project along with its procurement demands will help keep everyone on the same page and identify potential issues faster.

4. Fraud

Corruption is not uncommon in business, least of all procurement. From bribes to fake invoices to embezzlement, there are plenty of places in the procurement process where bad actors can take advantage of blind spots in procurement processes and steal from a business.

When this happens, it puts the whole organization at risk.

The Solution: Improve procurement transparency. Moving away from manual processes to automated procurement processes means more accountability and transparency in purchasing.

5. Changing Work Environments

More organizations work remotely, but with more remote work comes more challenges. Collaboration on projects and with vendors can become difficult. Overlooked processes, ignored requirements, and missed deadlines can easily happen without being able to verify or follow up in a face-to-face environment.

The Solution: Choose a single platform for communication and establish procedures for sharing progress, meeting deadlines, and discussing any supply chain issues.

6. Poor Supplier Performance

Your supplier is a vital business partner that should work with you to increase your success. Suppliers should deliver on expectations, communicate clearly, and collaborate with your team. When suppliers underperform, it puts unnecessary strain on your business to meet customer expectations.

The Solution: Work with your suppliers and track performance. Using a vendor management system, you can rate your suppliers and compare their performance over time.

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7. Unethical Sourcing

Customers expect ethical and sustainable business practices. And even though your organization may go out of its way to work with partners that match your business values, it’s possible that the vendors they work with don’t. Ultimately, the onus falls on your business to ensure your vendors meet your sustainability and ethical goals.

The Solution: Vendor management systems allow you to store all relevant data on vendors and compare them to other competitors. This can help give you better insights into your suppliers.

10 Procurement Risks (And How You Avoid Them) (3)

8. Overspending

Overspending can put your business at peril. Without an adequate budget, you could face additional fees, damaged vendor relationships, or a complete shutdown of your procurement process.

It can lead to unneeded products occupying expensive warehouse space. Worst of all, it can force you to take out emergency loans to cover basic expenses (like payroll).

The Solution: Leverage e-procurement solutions to automate invoicing and purchase orders, giving you greater transparency into your budget and spend in real-time.

9. Inaccurate Supply Chain Forecasts

Miscalculating the supply chain forecast can leave you paying more for goods and services (or not being able to acquire either when you need them). Not only do you miss out on the best pricing, but you may also face other costs such as warehouse storage and rushed delivery fees.

The Solution: Use supply chain management software to collect the data needed to provide accurate forecasting, so your business can get secure delivery at the best market prices.

10. Manual Procurement Process

Organizations that still rely on manual procurement processes face unnecessary risk. Most of the issues discussed so far come from a lack of transparency in the procurement process. Manual procurement processing makes it impossible to get that transparency.

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Manual data entry opens your organization up to costly data entry errors. A lack of real-time reporting makes it easy to miss the signs of an approaching catastrophe. And data silos create multiple (potentially inaccurate) pictures of a project’s progress.

All of these events expose your business to unnecessary risk and make it harder for your procurement team to develop potential solutions should something happen.

The Solution: Automate your procurement process with e-procurement platforms. These expansive, integrated systems provide the real-time reporting and data tracking you need to avoid many of the potential risks your supply chain faces.

The Biggest Procurement Risk Mitigation Challenge

Without better systems and workflows, you end up scrambling for time to focus on the bigger issues facing your organization’s procurement process. While you can create better procurement plans and improve procurement management internally, there are limits to what you can accomplish in-house.

Building a procurement system that can easily mitigate risk requires the right tools and expertise. Sadly, most internal teams have their hands busy running their business.

Fortunately, there’s a better solution: hire procurement specialists to create a risk-resistant procurement process for your growing organization.

How to Navigate Procurement Risks Easier

At Quandary Consulting Group, our process consultants can help you improve your workflows and systems by building custom applications and integrating your disparate procurement processes.

Always within budget. Always delivered on time.

See how we've helped our clients improve their businesses and get insane ROIs by checking out our case studies below.

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FAQs

How do we manage risk in procurement? ›

Procurement risks and how to manage them
  1. Reduction in waste.
  2. Better use of resources.
  3. Improved service delivery.
  4. Improved supplier and client relationships.
  5. Improved customer service.
  6. More effective change management.
  7. Increased innovation.
  8. More informed decision making throughout the business and supply chain.

What are the top 5 most challenging issues they procurement issues face in the future and why? ›

Market risks, potential frauds, cost, quality, and delivery risks constitute the most common type of risks. Additionally, compliance risks like anti-corruption, policy adherence, and more keep your procurement leaders up all night.

What is market risk in procurement? ›

Procurement risk is the potential for a procurement process to fail in the purchase of goods, works or services. Risks can include fraud, cost, quality and delivery.

Why is it important to manage procurement risks? ›

Risk management helps companies ensure the smooth and successful running of purchasing and supply operations. It also contributes to the resilience of a supply chain as a whole and to business continuity.

How do you identify risks in procurement? ›

  1. Risk Identification. The initial identification of risks and issues with the potential to impact on the objectives of a given procurement exercise is essential in terms of understanding. ...
  2. Risk Assessment. ...
  3. Control. ...
  4. Tolerate. ...
  5. Treat. ...
  6. Transfer. ...
  7. Review & Rethink Strategy. ...
  8. Risk Monitoring.

What are procurement issues? ›

The common challenges in procurement are:

Risk management: The procurement function is riddled with risks such as non-compliance, invoice fraud, and sourcing risks. Legal and internal compliance issues are a risk to the procurement function. A centralized and transparent supply chain management can mitigate such risks.

What is the example of initial risk in the procurement process? ›

Common types of procurement risk include fraud, cost, quality and delivery risks. In many cases, procurement risks are also compliance risks as purchasing practices are typically government by anti-corruption laws. The potential for failures in a procurement process resulting in business losses and disruption.

What are the risks in a contract? ›

For contracts, the four most common risk categories include financial, legal, security, and brand. In many cases, your contract risks are closely related to each other and often have a domino effect. A brand risk may trigger a financial risk, or a security risk may trigger a legal risk.

Which procurement problem are you currently facing and what solution have you applied? ›

Top 5 procurement challenges — and how to overcome them
  • Lack of internal communication.
  • Procurement bypass.
  • Difficulty tracking contracts.
  • Poor supplier relationships.
  • Lack of technology.
26 Jan 2022

What are the recommended solutions to procurement planning problem? ›

SOLUTION: Conduct thorough supplier evaluation criteria and/or assessment before you select any supplier. Once selected actively include major suppliers during problem-solving processes. It leads to positive outcomes for overall growth. Treat your supplier as strategic business partners.

What are conflicts in procurement? ›

A conflict of interest will arise if a person who is involved in a grant or tender assessment process applies for a job with, or is offered a job by, an organisation who is also applying/tendering for the same grant or procurement process.

What are the types of market risk? ›

What Are Some Types of Market Risk? The most common types of market risk include interest rate risk, equity risk, commodity risk, and currency risk. Interest rate risk covers the volatility that may accompany interest rate fluctuations and is most relevant to fixed-income investments.

What is an example of market risk? ›

Market risk is the risk of losses on financial investments caused by adverse price movements. Examples of market risk are: changes in equity prices or commodity prices, interest rate moves or foreign exchange fluctuations.

What is product risk? ›

Product risk is the set of things that could go wrong with the service, software or whatever is being produced by the project. In the same way that project and business risks are quantified (using likelihood and impact) product risks should also be categorised and measured.

What methods can management use to mitigate risk in the procurement planning process? ›

Five Ways to Manage Procurement Risk with Contract Management
  • “Putting it in writing.” Contracts are the lifeblood of an organization as they codify the relationships that enterprises have with suppliers and customers. ...
  • Assigning risk. ...
  • Audits and Compliance. ...
  • Holding Suppliers Accountable. ...
  • Force Majeure.
1 Jul 2016

What are the contractors risks in procurement construction? ›

Those risks and uncertainties are caused by performance of workers, material and parts quality, delays in supply of important materials to site, project budget and cost control, or the complexity of project procurement processes, which may threaten the project objectives.

What are the internal factors affecting procurement? ›

The findings show that the internal factors affecting procurement processes are procurement policy, ICT infrastructures, and Employees cultures and employees perceptions.

What are the types of procurement? ›

It can be classified as direct or indirect procurement, depending on how the company will use the items being procured. It can also be categorized as goods or services procurement depending on the items that are being procured. Direct procurement refers to obtaining anything that's required to produce an end-product.

What is the example of initial risk in the procurement process? ›

Common types of procurement risk include fraud, cost, quality and delivery risks. In many cases, procurement risks are also compliance risks as purchasing practices are typically government by anti-corruption laws. The potential for failures in a procurement process resulting in business losses and disruption.

What are the risks in a contract? ›

For contracts, the four most common risk categories include financial, legal, security, and brand. In many cases, your contract risks are closely related to each other and often have a domino effect. A brand risk may trigger a financial risk, or a security risk may trigger a legal risk.

What are the gaps in procurement? ›

Four main gaps were identified, namely, fragmentation of files; different department keeping the fragmented files; unavailability of certain required records; and difference between process file name and number in comparison with the process name and number in procurement plans.

What are current trends in procurement? ›

Robotic process automation (RPA), advanced analytics, advanced sourcing optimization, artificial intelligence (AI) and advanced contract analytics will be the highest priority areas for investment for procurement. These technologies will be increasingly used to augment and replace existing human capabilities.

How do you identify risks in procurement? ›

  1. Risk Identification. The initial identification of risks and issues with the potential to impact on the objectives of a given procurement exercise is essential in terms of understanding. ...
  2. Risk Assessment. ...
  3. Control. ...
  4. Tolerate. ...
  5. Treat. ...
  6. Transfer. ...
  7. Review & Rethink Strategy. ...
  8. Risk Monitoring.

What are the major types of risk in public procurement of innovation? ›

Organisational and societal risks: Organisational risks are all those risks of the procurement failing or under‐delivering for reasons situated within the organisation that procures. Societal risks are those related to a lack of acceptance and uptake by the users of the new or changed service delivered within society.

What are the 4 types of risk? ›

The main four types of risk are:
  • strategic risk - eg a competitor coming on to the market.
  • compliance and regulatory risk - eg introduction of new rules or legislation.
  • financial risk - eg interest rate rise on your business loan or a non-paying customer.
  • operational risk - eg the breakdown or theft of key equipment.

What are the 3 types of risks? ›

Types of Risks

Widely, risks can be classified into three types: Business Risk, Non-Business Risk, and Financial Risk.

What is the types of risk? ›

Types of Risk

Broadly speaking, there are two main categories of risk: systematic and unsystematic. Systematic risk is the market uncertainty of an investment, meaning that it represents external factors that impact all (or many) companies in an industry or group.

Which procurement problem are you currently facing and what solution have you applied? ›

Top 5 procurement challenges — and how to overcome them
  • Lack of internal communication.
  • Procurement bypass.
  • Difficulty tracking contracts.
  • Poor supplier relationships.
  • Lack of technology.
26 Jan 2022

What are the future challenges for procurement? ›

Major Procurement Challenges
  • Pandemic Initiatives. ...
  • Risk Management. ...
  • Sustainability. ...
  • Diversity. ...
  • Working Capital. ...
  • Innovation. ...
  • Digitalization Projects. ...
  • Stakeholder Management.
10 Jan 2022

What is procurement Strategy? ›

Strategic procurement is a process that looks at the entire supply cycle within an organisation with the aim of optimisation. Sometimes it's referred to as strategic sourcing or strategic purchasing, but the goals remain the same: managing supplier relationships, minimising costs, and reducing risks within the cycle.

What is best practice in procurement? ›

Steps to ensure spend transparency in the procurement process: Define and implement procurement policies properly. Monitor and document every step of the procurement process. Identify and manage a list of approved supplier lists.

Videos

1. Minimizing Procurement Risks: Establish Robust Policies and Processes
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2. Professionals in Direct Materials Procurement Talk On-Time Delivery Issues
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3. A simple approach to data protection | BRK55
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4. Mitigating Futures Risk | Futures Basics & Beyond
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5. ISO Certification 10 of the Most Common Audit Findings (And how to avoid them)
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6. IDI Webinar Series #19: Risk Management in Procurement
(International Development Institute-IDI)
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