Procurement managers face complex challenges to control spending while purchasing a varied group of supplies and services for company projects. Carving out a cost-saving strategy must involve a continual upgrading of procurement policy based on evolving financial information.
Without a well-defined strategy in place, serious risk factors can interfere with a project’s successful completion. Examining and evaluating all potential risk factors in advance protects the project and eliminates excessive spending.
Decisive management takes proactive steps to ensure unexpected events do not disrupt the flow of supplies to projects underway. In a risk management survey conducted by BrainNet it was determined that “a risk manager should be able to perceive risks as more than a real threat but also as damage potential that is made and evaluated constantly by markets, shareholders and stakeholders.” Deliveries can be delayed or incomplete. Risk management is a critical component of today’s procurement strategy, and identification of troubled suppliers is necessary to alleviate the risk of a broken supply chain. There are specific risks that must be identified to mitigate any disruption of a project’s successful completion.
Supply Chain Risk
Dependence on a single manufacturer for a specialised part can disable a project if a vendor is unable to fulfill their obligation. Any business finding itself in such a compromising situation must evaluate the financial impact attached to a project with a sole source that can suddenly shut down, which can precipitate a lengthy and costly project re-evaluation. In Gower Publishing’s study, “A Short Guide to Procurement Risk” by Richard Russill, it is stated that “Vulnerabilities in physical supply chains are poorly understood and managed. This has been identified as one of four emerging risk issues likely to impact in the years to come.”
There are times when a supplier fails to make their commitment and another supplier can take over, but the time required to accomplish the switch causes a severe financial impact. During the procurement procedure, it’s necessary to prioritise the selection process by investigating the monetary health of the supplier and determining the financial impact on the project if the supplier fails and a lengthy switchover is required.
A mandatory annual review and update of procurement contracts is essential. The process evolves continually and if contracts are not evolving as well, there can be a financial impact on both the business and the project. Relying on a vendor’s fragmented contract, or using a simple purchase order in place of a managed and leveraged contract, is an invitation to disaster. In an extensive study conducted by Apics (Association for Operations Management) and Protiviti (Independent Risk Consulting), it was recognised that a company must “develop a strategic plan for the contracting process” and “must understand the overall objectives and strategies of the organisation, as well as examine overall supply chain/procurement objectives and strategies.”
Companies that forgo investing in the development of employee capital, as well as neglecting their supply chains need for continual professional and technology developments, increase the probability of additional project costs. Placing a decisive focus on decreasing the procurement and supply chain risk provides monetary and other business benefits. When risks are recognised in advance and eliminated or lessened, the profit margin increases.
Other risks factors may exist that are exclusive to your project, which require evaluation and review. The financial health of potential suppliers is one of those factors. Complacency cannot be tolerated in contract awards. Procurement management must include risk management in order to achieve a successful and financially sound project completion. Continual training is essential for personnel in charge of the high-level position of procurement and risk management. A company’s profitability and professional reputation depend on the successful management of procurement risks. Realistic policies, well-defined objectives and strategies, and effective risk management will result in professional and financial success.