Procurement Risk – A Simple Guide
Procurement risks are risks associated with, and the probability of failure of specific procurement processes. Assessing procurement risks is necessary for businesses to streamline their supply chain and mitigate the potential for fraud, poor quality, issues in deliveries, and cost overruns.
A procurement risk is the risk of failure in procurement processes that relate to the purchase of resources, services, or products in a company.
Every purchase in a business must be backed by verifiable transactional data. Since decision-making is required at several stages before the transaction is approved, businesses are required to analyze procurement risks at every stage of the process to maximize accuracy and efficiency.
Depending upon the nature of the organization, the severity of procurement risks is likely to vary. Some organizations deal with a greater amount of procurement risk at every step of the supply chain.
There are some common procurement risks that almost every organization has to deal with, examples of which include;
The suppliers you choose to work with play an important role in the smooth functioning of the business. An unreliable supplier might not be able to deliver the goods on time, which could affect business operations and have a negative impact on the company’s bottom line.
Unreliable suppliers don’t just delay deliveries, but the quality of goods received might not be consistent with what was ordered. That could eventually result in lost sales, and the turnover might be below forecasts, ultimately affecting investor confidence too.
Similarly, suppliers might not comply with local regulations or uphold contract stipulations. This could also cause a negative fiscal impact on your business.
Once a department identifies the need for a specific product, a requisition order is submitted to the appropriate department, usually defined by the company’s internal approach hierarchy. The risks are slightly different at this stage. For instance, the department might overstate or understate the quantity of the products required.
The budget allocated might not be adequate, or the timeline might not be feasible. An inaccurate internal needs analysis creates a ripple effect, causing businesses to make a litany of bad decisions. For instance, a business might end up buying less quantities of a particular product, which doesn’t just result in lost sales, but creates a ripple effect, leading to a drop in stock prices, difficulty in securing funding, and also affect the company’s credibility.
In turn, this increases storage costs, or the business might not have enough cash flow to pay suppliers. This affects not just the company’s profitability, but also its ability to achieve and maintain a competitive advantage. To mitigate this procurement risk, businesses generally rely on procurement software that accurately tracks inventory and also offers comprehensive transactional data for each requisition order. This helps businesses analyze usage trends and make more accurate purchase decisions.
Poor supplier management can lead to a series of problems, including unpaid invoices, a breakdown in supplier relationships, poor contract compliance, and even expose the company to lawsuits.
Several risks must be analyzed at this stage, including:
Digitizing and automating purchase orders, for instance, ensures more accurate record-keeping and also reduces human error. By establishing clear, two-way communication with suppliers, gathering feedback, and ensuring invoices are matched and cleared on time, businesses can also foster better relationships with their suppliers.
Procurement legislation is an important factor to consider, especially for businesses that are working with overseas suppliers. Businesses must also adhere to legal requirements for public procurement. The risk for fines and penalties is quite high, which is why it’s important for businesses to maintain accurate and updated contracts with suppliers.
Contracts should be correctly worded and must be reviewed by a legal team. The contracts should be periodically reviewed to remove any incorrect or outdated data. This ensures accurate audit trails and mitigates the risk of fines or penalties.
The potential for human error is quite high, especially for businesses that still manage procure-to-pay processes manually. Hand-written forms, POs, and invoices are more susceptible to human error, and there’s also a risk of paper copies being lost along the way, which further increases the risk of invoice fraud.
Human error can lead to documents that are fraught with errors, loss of important forms or data, which ultimately increases the invoice approval cycle time. This also leads to more inefficiencies as companies have to spend more time rectifying mistakes.
Human error in the procurement department can be greatly reduced by businesses that use procure-to-pay software systems and rely on a fully automated processing model.
Another procurement risk that businesses have to consider is the delay in procurement. This usually happens due to wasted hours as the procurement team is more focused on correcting older errors instead of working on procurement processes.
Manual procurement is generally quite labor-intensive, often involving repetitive, menial tasks. Without the use of procure-to-pay software, there’s an increased risk of businesses facing delays in procurement.
Supply chain management is a major concern for businesses, as it directly affects customer experience and your company’s profitability.
Many businesses also face supply chain delays owing to external factors, such as shortage of materials or logistics issues. By using procure-to-pay software, you can at least automate the financial process, from procurement to invoice matching and posting payments in your financial accounts.
Both fraud and corruption are major procurement risks. Whereas most risks are caused due to the lack of available data or process inefficiencies, corruption and fraud are borne of malicious intentions. These include risks associated with funds embezzlement, invoice fraud, and theft.
The potential for corruption and fraud is incredibly high in the manual procure-to-pay process, especially when there are no clear protocols for only buying from approved suppliers. Without three-way matching and defined approval hierarchies in place, it’s easy for an individual to submit a fake invoice and get approval from the procurement department. Corruption and fraud risks are easy to mitigate by migrating to a digital, automated accounts payable function.
These are just some of the most common procurement risks faced by organizations today. SoftCo’s Procure-to-Pay software can seamlessly integrate into existing ERP solutions and offers greater transparency over data. Since it automates data entry, scanning, and matching, procurement risks decrease significantly. It offers greater visibility over corporate spending and accruals at the end of the month