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How Supply Chain Management Can Reduce Risks in Procurement

Posted by Stephanie Bennett on Mar 8, 2018 11:04:08 AM

Are you prepared when it comes to mitigating risks in your supply chain? Our experts explore how six common risks and how to best manage them.When sourcing suppliers for your supply chain, an important part of any procurement strategy is to identify suppliers have the industry expertise needed to provide the product to you on time, on budget, and to a high quality.

With so many suppliers involved, it can be challenging to ensure all of these suppliers meet your business's deadlines, quality control requirements, ethical standards, and sustainability goals.

As such, every procurement department needs effective supply chain management to reduce risks. So, how do you effectively manage these risks to ensure your products meet expectations, whilst still building lasting relationships with your suppliers?

Risk mitigation has become more and more important for Chief Procurement Officers (CPOs) in recent years, with a study by Deloitte showing that 25% of CPOs participate in risk management strategies – a figure that is expected to increase over the coming years.

Since managing supply chain risks is a high priority for any business, our experts have explored six common risks associated to the supply chain, and how to handle them.

“Only those who will risk going too far can possibly find out how far one can go.”
T.S. Eliot

1. Low Quality

One of the biggest supply chain risks is receiving an inferior product that does not meet your expectations. In the same Deloitte survey as above, 29% of CPOs cited that improving product specifications is among their highest priorities for the next twelve months. This lack of skill can, understandably, impact the expectation of quality, but most CPOs realise the importance of ensuring quality is always met.

Before you begin working with a supplier, you will need to outline an agreement that details the steps involved to meet the desired quality of your end product. The best suppliers will have the appropriate ISO certificates (International Organization for Standards), so you can rest assured that quality control is strictly monitored.

2. Rising Costs

All companies have a budget, so it’s no surprise that price is one of the first talking points when deciding on a supplier. In fact, 53% of procurement professionals feel that cost-cutting is a number one priority. Factoring in rising costs can be a challenge though, especially when you want to receive more for your money and reduce payment friction.

Two common solutions would be to restrict your supplier base (25% of CPOs surveyed cited this as necessary method) or to outsource non-core procurement strategies (14% of CPOs commonly use this method). Both of these options can help in the long-run, but when you’re in the initial stages with a supplier, it is pivotal that you outline a Service Level Agreement (SLA). Establishing an SLA can help curb costs because you’ll have a clear understanding of the services that will be provided and the specific benchmarks to measure success.

Furthermore, automated software can reduce payment friction, by allowing your company to better measure when invoices should be paid; having this insight can significantly reduce the costs of tracking down payments and re-sending invoices.

3. Missing Deadlines

Both your suppliers and your project managers are in charge of ensuring deadlines are met. Since missing deadlines often has larger cost implications, one way to keep track of deadlines is to utilise analysis software.

In recent years, 70% of CPOs feel that investing in innovative technologies is useful to their procurement strategy and reducing risk. If your business is yet to invest in such technology, there’s never been a better time. Such software allows you to plan deadlines and keep track of each stage of the procurement process, offering real-time data so that you can always keep your finger on the pulse.

Of course, you cannot plan for unpredictable disruptions, but having access to and using analysis software can help vastly improve and streamline your procurement strategy.

On the other hand, some companies have reduced risks by outsourcing their procurement strategy, in order to pass the cost of missed deadlines onto the supplier.

To mitigate risk before you begin, both you and the supplier should set a realistic deadline – and your project manager and supplier’s point-of-contact should check in routinely to assess the progress and the likelihood of meeting your target.

4. Sustainability

It’s natural to want your suppliers to meet certain sustainability targets, in line with your business’s own sustainability goals. In fact, finding out about a supplier’s sustainability commitment was considered to be a primary concern for 81% of recently surveyed businesses by Green Research.

Companies such as Unilever who have committed to sustainability goals directly related to their supply chain have managed to increase their bottom line, proving popular with consumers for taking an ethical stance.

In order to ensure sustainability and quality, check that your supplier is ISO14001 accredited for environmental commitment. If suppliers do not meet those standards, this could have an impact on your business’s own ethical stance and reputation down the line. Since consumers are more and more aware of sustainability, sustainable practice throughout your supply chain can be worn as a business badge of honour.

5. Lack of Expertise

Identifying a supplier who offers a better price, doesn’t mean that they can necessarily offer you a better service. Finding suppliers who are experts in their field is crucial if you want to avoid the risks associated with a lack of quality or knowledge. In recent years, talent shortage in supply chains has been a major problem, which affects every business.

Any company wants to feel safe turning responsibility over to an external party, which is why finding the right suppliers mitigates some risks. Furthermore, you want to know that you can keep this supplier relationship for years to come, even as your company grows and makes more demands. You may need to invest more to begin with, but investing in experts pays off in the long-run.

6. Inadequate Technology

Technology advances at a rapid rate and suppliers who aren’t investing in new technology are likely to slip behind quickly when it comes to their services. To help keep ahead of the curve – and reduce risk – identify suppliers who routinely assess and update their technological needs. This could mean everything from hardware and equipment to software and computing.

When discussing the importance of going digital, The Hackett Group notes that:

“84% of procurement organisations believe that digital transformation will fundamentally change the way their services are delivered over the next three to five years. Yet only 32% have developed a strategy for getting there.”

Identify suppliers who invest in digital technology, as well as new machinery. Stock management software and analysis technology (as previously mentioned) are becoming more common, providing ways to streamline your procurement strategy. For example, some digital procurement software allows you to see your stock levels, view previous orders, make new orders, set up triggers for repeat orders, and collate all of your projects through one online platform. In fact, over the next year, 30% of CPOs plan to invest in esourcing and 11% plan to invest in electronic data interfaces.

Make sure your business is getting the most from evolving technological advances by making smart investments too. Ask your suppliers what plans they have to update their technology. Embracing new technology such as this can help you save both time and money in procurement.

Risk Management Strategies

As well as these six common problems in a supply chain, your business may encounter other complications. Staggeringly, only 50% of CPOs are involved in corporate risk planning, up only 2% from the previous year. For every risk, it’s important to have a general Supply Chain Risk Management (SCRM) plan in place. This should include four stages:

  • Identification: What are the risks?
  • Assessment: How likely will the risk occur? How severe will the impact of the risk be?
  • Controlling: What can be done to reduce the impact of the risk?
  • Monitoring: Has the situation altered or changed? Are there any new, emerging risks?

Once you’ve identified your risks amongst suppliers, assess the likelihood of the risk, try and find solutions to control the outcome, and monitor for developments.

It’s common to do a risk assessment of all suppliers and note your findings. Consider ways to mitigate all potential risks, from those with higher likelihood to those less likely risks. Consider how these disruptions could impact your service overall.

To ensure some risks are managed on both ends, get to know your suppliers, only pay for what you receive (as part of your SLA), ensure you get what you asked for (your SLA can protect you here too), prevent or resolve disputes (you want to maintain your positive relationship with your suppliers), and avoid sales-process risks (lack of information, absent stakeholders, reorganisation or changes).

Only by having an understanding and a clear expectation can both you and your supplier get what you want out of the deal. When you build solid relationships with your suppliers, you will know what to expect, helping you to – ultimately – manage risks.

From using your own project managers to analyse and mitigate risks along your supply chain, to outsourcing to a company who can do all of that for you, managing supply chain risks is in any company’s best interest. Use these tips to help manage your supply chain risks and ensure your operations run smoothly, well into the future.

Want to know how you can save money on your procurement? Find out more about procurement savings by downloading our guide, The 4 Stages of Procurement Savings.

Download our guide to procurement savings

Topics: Supply Chain, Risk Management