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5 do’s and don’ts of procurement risk mitigation

Ask the participants in AON Risk Solutions’ 2013 Global Risk Management Survey what their organizations are worried about right now, and their top three concerns are economic slowdown/slow recovery, regulatory/legislative changes, and increasing competition.

Company leaders and managers are also losing sleep over possible damage to their firms’ reputations and brands, failure to attract or retain top talent, and inability to innovate in a way that meets customers’ needs. And though few if any of these high-level concerns fall directly on the shoulders of the typical procurement department, there are steps that buyers can take to help their firms mitigate and/or avoid the problems altogether.

Here are five do’s and don’ts that procurement professionals can use to help mitigate risk at their organizations:

  1. Do assess your department’s role in overall risk management success. “Within purchasing departments, buyers are in a good position to set a strategic direction when it comes to risk management,” says Doug Hentschel, assistant professor and department chair of the Operations and Supply Chain Management program at Northwood University in Midland, Mich. This role may not always be a natural fit for the buyer who is focused on selecting suppliers, assuring quality and negotiating prices and contract terms, but each of those activities can play an important role in the company’s overall risk management success.
  2. Don’t rely too heavily on a single, trusted vendor. In some cases, procurement risk management can be as simple as having alternate suppliers waiting in the wings, should a top vendor go bankrupt, suffer a catastrophic loss or be shut down due to regulatory scrutiny. “Avoid putting all of your eggs in one basket,” says Hentschel, “and always have alternatives on hand, ready to tap into.”

  3. “Within purchasing departments, buyers are in a good position to set a strategic direction when it comes to risk management,” says Doug Hentschel, assistant professor and department chair of the Operations and Supply Chain Management program, Northwood University, Midland, Mich.
    Do develop a list of “order qualifiers.” Even worldwide quality certifications and standards such asISO aren’t always enough to ensure a high level of quality on the supplier side, says Hentschel. Knowing this, suppliers should come up with their own set of order qualifiers (including product quality standards, service levels, delivery times, and so forth) that must be met in order for both current and future purchase orders to be approved and processed. “If suppliers don’t have the qualifications that you’re demanding,” says Hentschel, “then they can’t do business with you.”
  4. Don’t forget to check supplier financial status. The economic downturn left a lot of companies in negative financial territory and some of that impact is still evident in the vendor community. One fairly simple move that buyers can make, says Hentschel, is to thoroughly check out the financial status of the companies that they plan to do business with. You can use annual reports, 10-K filings (available online here for public companies), press releases (usually posted on the firm’s corporate website), and Google News to stay in the know about your suppliers’ financial status.
  5. Do know the limitations of purchasing’s role in the risk mitigation process. The phrase “risk mitigation” tends to conjure up images of executives in expensive suits sitting around a conference table coming up with innovative ways to thwart future problems. In reality, all employees can play a role in helping their companies avoid and/or manage risk. Realize, of course, that individual corporate strategy will dictate the purchasing department’s level of involvement in risk mitigation. “In most cases, purchasing agents probably won’t have the authority to conduct a lot of risk assessment,” Hentschel points out, “but it certainly won’t hurt their managers’ feelings if they start thinking in those terms.”

Top 10 organizational risks

Concerned about risk? See how your worries stack up against other global companies. In its most recent Global Risk Management Survey, AON Risk Solutions identified the top 10 risks facing organizations today as:

  1. Economic slowdown/slow recovery
  2. Regulatory/legislative changes
  3. Increasing competition
  4. Damage to reputation/brand
  5. Failure to attract or retain top talent
  6. Failure to innovate/meet customer needs
  7. Business interruption
  8. Commodity price risk
  9. Cash flow/liquidity risk
  10. Political risk/uncertainties