Risks linked to the purchasing process: Identify, anticipate, manage

risks purchasing process

Risk management is one of the main tasks of a Purchasing Department. For example, setting up a risk map is one of the best ways to guarantee the sustainability of an organization’s purchasing process.

But what types of risk are involved in the purchasing process? How can they be prevented or anticipated? The company must adopt a forward-looking approach rather than an adaptive one. As the saying goes, prevention is better than cure. Finally, how can the company protect itself against risks using analysis tools?

Here, in 3 points, are the answers to these questions for better management of the risks associated with a company’s purchasing process.

1. Purchasing risks

Risk is the probability of a failure affecting the achievement of strategic objectives. A company must therefore identify and analyze each type of risk using a risk map. This criticality diagnosis enables risk levels to be defined, so that an action plan can be adopted in the event of complications in the purchasing process. Risk analysis therefore involves identifying risks that may be internal or external to an environment.

External risks

With the globalization of the Internet and the dynamics of international markets, perpetual competition has increased supplier risks. To secure your supply chain, we recommend regular supplier sourcing. Changes in raw material prices, for example, have a direct impact on business margins. Knowing this is one thing, anticipating it with alternatives is a reasonable insurance policy. This outsourcing has led to an increase in technical risks, such as non-control of the production chain, defective products and late deliveries. Quality risks, due to drastic controls combined with geographical constraints, can lead to deviations and increase industrial risks. Finally, payment, the final link in the purchasing process, can be subject to economic risks. Volatile exchange rates, changing prices, fluctuating material costs.

Internal risks

Risk management also applies within a company. Often complex, internal risks are at the root of many malfunctions in the purchasing process: business risks, for example, with organizational failures. In addition to lost productivity costs, opaque information encourages the emergence of internal tensions and increases staff turnover. The purchasing process, closely linked to corporate social responsibility (CSR purchasing), can be directly confronted with ethical, societal (buying locally, healthy supplier relations) and environmental issues.

A good purchasing strategy is to conduct a process with the ambition of adopting new compliance standards and certifications, so a risk analysis upstream of an audit helps to better understand their consequences, as well as the action plans to be implemented. Warning signals will then be more easily visible.

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2. Identifying warning signs

Numerous signals can be used to detect the appearance of risks. A well-controlled purchasing process needs to be fast and profitable. As soon as a flaw appears, like a grain of sand in a cog, it jams and slows down the process. Tensions, for example, reveal a lack of communication in a supply chain. Poor management of purchasing organization can lead to unsuitable orders being received, administrative costs, delays in supplier payments, etc. Regular out-of-stock situations are not trivial (unless a scarcity policy is in place), and indicate a failure in the supply chain. Paying attention to these warning signs helps to limit the impact on a business, and to implement a cross-purchasing strategy with controlled risks.

3. Risk reducers: analysis tools

Risks can be identified, prioritized and controlled. Methods and tools are used to prioritize risks and reduce their impact. The constraints matrix is used to evaluate each risk and classify them according to purchasing segment. The definition of a weighting index ensures a classification of their impact on the business. To optimize the processing of this data, it is a good practice to use regularly updated dashboards. Here are a few examples of indicators to be monitored for strategic suppliers: payment times, competitive bidding, purchasing sales, dependency rate, delivery times or service rate…

In conclusion, purchasing performance can be controlled by integrating and prioritizing risks. Identifying, classifying and analyzing constraints enables us to devise an effective strategy for limiting their impact on a purchasing process.
When it comes to optimizing and digitizing purchasing, digital tools are a good way of reducing risks. In addition to boosting efficiency, they guarantee optimal traceability and control of purchasing-related hazards. The emergence of digital solutions in recent years has enabled purchasing departments to improve their management strategies.

 

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