Procurement Risk Management

Risk Management in Purchasing and Supply Management is crucial for any organization dealing with complex supply chains. One of the main functions of supply management is to ensure smooth and uninterrupted flows of goods and materials.

Today, with rapid globalization taking place, the supply chains have turned increasingly complex covering different countries and continents with associated high risks of supply disruptions. Therefore companies need to constantly think of analyzing and reducing these risks. These disruptions can have major negative consequences for example, they can result in production disruptions and hampered productivity and capacity utilization.

For a purchasing organization, a supply disruption can also mean inability to meet demand and satisfy customers. Thus, it is essential for organizations to understand the sources and drivers of risk before devising risk mitigation strategies which may require adding capacity, increasing inventories, aggregating or pooling demand, increasing capability, or having more customer accounts.

Supply risk management activities may also involve process improvement, buffer strategies, forming strategic alliances and developing suppliers. Risk management involves three key activities:

1. Risk analysis

2. Risk assessment

3. Risk mitigation

1.Risk Analysis –

Identify potential problems and estimate the probability of their occurrence. One way to analyze risk is to develop and use a checklist to measure how well a procurement agency is in compliance with law and ethical standards. Checklists can be valuable to prevent and detect corruption and fraud by guiding procurement staff throughout the process in a more transparent and effective manner. Using a checklist, a procurement agency can identify any possible irregularities, suspicious cases or difficulties in the procurement process.

2. Risk Assessment

estimate the impact of a potential supply problem on company operations. Risk assessment is a proactive measure which a procurement agency can take within its organization and its processes to identify areas of concern, weakness or high risk in procurement.

3. Risk mitigation

Design plans to prevent potential supply disruptions and allocate risks and responsibilities to specialized people or departments. Insurance can be one of the ways of mitigating supply chain risk.

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