The Top Procurement Risk Metrics to Consider
By Hugo Britt | June 8, 2021
After COVID-19, managing unprecedented levels of supply chain disruption is undoubtedly a top concern for procurement professionals.
The importance of implementing effective risk mitigation strategies was reinforced under the starkest of circumstances. Organizations across the globe were forced to navigate lockdowns, border closures, shipping delays, staff shortages, and scarcity.
To protect themselves against future black-swan events, many procurement teams have committed to diversifying their supply base, developing contingency strategies, identifying current and future risks, and improving transparency throughout the supply chain.
Procurement Risk Metrics to Monitor
Supply chain disruption might be the most pressing issue for professionals right now, but it’s certainly not the only concern.
Below, we outline six additional procurement risk metrics you should be monitoring.
1. Cost blowouts
Many factors contribute to a cost blowout, including process inefficiencies, ineffective supplier relationship management (SRM), unrealistic scheduling, excess inventory, freight expenses, unforeseen supply chain disruptions, and the costs of IT implementation.
To mitigate these risks, it’s important for procurement professionals to understand their organization’s biggest supply chain pain points.
While monitoring spend across global supply chains is no easy task, procurement teams can reduce the likelihood of a cost blowout. Robust planning, simplification of complex processes, effective project management, a comprehensive SRM strategy, and the use of automation to improve visibility will make it easier to spot a cost blowout looming on the horizon.
2. Compliance and fraud
Both public and private sector procurement professionals depend on third-party contractors to deliver a wide range of products and services. Among other benefits, contracting is typically the most cost-effective way to hire highly specialized workers for short-term or seasonal work – but it also comes with additional risk.
With third-party contracting on the rise, procurement teams must think carefully about how best to manage compliance and avoid fraud. This might include a complete overhaul of the onboarding and due diligence process for contracted workers.
Of all the procurement risk metrics, quality control is perhaps the most likely to fall by the wayside. Procurement professionals often focus heavily on supply chain disruption, SRM, and maverick spend. For example, in the event of a highly disruptive black swan event, like COVID-19, quickly identifying and onboarding alternate suppliers is likely to take precedent over quality.
However, with the proper processes in place, procurement teams shouldn’t have to choose between quality and efficiency. After all, timeliness is no use to anyone, especially the end customer, if the quality of a product or service isn’t up to scratch.
Implementing contingency strategies, investing in local or near-sourcing, establishing a preferred supplier program, and avoiding reliance on a single-source supplier will help to safeguard an organization against poor-quality products and services.
Alongside these risk mitigation strategies, procurement teams should implement appropriate quality control and quality assurance measures to monitor their existing supply base.
4. Maverick spend
Maverick spend, which refers to any spending that occurs outside of an official purchase-to-pay procurement process, can account for 80% of an organization’s total spend.
When buyers fail to comply with proper procurement processes they waste money and time and expose the organization to greater risk. They are less likely to spend with preferred suppliers and contracts are more likely to conflict, which can lead to compliance issues. For procurement professionals, allocating their limited resources to resolving these conflicts, or chasing down rogue transactions and unapproved vendors is a waste of time and highly frustrating.
One way for procurement teams to curtail maverick spending is to provide better education for buyers on the importance of proper procurement processes and their preferred supplier programs. If employees don’t understand the procure-to-pay process, they can’t be expected to use it. Stricter measures on who is authorized to buy products and services, especially when the spend exceeds a certain value, can also help limit rogue spending, as can procure-to-pay solutions.
5. Inaccurate data
The issue of inaccurate, dirty or missing data often arises because procurement teams simply don’t have the tools or technology to effectively capture the data they need or analyze it for actionable insights.
It’s important to establish a data management strategy and practice good data governance, but this is far easier with the help of data analytics software.
Investing in the right technology will enable procurement teams to assess supplier performance and conduct risk assessments. They’ll also be able to make data-driven supplier selection decisions, optimize supply chain strategy, analyze customer behavior, identify top-quality products and services, and tap into unstructured data.
6. Brand reputation
How can GPOs help teams manage procurement risk?
By joining a GPO, procurement teams can leverage the collective buying power of a group of organizations, taking advantage of bigger discounts without the need to purchase products and services in high volumes. Negotiated contracts with pre-approved, top suppliers are already in place, which means you can will save time, money, and effort.
Organizations save an average of 20-25% on products and services through a GPO, avoid lengthy RFP processes and spend less time gathering data, interviewing, choosing and vetting suppliers.
GPOs also make it easier for organizations to recover from supply chain disruption. Professionals can quickly find and onboard a new, pre-approved and trustworthy supplier, which is particularly valuable when an urgent contingency strategy is required.
Need help reducing procurement risk within your organization? Contact us to learn how we can help.