lOMoAR cPSD| 47708777 Five Easy Steps To Risk Management in Procurement
There is no such thing as a risk-free business.
Every department within an organization has
to manage some form of risk every day.
Cindy Rittel September 26, 2019 By ·
There is no such thing as a risk-free business. Every department
within an organization has to manage some form of risk every day.
Risk management looks simple on the surface, but is a highly
complex part of the organizational and procurement strategy.
Controlling and mitigating the myriad of risks associated with
business operations is one of the key pillars for success.
Well look at what this means from a procurement point of view
shortly, but to provide some context, first we need to look at the
process involved. Risk Management is the process of identifying,
understanding and grading risks so they can be better managed and mitigated. lOMoAR cPSD| 47708777
Though the actual process may differ from organization to
organization, a true risk management process has a number of
common steps. You may even recognize this as a process you are
already doing, without even knowing what it really is.
Five Easy Steps to Risk Management 1. Risk Identification
Risks can range from the major (a key supplier files for
bankruptcy) to the less critical (a member of the project team
moves to a new role). Every risk needs to be identified, no
matter the size. Create a risk register to keep track of them. 2. Risk Analysis
Once identified, each risk is analyzed against two criteria —
impact and likelihood (terms are interchangeable). This is
usually graded on a numerical scale. Pro tip: Avoid using a
scale where there is a middle option, as its human nature to
go for the middle ground if you are not one hundred percent sure. lOMoAR cPSD| 47708777 3. Risk Ranking
Using a risk matriDownloaxd, give the risk an overall score byed by Anh Tr?n
(trananh1307@gmail.com) multiplying impact by likelihood. This will provide a
way to rank all the risks and identify which are the most critical for
your organization or project. Where scores are equal, you may
choose to favour impact over likelihood (or vice versa) to rank one above the other. 4. Risk Mitigation
Once you know the risks and have a ranking, you need to
plan mitigation strategies or contingency plans for each.
Make sure that you involve all key stakeholders in this and
note roles and responsibilities in the event of these risks occurring. 5. Risk Monitoring
No risk register is set in stone. Impacts and likelihood will
change over time; new risks will appear and some may even
drop off. A robust monitoring plan is key to making sure your
register is up to date and everyone continues to know what to do. lOMoAR cPSD| 47708777
Price Stability: Dont Get a Nasty Surprise
Procurement risks are much the same as other parts of the
organization. Procurement strategies should include risk
management, while Dstrateownloaded byg Anic sourcinh Tr?n (trananh1307@gmag and il.com) strategic buying lOMoAR cPSD| 47708777
should help to mitigate the majority of high-profile risks.
However, when faced with longer-term contracts in both direct
and indirect sourcing, there is a major risk in unexpected price
rises from suppliers. Even with agreements in place within a
contract to fix prices for a certain length of time, this risk will still
exist and can never be fully planned for or mitigated.
Running through a simple PESTLE analysis of the external
environment for a particular industry or market can help to
highlight key risks and external factors. The vast majority of these
factors could in turn impact pricing, or lead to situations where
your suppliers need to increase prices during the life of a contract. Mitigating the Risk
What options are available to you? Regardless of your relationship
with your supplier, or how big a customer you are to them, you
can still challenge price increases and ask suppliers for justification for the increases.
You may also choose to limit any price increases to a certain
percentage, for example in line with the Consumer Price Index
(CPI). However, evidence should still be provided, including where
percentage increases sit within the cost breakdown (labor, raw
Downloaded by Anh Tr?n (trananh1307@gmail.com) lOMoAR cPSD| 47708777
materials, etc.), so the percentage isnt just applied across the whole price.
Or you may choose to mitigate your risk and leverage the
expertise of a procurement consulting organization or Group
Purchasing Organization (GPO). GPOs can help take the time and
resource-intensive risk management process out of your hands
and can provide better solutions than you may achieve yourself.
GPOs will provide not only bundled, pre-negotiated contracts,
which supply a lower price at the outset, but also support
organizations in ensuring full transparency on pricing, even as far
as guaranteeing that rates dont increase at all. This leaves more
time and resources for procurement to carry out strategic
activities, while being assured that they can still deliver those much-desired savings.
Contact UNA today to discuss how GPOs can help your
procurement function mitigate risks.
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