Taking a Risk-Based Approach to Procurement

November 4th, 2021 Hannah Tichansky Reading Time: 7 minutes
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Taking a risk-based approach to procurement will free your organization from the shackles of fear and uncertainty. A risk-based approach allows organizations to strategically manage potential risks by identifying, assessing, and prioritizing risks throughout the entire procurement process.

This enhances efficiencies and effectiveness, ensuring resources are allocated to managing risks with the highest potential impact. Furthermore, it helps safeguard the organization’s interests and ensures the continuity of supply chains.

Procurement Risk Professionals Are “Wizards”

It may sound like quite the juggling act for an average procurement professional, doesn’t it? Well, let us explain who is capable of rising to the challenge.

You may have heard of business warriors, but have you heard of procurement wizards?

There’s a new breed of champion in the enterprise – a stronger, more empowered, more dexterous procurement function set to navigate the journey to greater organizational resilience.

Procurement wizards are a special breed – they have the ultimate combination of strength, dexterity, constitution, wisdom, intelligence, and charisma. They combine these attributes to weave their ‘magic,’ safeguard their teams, and fulfill their quests.

Let’s take a look at these attributes as they relate to the procurement wizard.

The Changing Role of Procurement

Procurement professionals have recently become more integral to company operations and resilience. This increased recognition is seen across all industries, and according to Deloitte Insights:

“CPOs are successfully navigating… complexities while delivering across a greater breadth of KPIs. Although they are still heavily focused on costs, they have expanded their value propositions to influence demand, drive innovation, and work closely with strategic suppliers and partners to foster commercial compliance, increase speed to market, accelerate M&A integration/divestiture programs, and drive continuous improvement.”

Deloitte Insights

The procurement team is at the interface between the enterprise and the extended enterprise: the organization and its suppliers. No one knows what’s happening with suppliers as intimately as procurement.

Procurement professionals understand the risks and the wider ecosystems their suppliers operate in and make predictive connections between these.

For example, they may have an early line of sight that a semiconductor chip supplier is struggling to deliver – and be able to quickly identify if this is specific to this supplier or more endemic to the broader ecosystem and quickly pivot alongside the business accordingly.

And it’s not just risk, but procurement can capture opportunity and innovation and capitalize on them for the enterprise, such as:

  • Identifying new products, materials, capabilities, and offerings
  • Leveraging advanced technology (AI, blockchain, etc.) to streamline the process and improve accuracy in demand forecasting
  • Focusing on ethical sources and sustainable procurement practices to support environmental and social objectives while aligning with consumer expectations and regulatory requirements (potentially opening up new markets & improving brand reputation!)

These changes have become necessary in a world of ever-increasing technology breaches, disruptive events, and regulatory uncertainty. CPOs and similar roles have begun to reframe how the role of procurement melds into organizational strategy and how their function can best serve the organization.

One key to this new way of thinking is framing procurement around risk management, particularly when managing third parties, suppliers, and the third-party ecosystem as a whole.

The Magic of Taking A Risk-Based Approach to Procurement

But what does taking a risk-based approach to procurement mean, and why is it so important to rethink the procurement role?

Procurement officers were once separated from other departments (and not always included in overall company strategy). Nowadays, they have become organizational heroes (or wizards) since the COVID pandemic when companies scrambled to:

  • Secure and manage suppliers
  • Procure needed PPE for employees
  • Place greater scrutiny on investments

This shift in procurement influence is even changing job responsibilities. While the old approach to procurement related to margin impact and onboarding vendors and technology, these more short-term responsibilities are changing to a need to focus on long-term strategy and impacts.

No longer can organizations afford to keep a simplified version of the procurement role. Procurement professionals must also be in tune with the latest trends and tech and contribute to risk management efforts.

Common Procurement Risks

As procurement wizards study comprehensive market reports, predictive algorithms, and advanced analytics, they’re uniquely skilled at discovering emerging risks capable of casting shadows over the efficiency and reliability of their processes.

In the past, many of the risks these unsung heroes have focused on include:

  • Compliance Risks: To ensure integrity and legality in the procurement process, teams would watch for risks of not adhering to laws, policies, standards, or regulations, which could lead to financial losses or legal penalties.
  • Reputational Risks: Procurement professionals have always been tasked with foreseeing risks associated with a potential for negative public opinion, such as unethical sourcing, poor product quality, or poor supplier practices.
  • Price Instability: To avoid straining budgets or affecting the viability of projects, procurement teams have been relied upon to watch for fluctuations in market prices for goods and services.

Procurement professionals have served organizations well for many years in this narrow role, but times have changed, and now they’re tasked with a much broader range of responsibilities.

What Are the Major Risks with Procurement in 2024?

Just as the role of procurement personnel is shifting, so too are the challenges they face.

1. Supply Chain Disruption

Supplier risks that emerged during and after the pandemic are critical to new and elevated risks facing procurement professionals. A lack of awareness of supply chain risks has been exposed, and the perceived level of risk has continued to rise.

According to Axios research, 75% of businesses reported a supply chain disruption related to the pandemic.

These disruptions can often arise from a lack of information and risk awareness surrounding third-party vendors.

According to Aravo’s benchmarking research, which exposed gaps in third-party management that could lead to disruptions: 

  • 90% of organizations experienced an incident associated with a third party
  • 55% of organizations are not assessing the financial viability of their vendors
  • 56% of organizations are not assessing the operational risks of their third parties

2. Inadequate Vendor Management

According to Deloitte’s 2021 Chief Procurement Officer Survey, only 18% of CPOs had formal tracking processes to determine direct (tier 1) risks within their suppliers, and only 15% were aware of risks further down their supplier base.

In addition to the vendors you have direct contracts with, it is also important to know your fourth parties and nth parties- i.e., your third parties’ subcontractors.

Without this understanding, companies leave themselves vulnerable to issues such as cyberattacks, supply chain disruptions, and penalties.

3. Too Narrow of a Scope

What we’ve been saying is true-it’s time to get rid of the old and welcome the new! In the past, procurement professionals weren’t usually centralized and were focused on short-term initiatives like the sourcing and transactional onboarding of suppliers, cutting costs, and other relevant financial decisions.

Organizations that still maintain this narrow scope of the procurement role face challenges when thinking holistically and managing risks from all angles.

4. Resistance to Continuously Upgrading VRM/TPRM Software

Committing to the continuous improvement of technology is a massive undertaking. Still, it’s one that all organizations must face if they wish to stay on top of the procurement game while identifying, managing, and mitigating emerging risks.

The right vendor risk management software will allow organizations to maintain a single inventory of all their third-party relationships, tier firmographic data, and risk profiles.

5. Poor Vendor Sourcing

Procurement professionals are on the front lines of vendor relationships and must identify reliable vendors that align with the organization’s goals.

Transparency between all parties is key here.

In fact, a study conducted by Harvard Business Review found that a third of surveyed organizations believe that increased transparency could help save at least 10% in operational costs.

How to Take A Risk-Based Approach to Procurement

With this shift, it can be difficult to prioritize how to get started and what to focus on first.

While not everything will be implemented immediately, there are agile practices that should be on a procurement wizard’s agenda, including:

  • Take a holistic approach
  • Develop a long-term company strategy
  • Undergo a digital transformation
  • Eliminate process silos
  • Monitor ESG
  • Empower your procurement team

Take a Holistic Approach

CPOs must focus on collaboration and influence across job functions. Being involved in the entire third-party/supplier relationship management process ensures agility.

This allows prioritization of suppliers who may pose a higher risk to an organization rather than relying on a one-size-fits-all procurement strategy that could allow risks to fall through the cracks.

Develop a Long-Term Company Strategy

By shifting the primary focus to long-term initiatives and goals, procurement professionals can gain a greater foothold in wider organizational strategy.

This includes determining risk management priorities and working with risk, legal, executive, and other teams to better manage supplier onboarding, relationships, and supplier risks.

Undergo a Digital Transformation

While it’s not a magic spell, a key step is to build scalable practices rather than one-off pilot programs.

By prioritizing data cleanup and investment in TPRM tools that can build efficiency, CPOs can see positive impacts across the organization that support overall risk management.

Eliminate Process Silos

Just as the procurement role has been siloed from other organizational functions, so too have procurement-related processes. The risk of this isolation is increased vulnerability to supplier risks and lack of visibility into what is being purchased, what vendors are being onboarded, and what risks they bring to the table.

Procurement professionals lead greater organizational resilience and security by integrating or centralizing formerly siloed processes such as supply chain, third-party risks, travel expenses, procure-to-pay, and more.

Monitor Environmental, Social, Governance (ESG) Regulations and Compliance

The magnitude of environmental, social, governance (ESG) regulations and compliance is reshaping how organizations manage suppliers, affecting procurement, legal compliance, risk functions, executives, and more.

With concerns such as climate change, eliminating human trafficking and modern slavery from supply chains, identifying and eliminating corruption, etc., procurement must take a driving role in ensuring that third-party vendor relationships are aligned with ESG initiatives.

Empower Your Procurement Professionals

Perhaps the most important quest is to embrace the power procurement wizards hold within an organization. The white knights of the pandemic, CPOs, and their teams tackled challenges to protect their organizations, and executives have taken notice.

Don’t be afraid to insert yourselves into company strategy and products that matter, build teams to combat emerging risks better, and find ways to drive positive change.

Procurement Wizards to the Rescue

With these trends, it is becoming more and more apparent that CPOs and procurement professionals are becoming resilience wizards, helping companies manage supplier risk and incorporate this mindset into the overall strategy. And the benefits are already being seen.

According to Deloitte research, high-performing CPOs are 70% more likely to be a part of all organizational decision-making, including risk-related decisions and financial planning.

Significant organizational changes are not always the easiest to implement, but the benefits of taking a risk-based procurement approach are evident. If you are interested in learning more about how to take a risk-based approach to procurement, feel free to reach out to one of Aravo’s experts at any time!

Hannah Tichansky

Hannah Tichansky is the Senior Content Marketing Manager at Aravo Solutions, the market’s smartest third-party risk and resilience solutions, powered by intelligent automation. At Aravo, she manages all content and thought leadership produced for products and campaigns, and contributes as an author for articles and blog posts.

Hannah holds over 12 years of writing and marketing experience, with 6 years of specialization in the risk management, supply chain, and ESG industries. Hannah holds an MA from Monmouth University and a Certificate in Product Marketing from Cornell University.

Hannah Tichansky is the Senior Content Marketing Manager at Aravo Solutions, the market’s smartest third-party risk and resilience solutions, powered by intelligent automation. At Aravo, she manages all content and thought leadership produced for products and campaigns, and contributes as an author for articles and blog posts.

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