• Friday, April 19, 2024
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Risk Management in procurement (with practical examples that anyone can understand)

Risk Management in procurement (with practical examples that anyone can understand)

The easiest way to define procurement is as the acquisition of goods and services. It is a vital part of supply chain management, which has evolved from purchasing, which is an administrative function, to procurement, which is a more strategic approach to goods and service acquisition. Today, procurement goes beyond that. It also entails the good planning and management of the stakeholders who provide these goods and services.

Just like many other aspects of business operations, the procurement process has a lot of risks. If not well managed, there will be major exposure to losses and poor business performance. Remember that this article is worth reading if your organisation has a procurement unit. Moreover, who won’t have a procurement unit in 2024? Haha!

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Cost

What are the risks involved when we talk about cost? A lot of procurement professionals have been asked by their company to ensure costs are low during purchases. This is cool, but is it long-term? How sustainable is it? Have you ever heard of the total cost of ownership? I’m not going to define anything here. Let me give you an example.

Imagine you want to purchase a car. Option A is N1000 and Option B is N1500 (Please, this is an imagination; Don’t carry 1k to buy a car. I no dey oo. LOL). You immediately think that going for Option A gives you a N500 cost savings, right? It absolutely does at that time, but… Option A needs N100 monthly for gas and maintenance, and Option B needs N40. By the end of one year, you would have spent N2,200 on Option A and N1,980 on Option B. By the end of the second year, you would have saved more than N900 if you went for Option B. So, you see, focusing on unit cost isn’t always a sustainable way to deal with cost-associated risks.

Quality

Quality is often a myth, but it’s not a business school discussion. For instance, a surface pump for domestic water supply requires a float switch to control pumping, demonstrating the importance of quality in our daily lives.

You have a low-quality option for N20 and a high-quality one for N35. And then you say, “Why on earth would I pay almost two times the cost of this for a float switch? Is it not the same thing they both do?” Well, here’s the twist: The N20 one lasts for two months before it goes bad, and the N35 lasts for four months or more. You would need 6 pieces of the N20 guy per year, which will be N120. 3 pieces of the N35 come to the N105.

So generally, a good buyer is a long-term thinker. Back to the business environment, quality is not a myth, and it is paramount to competitiveness. Moreover, the peace of mind it brings gives more time to focus on other strategic purchases and procedures, which add value to the company and foster continuous improvement and growth.

Time

Supply chain value is paramount, and speed has become crucial in production and service delivery. In the service industry, sourcing a building contractor for a restaurant branch renovation is critical. The estimated time of completion (ETC) is the top priority, followed by quality and cost. The only justification to choose a contractor with a cheaper cost and longer ETC is if the savings from mobilising that vendor outweigh the money lost during the additional period the branch is closed.

For instance, if Contractor A offers a shorter renovation time, the only justification to choose Contractor B is if the value to customers and savings from using Option B outweigh the profit if the branch is closed for a longer period.

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Capacity, culture alignment, and large pool of suppliers

Working with suppliers who have the capacity we desire and culture alignment is one thing that many procurement professionals may not pay attention to, and to be honest, we really need to. Imagine a medium-scale FMCG company that had inaccurate forecasts and planning and had to turn to a supplier to save the day (remember that we are imagining here).

They are open 24/7, so they reach out to a supplier on Saturday morning to supply raw materials to their plants, and the supplier says, “We do not work on Saturdays. Apologies for any inconveniences caused.” Please tell me who cooked these beans. Now, write this down: NEVER RELY ON ONE SUPPLIER. They will check their supplier pool and ensure they get the raw materials to the plant. If you are reading this and you do not have a large pool of suppliers, then you need some more strategic sourcing.

Procurement professionals should prioritise risk management for daily activities and processes, focusing on all data and considering the potential harm and harm to the organisation rather than focusing on a few parameters and making decisions based on them.