Blog August 8th, 2023 The 5 most common risks in procurement: The power of procurement analytics

Rubina Hatziparassidis

In times of increasing digitalization, medium-sized companies have recognized that the use of procurement analytics solutions is a deciding factor in minimizing risks in operational and strategic procurement and ensuring business continuity. Advancing digitalization has permanently changed the procurement landscape and companies are increasingly looking for efficient methods to optimize their procurement processes. Procurement analytics, such as SCALUE, helps mid-sized companies identify and assess supply chain risks. In this article, we will highlight five common risks in procurement and explain how using procurement analytics is an efficient solution for risk management.

Risks in procurement

1. Supplier dependency:
A common risk is that a company is heavily dependent on just a few to just one (Single Source) supplier. The procurement department is often unaware of how dependent it is on just one supplier. If such a single source supplier stops supplying or is no longer able to supply the required quantities, this can lead to significant bottlenecks and jeopardize business continuity.

2. Price volatility:
Price volatility in global markets can cause the cost of goods to fluctuate widely. Sudden price increases can strain the procurement budget, jeopardize liquidity and affect the company's profitability. In particular, the lack of a link between internal prices and market indices interferes with your procurement department's ability to evaluate prices already agreed with suppliers and further complicates forecasts for the coming months, quarters and years. This makes the procurement strategy even more challenging.

3. Supply bottlenecks:
Supply bottlenecks can occur when a supplier is unable to deliver the required quantities on time. This can disrupt the company's production processes and lead to delays in deliveries to customers. Geopolitical events, trade conflicts and macroeconomic factors such as currency fluctuations can affect the global supply chain and lead to uncertainty and risks.

4. High Working Capital:
Another significant risk in procurement is high working capital. Short-term improvements can be achieved by analyzing payment and delivery terms from your suppliers. However, there is a risk of increased costs due to early payment discounts or payment delays. High working capital affects your company's liquidity and can limit financial flexibility.

5. Inadequate data analysis and delayed decision making:
The lack of reliable data analysis and data-driven decision making can prevent your procurement management from gaining sound insights into their procurement processes. As a result, there is a risk that important opportunities and risks for cost savings and supply chain optimization will be overlooked. Communication within and outside the procurement department, as well as trust in procurement, also tends to suffer. Especially when each employee works with different and unreliable figures, etc...

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How can these risks be managed using procurement analytics like SCALUE?

1. Supplier evaluation and diversification:
By using procurement analytics, your company can monitor and evaluate supplier performance. SCALUE allows you to analyze suppliers based on KPIs such as delivery reliability, procurement volume and pricing. This allows strategic sourcing to identify those suppliers that represent high risk and find alternative sources in a timely manner to reduce dependency on individual suppliers. Furthermore, with the help of transparency, your procurement management gets an overview of which suppliers they are highly dependent on and can counteract this to avoid bottlenecks.

2. Monitor price trends:
A procurement analytics solution can analyze historical price data and link external data sources (LME, Mintec, etc.) to your data, enabling strategic sourcing to more reliably estimate forecasts for future price developments. In this way, you can better react to price volatility and adjust the procurement strategy accordingly at an early stage.

3. Proactive supplier management:
With SCALUE, strategic procurement can identify supply bottlenecks at an early stage. The solution enables preventive planning by visualizing supply chain headquarters and identifying potential bottlenecks from critical regions. This enables your procurement department to find alternative sources and make supply chains more resilient (Resilient Supply Chain). Your procurement managers gain accurate and reliable insight into the performance of their suppliers (Supply Performance). As a result, potential risks can be identified early and proactively acted upon to ensure business continuity.

4. Optimized working capital:
By using procurement analytics solutions, your company can optimize working capital in a measurable and sustainable way. The analysis of payment and delivery terms, order and delivery frequencies, as well as volume developments enables an efficient procurement strategy to measurably reduce tied-up capital and increase financial flexibility. In addition, monitoring supplier performance in terms of timeliness, quantities and prices enables working capital to be optimized and reduces the need for expensive emergency orders. Accordingly, solid control and targeted optimization of working capital through procurement analytics creates financial stability and strengthens your company's competitiveness.

5. Data analysis and decision making:
Procurement analytics solutions enable you to analyze large volumes of procurement data, identify trends, and make data-driven decisions to target and improve your procurement strategy and ensure long-term success. When you have a reliable and up-to-date procurement analytics solution in place, you can confidently manage every negotiation, RFP, and management meeting and measurably demonstrate your value proposition. Even with poor data quality, you can leverage SCALUE and gain valuable insights.

Conclusion

The advance of digitalization has significantly changed risk management in procurement. Companies are increasingly turning to procurement analytics solutions to successfully manage supplier dependency, price volatility, supply shortages, high work capital, and insufficient data analysis. With data-driven decisions, you can optimize your procurement processes and ensure long-term success. Procurement Analytics gives your organization the power to effectively manage risk and ensure business continuity.

How SCALUE can help you? Schedule a free demo now!

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