Understanding procurement risk
People – and organizations – are inherently risk averse. We attempt to lower uncertainty and minimize disruption in our daily lives. In the context of today’s business environment, where organizations must continuously rethink supplier strategy and cost optimization mechanisms, risk aversion and mitigation is paramount. To understand risk in the procurement function, let’s first consider how risk manifests across the broader supply chain.
What is Supply Chain Management?
Supply Chain Management (SCM) is the management of the flow of goods and services from point of origin to the point of consumption. Quick and efficient Supply Chain Management, often leveraging information technology, a network inventory warehouses, and logistics, is critical to drive business efficiencies and reduce organizational costs. Procurement, or the process of acquiring goods an organization needs for its business, is one element in the supply chain, central to helping to reduce costs.
What is Supplier Risk Management?
Risk management is the identification, evaluation, and prioritization of risks, allowing an organization to best manage and mitigate them. For businesses or organizations dependent on third-party suppliers for business objectives, as nearly all businesses are, Supplier Risk Management (SRM) involves mitigating supply chain disruptions through management of supplier-centric risk.
As global supply chains – and SCM – become more complex, the need to manage supplier risk becomes more critical. Some large organizations can have hundreds of thousands of suppliers and each of these third-parties presents risk exposure. In 2018, for example, ExxonMobil spent more than $25 billion in capital and exploration expenditures, with payments made to more than 100,000 suppliers of goods and services worldwide. This type of global purchasing management requires large teams, technology, and automation. It also presents new risk.
To reduce some complexity, many organizations look to reduce the number of suppliers: fewer suppliers to manage and monitor may present less potential risk. Growing reliance on third parties to operate a business’ essential functions or purchase the items it needs increases the volume of risks.
The role of reducing risk in procurement
Procurement function leaders – whether a chief procurement officer (CPO), contract manager, purchasing manager, or buyer – have an important role to play in protecting their organizations from risk. Risk is inherent to all organizations and the complexity of global supply chains and reliance on third-parties to purchase goods inherently means risk exposure exists – often in high volume - in procurement.
Procurement can be presented with operational, reputational, or ethical risk. Emerging risks like cyber or reputational risks are increasingly considered. Regulatory risks can also exist across business, and not solely for those in the public sector.
For a corporate function largely measured by reducing costs, risk management can be especially challenging: how can an organization save money and drive efficiencies while still using high-quality, vetted suppliers that meet operational goals?
Fortunately, procurement is positioned to monitor and mitigate risks from the supply base, driving effective supplier risk management. And, as organizations navigate through periods of business uncertainty, procurement increasingly is driving value for the business, becoming a strategic partner in supply chain risk management.
Risk in indirect spend
Indirect procurement is expenditure on business operations and other requirements that do not have a direct impact on company profit – yet risk in indirect spend can still impact the bottom line. As most organizational focus is on direct spend, indirect spend suppliers often aren’t as closely managed as core suppliers, with complex contracts and teams of organizational buyers. This opens up organizations to increased risk.
Online stores mitigate risk
Online stores may help procurement address inherent risks of indirect spend. They are built on the concept of choice: the more choice, the more value that can be delivered to the buyer. When you search for a product on an online store like Amazon Business, for example, you’ll land on one detail page for that item. On that page you’ll see all the sellers who can sell you that product and the pricing they propose in an effort to win your business. In this digital storefront, buyers can quickly search, compare, and shop offers on hundreds of millions of products available across hundreds of categories – and hundreds of thousands of suppliers in a single place.
Organizations can effectively reduce supplier complexity – minimizing the risk inherent from multiple supplier agreements – by purchasing from a single e-commerce source that aggregates multiple suppliers. Buyers can still comparison shop and evaluate for best value of indirect spend, without the burden of searching, identifying, and vetting each individual supplier.
Online stores can offer comprehensive, one-stop digital shopping experiences with business selection and pricing from trusted suppliers. Sellers on Amazon Business have high standards for operational performance including:
Procurement is assured it is sourcing from diverse, vetted suppliers with minimal disconnect throughout the value chain.
Additional tools for managing risk
With Guided Buying from Amazon Business, procurement can define organization-specific policies that are reflected in the search experience and detail pages, empowering buyers to purchase quickly, knowing strategic sourcing is inherent to the experience. At the same time, visibility into spend is available for central management and optimization.
With Approval Workflows combined with Guided Buying, procurement can define category purchases or a spend threshold, or even a combination of both, that should lead to further review by an approver or the procurement department.
With Budget Management within Amazon Business, procurement has even finer controls on how to manage purchasing policies. Procurement leaders can set specific spend thresholds for a specific department in addition to existing Guided Buying and Approval Workflows. Additionally, these budgets can be attached to a specific Purchase Order (PO) to synchronize with procurement spend reports across all suppliers.
Ultimately, businesses can enhance end user purchases with tools like Guided Buying from Amazon Business, mitigating risk and ensuring adherence to organizational policies and preferences. With automation of mundane or repetitive procurement processes, particularly in indirect spend, attention can be given to more strategic sourcing.