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HomeProcurementMajor Considerations for Mitigating Procurement Crisis

Major Considerations for Mitigating Procurement Crisis

The primary role of procurement is to acquire goods and services from external sources and ensure the continuity of supply to the organisation. As there is a lot of uncertainty for many businesses, which can happen at any moment and from anywhere. Procurement teams need to stay aware of trends and risks facing the company or the suppliers. Besides, establishing a strong procurement strategy and relying on a set of proactive and reactive techniques can help the procurement team to mitigate the procurement risks, reduce the risk of supply chain disruption and be well prepared to handle the procurement crisis.

Maintaining Alternate Sources Of Supply 

Sourcing or manufacturing everything from a single supplier or one location for critical parts in the business creates serious risk. An organisation might such as product failure, supplier business closure, disasters like earthquake, large-scale outbreaks of infectious disease, electrical, fire, etc. As a result, there will be a shortage and delay in raw materials and finished goods, delay in projects, experiencing cost overrun and the organisation might lose the customers. Therefore, procurement team needs to take action to the immediate change to minimize the risk of disruption. For example, reduce reliance on any single country such as China, Vietnam, source for alternative supply and develop in-house sourcing and delivery options. Besides, alternate sourcing help to reduce inventory cost and assures part availability at optimum levels.

Understanding the Nature of Political Risks

Political risk is unavoidable in the global marketplace, it can be divided into four levels, which is geopolitical, country-level, regulatory and societal. Geopolitical risk is the biggest political risk faced by the organisations. Ongoing research, identify, analyse and collect the current quantitative political risk indicators is the most important political risk mitigation strategy in any emerging market. The coordination and involvement between the key external stakeholders such as customers, suppliers and creditors may help the organization to recover faster from an adverse political event. Besides, organisations can conduct briefing with the key external stakeholders to discuss about the unexpected political risk contingency plan. The procurement team should consider diversifying the overseas investment instead of focusing on just one or two emerging markets. Organisations that are proactive in their political risk management would minimise the impact of political risk and prevent the consequences.

Applying Currency Hedging Strategies

Most of the procurement is sourcing for goods and services around the world to achieve cost saving to the organisation. At the same time, global sourcing exposed to currency exchange risk. Currency exchange risk is unavoidable in global sourcing, and it is the major barrier to the organisation. Currency risk can lead to a short-term impact or long-impact, and sometimes for years. Therefore, procurement team should work with the finance department to get a better understanding on the risk level and implement the strategies that can achieve effective hedging against foreign exchange risk. The easiest way to manage currency exchange rate is spot transaction. Spot transaction is a single foreign exchange transaction where the payment of the purchase is settled immediately. A Forward Exchange Contract (FEC) allows the business to lock down an exchange rate the current price which is valid until the date set by the organisation.

Setting up a foreign currency bank account is an easy and convenient way to manage currency exchange risk. Besides, it provides a natural hedge to those businesses that transact using foreign currency. An organisation might be able to save any possible double conversation fees, make the most foreign exchange rate when they are stronger by converting and keeping the foreign currency until the payment date.

Logistics Operating Models 

It will be difficult to keep the goods moving and on time if there is no room for error during the transportation of goods especially when the crisis happen such as Covid-19. Today, organisations should shift away from Just In Time (JIT) supply chain as JIT collapsed when there is any massive crisis happen. Procurement team should build redundancy into their supply chain by having a higher inventory levels in order to avoid shortages and allow some breathing space to find alternative supply solutions if there is any crisis happen in the future. Besides, having multiple carries can help to reduce the logistic risk. Uses of technology such as artificial intelligence, analytics and digital platforms provide a seamless flow of data and create end-to-end visibility. It also allows the procurement team to search for a solution quickly and effortless if there is any disruption occurs.

Shipment delays happen on a daily basis. Although there is no way to eliminate the late shipments completely, but a procurement team can reduce the number of late shipments by planning ahead for peak season such as Christmas, Chinese New Year. Digital tools that can project the delivery timing and track the delivery status may assist the procurement team to start working on a shipment delay backup plan. As shipping rates are the important component of trade costs, higher shipping rates will cause the incremental cost of the goods. Hence, procurement team should get the most competitive price by benchmark the freight rate to compare the price quoted by the carriers against the market rate and get the most competitive rate. Tender more constantly may help the procurement team to avoid locked into long-term contracts.

Clearly Defined Contract Compliance 

A contract outlines the expectations between the client and the supplier and it is legally binding to protect both parties. Noncompliance happens when one party in the contract does not comply with standard contracts, fulfil, or meet his or her obligations. Contract compliance involves all parties in the contract, everyone need to clear about their roles and responsibilities.

A standardise process is very important to the success of the contract compliance efforts. The procurement team can manage the contract creation, maximize the organisation’s operational and minimise financial risk through contract management. An efficient contact management helps to structure the business expectation, simplify the organisation’s functions, evaluate the contract performance, identify the areas for improvement, enhance the spend visibility and visibility of suppliers.


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References

Desmond Goh Choong Leoong, ADPSM (2021). “Digital Procurement for Supplier Compliance Risk Evaluation”. Retrieved from SIPMM https://publication.sipmm.edu.sg/digital-procurement-supplier-compliance-risk-evaluation/ , accessed on 13/09/2021.

GEP. (2020). “The Future Of Logistic And Supply Chain In A Post-Covid World”. Retrieved from https://www.gep.com/blog/mind/the-future-of-logistics-and-supply-chain-in-a-post-covid-world , accessed on 13/09/2021.

Huang Cheng Xiang, DPSM (2020). “Main Considerations for Sustainable Procurement”. Retrieved from SIPMM : https://publication.sipmm.edu.sg/main-considerations-sustainable-procurement/ , accessed on 13/09/2021.

Ian Tobman. (2018). “3 types of political risks and how to manage them”. Retrieved from https://www.edc.ca/en/blog/managing-political-risks.html , accessed on 13/09/2021.

Jijnyasa Patowarya. (2019). “Ultimate Guide To Contract Management : Benefits & Best Practices”. Retrieved from https://www.zycus.com/blog/contract-management/contract-management-guide.html , accessed on 13/09/2021.

Lee Meng Yin, DPSM (2021). “Mitigating Global Sourcing Risks in a Pandemic”.  Retrieved from SIPMM https://publication.sipmm.edu.sg/mitigating-global-sourcing-risks-in-a-pandemic/ , accessed on 13/09/2021.

Shipsta. (2021). “4 Challenges Shippers Are Facing Right Now (and How to Overcome Them)”. Retrieved from https://blog.shipsta.com/en/overcome-shipping-challenges , accessed on 13/09/2021.

Thomas Y. Choi, Dale Rogers, and Bindiya Vakil. (2020). Coronavirus Is a Wake-Up Call for Supply Chain Management. Retrieved from https://hbr.org/2020/03/coronavirus-is-a-wake-up-call-for-supply-chain-management , accessed on 13/09/2021.

Jessline Piong Li Chai, DPSM
Jessline Piong Li Chai, DPSM
Jessline Piong Li Chai has substantive years of experience in the construction industry, and is now specializing in the field of procurement. She holds a Diploma in Commerce, majoring in Human Resource Management and is a member of Singapore Institute of Purchasing and Materials Management (SIPMM). Jessline completed the Diploma in Procurement and Supply Management (DPSM) on September 2021 at SIPMM Institute.
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