Mitigating risk with procurement software

Surviving in the global economic arena necessitates an eye for risk management and an understanding of the capabilities of procurement software. Manufacturers, distributors and retailers throughout the world have to orchestrate profitable relationships while abiding by inter-governmental regulations, considering social responsibilities and exercising sustainable practices. In order to satisfy these demands, market participants must possess a comprehensive view of all material sources.

Assessing risk management requirements

Whenever merchandisers buy a particular product, they're inherently taking a risk. There's no guarantee that the purchased item will be sold, that it won't be damaged or stolen en route or even that it will function properly when it's taken out of the package. The only factor that retailers have on their side is probability. Through assiduous market research and analysis, commodity-based companies deduced that obtaining such a good would result in a return on investment. Consumer demand supports this claim.

Carlos Alvarenga, a contributor to Procurement Leaders, noted that risk management is currently in its nascent stages as it relates to contemporary strategic sourcing practices, but its role is going to become much more prominent in the near future. As of now, charting probabilities primarily consists of conducting qualitative analyses in the form of supplier audits and typically scrutinizes discrete, disruptive and unlikely transactions. However, the future will produce material acquisition that inherently carries out the following tasks:

  • Identify which third-party factors (i.e. governments, associations, competitors) may hinder procurement.
  • Deduce the total cost of risk at the distribution and supplier level.
  • Determine which in-house investments either will or will not produce a return on investment.

Spearheading this movement will be cloud-based software capable of aggregating data from multiple different sources and processing this to form actionable intelligence. Warehouse management systems, port administration programs and other technologies will contribute, providing executives with a comprehensive perspective of all product obtainment practices

Attaining more to reduce expenses

Richard Waugh, a contributor to Spend Matters and vice president for a materials acquisition technology developer, stated that the majority of procurers utilize some form of technology that helps them execute more effective spend management strategies, find cheaper goods for better quality and enhance distribution routes. Looking toward the future, Waugh noted that these organizations are beginning to attain more technology that pertains to specified areas, such as supplier performance measurement and financial savings execution.

However, attaining advanced technology all depends on how much capital organizations have available. A study conducted by Waugh's company surveyed an unspecified number of global enterprises regarding procurement management. Out of the respondents, those that reported higher cumulative savings were much more likely to claim higher software adoption rates. What's even more interesting was that enterprises that encountered such success often reduced operational expense by using computing solutions in the first place.

It could be said that these savings were accomplished by factoring in the risks involved with procuring certain goods from particular sources. For example, a spend analysis program could correlate manufacturing costs in India with those of South Africa and then compare the quality of the goods being produced. In addition, other elements would be factored into the equation, such as:

  • Which ports are more expensive to dock ships at?
  • Are the goods manufactured in politically volatile nations?
  • How do companies producing raw materials treat their employees? (This point is particularly relevant, as many consumers base their purchasing decisions on how socially responsible an organization is.)
  • Do the original source manufacturers utilize automated or manual processes?

Procurement risk management essentially takes basic economic principle and seeks to derive the most information out of probabilities through algorithms. A global enterprise is connected to dozens, if not hundreds, of indirect partners and subsidiaries all engaged in different aspects of the distribution chain. Figuring out which transactions will carry the less amount of risk is imperative.

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