Risk management

Risk management in purchasing

Read how well planned risk management can help you to optimally position your purchasing in times of volatile raw material markets and economic market uncertainities in order to counteract supply bottlenecks.

In purchasing, we are dealing on the one hand with “normal” procurement costs and on the other hand with risk costs, which are more difficult to budget than pure procurement costs. In most cases, a reaction on risks is only made when costs already occurred, instead of acting proactively and establishing systematic risk management in procurement.

Sustainable procurement strategies and long-term supply contracts

To avoid obvious risks, companies often choose sustainable procurement strategies that engage multiple equivalent suppliers for materials, parts and services.

If this fails, the companies rely on single source suppliers with whom they enter into long-term supply contracts. This ensures supply even in the event of unexpected bottlenecks and short-term price increases can be avoided. As the supply chain is widely diversified, the risks are manageable.

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Dr. Stephan Hofstetter

Partner

T +49 211 875 453 23

Nevertheless, business interruptions, including interruptions in the supply chain, are a high business risk. This is reflected in the Allianz risk barometer with a value of 37% in 2017

The risk potential in procurement is constantly increasing due to long-term trends:

  • 1. Due to the reduction of vertical range of manufacture in many industries and companies, purchasing is becoming increasingly important and dependencies due to the loss of know-how are increasing.
  • 2. Access to global procurement markets is creating delicate, sensitive global supply chains.
  • 3. In order to reduce capital commitment inventories are optimized, which increasingly leads to supply risks due to tightly timed value chains.

The ISO standard 31000 is a proven measure for well-structured risk management that can also be used in purchasing. The risk management is primarily integrated into processes and decision-making. Opportunities as well as risks should be considered in all purchasing decisions.

In the field of operational risks, the topic of “quality problems” with suppliers comes first. In order to minimize risks and thus also repair costs, purchasing has to check and select suppliers with regard to process stability. A functioning and thus pragmatic and institutional quality assurance, in which the individual process steps are clearly defined and linked with responsibilities, is another risk-minimizing factor.

Currency risks and rising raw material and energy prices have a direct impact on companies’ assessments of strategic risks.
The highest strategic risk potential for companies is economic market uncertainty. However, this is a snapshot. In the future, the risks of “dependence through single-sourcing” and “insolvencies of suppliers” will be seen as constant companions. A structured supplier risk management system is thus becoming increasingly essential for buyers in order to effectively protect the company from negative effects.

Most risks can be assessed, proactively handled and constantly controlled with the help of strategic supplier management. Potentials as well as risks must be evaluated and taken into account when making decisions. The probability of a risk occurring depends on the company’s risk strategy, which is indispensable for purchasing. Risk awareness in strategic purchasing and operational procurement can be increased through trainings.

In purchasing, recognized methods and tools for identifying potential can also be used to assess risks. Kraljic developed a two-dimensional portfolio analysis to identify the risks in procurement, since the ABC analysis from Pareto is only focused on measuring the importance of a supplier. In general, the risk matrix for assessing risks is the elementary instrument. In this way, relevant risks can be classified according to probability of occurrence and damage potential.

The need for functional risk management in purchasing is therefore very high.
Kloepfel Consulting supports its clients with the necessary know-how, with the organizational competences and above all with the time that is often lacking in a purchasing department to set up an integrated risk management system. To establish this successfully, clearly defined processes and responsibilities and links between different functions are required.

Once a risk management system has been implemented in the company, the “additional” effort in daily business is low. The costs that could be caused by a sudden insolvency of a supplier, for example, are considerably higher than the costs of implementing and operating a well-founded supplier risk management system.

It is important to us that the tightening of the risk situation does not lead to a general strategy of risk minimization while simultaneous excluding opportunities. Entrepreneurial activity is inseparably associated with risks and only the assumption of risks enables a company to grow.

What is often underestimated: In addition to quantitative creditworthiness criteria such as balance sheet ratios, banks always base their lending decisions to a certain extent on qualitative factors. These include, among other things, the operational efforts to establish a risk management system. A stress test in purchasing can therefore be a good starting point for discussing the possibilities of rating optimization with your bank.

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