Modern procurement risks are evolving daily, requiring effective risk mitigation strategies. The following are 3 pillars of Procurement Risk Management Strategy:
- Environmental Context:-All organizations are impacted by various factors to varying degrees. Understanding one’s business landscape and the environmental factors that underpin its existence is a critical exercise. Procurement Risks arise from socio-demographic, ecological, economic, competitive, political, technological, customer, product, and industry factors that apply pressures on supply chains. Procurement professionals must understand the level of risks these factors pose to their organizations. An analysis must be made to determine how our organizations are positioned to mitigate these risks and to capitalize on any positive factors. It is from this contextual information we can develop effective risk management strategies.
- Strategic Prioritization and leverage of the 80-20 Rule: Understanding that all risks are not equal is essential for the deployment of an effective risk management strategy. The fact is that 20% of the factors in a business landscape drives 80% of our organization and supply chain risks. Furthermore 4% of these same elements drive 50% of our supply chain risks. It is necessary that we laser focus our efforts and prioritize our resources in line with the 80-20 and 4-50 dimensions.
- Operationalization and the leverage of FMEA (Failure Modes and Effects Analysis): Well written and thought out risk mitigation strategies are nice to have but are useless until they are effectively deployed. Part of effective deployment is prioritization and resource allocation. Factors that pose the most significant risk levels should be allocated most available resources. The key is to document and analyze risks from 3 perspectives, severity, detectability, and level of occurrence. FMEA provides a Risk Priority Number (RPN) which is leveraged to prioritize resource allocation to risk factors. The formula for RPN is Severity X Occurrence X Detection. Therefore, a risk element with a severity of 8 out 10, occurrence of 10 out of 10 and a detection score of 10 out of 10 has and RPN of 800. If another risk element has an RPN of 200, the risk element with an RPN requires a high degree of attention and resources.
NLPA Library: Looking for authoritative procurement templates, tools, webinars, and more? Stop trying to create resources from scratch and start taking advantage of having exactly what you need right at your fingertips in the NLPA Library