Expertise

How to manage international procurement risks

In order to manage international procurement risks, it is necessary to prioritize third-party components, assess existing risks, implement measures to manage them and continuously monitor risk exposure.

Suez Canal

On March 23, 2021, the captain of the Ever Given lost control of the 400m-long container ship, blocking the Suez Canal, the most important shipping lane between Asia and Europe, through which 12% of the world's trade is conducted. Within a matter of days, 300 merchant ships, carrying goods worth 60 billion dollars, were stuck in a jam. The price of oil rose by 5%. Manufacturers were left waiting for their goods. Waterways like the Suez Canal are among the critical spots of world trade. Mishaps like that of the Ever Given reveal how susceptible international supply chains have become to disruptions. They give rise to the demand to optimize supply chains not only in terms of costs, but also to take the risks into account when designing them.

An Innosuisse project led by the University of Applied Sciences of the Grisons and the Bern University of Applied Sciences in cooperation with industry partners and the procure.ch trade association has examined how the international procurement risks can be managed. The result of the project is the iBERIMA procedure, which helps companies to manage international procurement risks. iBERIMA consists of a process that guides users through the steps of procurement risk management as well as tools that support their implementation.

Focus on the major procurement risks

The process starts by prioritizing components purchased abroad. Their availability determines the company's ability to offer its services on the market. The third-party components are evaluated and positioned in a matrix on the basis of the two criteria of impact on results and dependence on availability. Third-party components with a major impact on the company's results and a high dependency on procurement are considered strategic and are prioritized in risk management.

Strategic components are analyzed in terms of the potential risks associated with their procurement. These include environmental risks arising from political instability in a country, corruption or a lack of legal security, supplier risks resulting from financial difficulties of suppliers, qualitative defects or price increases, logistical risks arising during transport or customs clearance. However, procurement risks may arise within the company due to poor procurement management, misunderstandings and design changes to products. Identified risks are documented and described.

Evaluation of risk potential

The evaluation of the identified risks deals with the issues of how probable their occurrence and the possible extent of damage, for which risks measures must be taken in the area of risk management and which risks are acceptable for a company. The result of the risk assessment is a risk matrix that depicts the company's risk exposure in international procurement. Risks with a high probability and considerable potential for damage must be mitigated in order to make them acceptable for the company. Risks with a high probability or high potential for damage must be assessed to ensure that the risk exposure is manageable for the company as a whole. Risks with a low probability and low potential for damage do not require management. They are not critical for the company because they occur relatively rarely and the resulting damage cannot endanger the company.

Risk mitigation measures

Risk management involves developing measures to reduce the likelihood or mitigate the adverse impact of a procurement risk that has been identified as critical. Basically, companies have three types of measure at their disposal. To avoid risk, they can decide not to source from critical markets, to manufacture components themselves or to hedge against currency fluctuations. To reduce risk, they can subject critical suppliers to regular audits, maintain long-term supplier relationships, purchase critical components from multiple suppliers or store emergency stocks. Risks can be transferred by taking out liability or business interruption insurance, setting up consignment warehouses or applying Incoterms. To fundamentally reduce risk exposure in international procurement and increase supply chain resilience, companies can increase inventory levels, diversify the supplier structure geographically and make supplier relationships more flexible. Each measure to address procurement risks is evaluated in terms of its cost-effectiveness (cost of the measure compared to risk reduction), the risk matrix is reassessed and implementation plans are prepared to be ready in case the risk occurs.

Monitoring risk exposure

Risk monitoring assesses whether the measures chosen to manage the risks are implemented, whether they are effective, whether the potential for damage and probability are reduced as desired, and how the company's risk exposure changes overall. In addition, this process step includes the establishment of an early warning system that can alert the company to the occurrence of procurement risks at an early stage. The early warning system monitors internal and external risks on the basis of defined indicators, reports unforeseen changes and gives the company time to react promptly. For example, the constant increase in the size of container ships can point to the resulting transport risks and prompt companies to procure critical third-party components from different regions via different transport routes.

To ensure continuous procurement risk management, it is important to institutionalize this process within the company and to run through it regularly. The iBERIMA process manual and the supporting tools are available for this purpose at www.iberima.ch

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