Procurement is one of the most important aspects of any business. It’s how you ensure you have the resources and supplies needed to run your company effectively and keep costs down. However, procuring isn’t always easy, especially for startups with limited budgets and resources.
That’s where procurement risk comes into play, which is when a buyer makes a purchase that could cost them more than the item itself is worth or endangers their brand reputation. In this article, we’ll go over some common procurement risks that startups often face and how they can mitigate these risks to stay protected against them.
Price Volatility in the Market
Price volatility is a risk that is hard to manage. It’s precarious for startups because they will likely have lower margins than established companies. Price volatility refers to the risk of an unexpected change in market conditions, which can lead to price increases for your products or services.
Startups should keep an eye on the market and consider a fixed-price contract if possible. It means that you’ll get paid based on what’s agreed upon at the start of your contract with the buyer, regardless of whether prices rise or fall later on down the line.
This way, you know exactly how much money you’ll be making from this deal without worrying about anything else coming into play like any sudden shifts in supply/demand or other external factors, both internal (like competitors) and external (like policy changes).
Risk of Non-Performance
When you’re a startup, getting your head around the concept of contract law can be challenging. After all, contracts are generally binding agreements between two parties and usually involve monetary exchange or promise. But in business speak, “contract” is often used more broadly to describe any agreement between two parties that binds them morally and legally, even if there’s no financial exchange involved at all.
Even if a supplier doesn’t charge you for their services or products (e.g., an unpaid intern or volunteer), there could still be legal consequences if they fail to perform their duties as outlined in the contract. So while this risk may seem like something specific and only applicable to large corporations with lots of money at stake (like Amazon), startups should take note. Non-performance is always possible when dealing with third-party suppliers outside your organization’s control.
Receiving a Lower Quality Product
Receiving a lower-quality product is one of the most common procurement risks. However, high-quality suppliers can be hard to find and even harder to evaluate. First, you will need to ensure that their products are available in the country where you plan to sell them. If this information isn’t readily available (and often not), start asking questions about their supply chain management process. These include handling orders from other customers and managing quality control throughout the manufacturing process.
One way to mitigate this risk is by using a letter of credit instead of paying upfront or via PayPal when ordering with new suppliers with no track record with your company. It gives you time while the supplier gets the product made up before paying for it. During this period, you can work out any issues that may arise between ordering and delivery dates due to quality concerns or logistical delays within their supply chains by placing more stringent requirements around what happens if something goes wrong during production (such as requiring 100% inspection).
Overly Long Contract Terms
One of the most common procurement risks is overly long contract terms. It can make it difficult to change suppliers, get out of a contract, and receive a refund if you don’t like your product or it breaks down.
For example, let’s say you’re shopping for a new phone charger, a simple purchase but one that will cost you $50. If that charger breaks after six months, you’re stuck with it unless one of two things happens. Either your provider agrees to fix or replace it free of charge, which may be unlikely given their lengthy contract term. Or they give you enough notice about breaking before such an event occurs, so there’s still time for them to ship out another item before its warranty period expires.
Poorly Written Contract Language
The contract you sign with your suppliers is the backbone and foundation of your procurement program. The contract’s language must be precise, detailed, and carefully drafted to ensure that both parties are protected.
A well-crafted agreement with clearly defined terms will allow you to more effectively manage your business relationships with suppliers, giving you greater flexibility and control over how those relationships unfold.
Manage Your Risks
The first step toward managing procurement risk is to understand and learn more about it. Procurement risk refers to the potential for losses due to non-compliance with laws and regulations governing purchasing or leasing goods or services.
It would be best to manage procurement risk because failure could result in penalties, fines, and other adverse consequences from government agencies like the U.S. Department of Justice (DOJ) or Securities and Exchange Commission (SEC).
Procurement risks fall into one of two categories – business process-related risks and supplier-related risks. Business process-related risks include:
- Inadequate legal documentation.
- Preliminary approvals.
- Inaccurate pricing.
- Contractual disputes with vendors.
- Internal theft by employees who handle vendor payments on behalf of their employers (such as purchasing agents).
Supplier-related risks include bad supplier relationships that hurt your reputation, lack of experience dealing with foreign suppliers, unqualified vendors, fraud by contractors against you, and more.
If you’re a startup, you last want to lose out on valuable business opportunities. To protect yourself from these procurement risks and ensure that your company thrives, you must know what they are and how to manage them. We hope this article has helped you better understand the risks associated with procurement processes and how startups can mitigate them by being aware of them beforehand.