Procurement risks: Lack of due diligence can lead to financial and reputational harm

Procurement is one of the most critical areas of any organisation, large or small. Procurement officers secure the materials and goods that a business needs in order to be productive and successful, and they do so while trying to ensure the best possible price, quality, efficiency of delivery and other important considerations.

Unfortunately, due to the very nature of dealing with third-party suppliers/vendors, procurement also requires a high level of risk management. As many high-profile cases have shown, supply-line problems can cause financial and reputational damage, sometimes on a grand scale.

The infamous horse meat scandal in the UK presents a classic scenario of the damage that can come from risky third-party associations. Widely known international corporations, including Burger King and others, were forced to cut ties with a meat supplier after facing financial and reputational harm from the news that some of the supplier’s products were tainted with horse flesh.

The revelations of tainted meat resulted in international news headlines, waves of criticism from consumers and food products being pulled from shelves and freezers in response to the uproar.

As damaging as it was, the crisis helped to illustrate why due diligence is becoming ever more important as supply chains, especially among international organisations, expand and become more complex.

The following are some priorities every organisation should have in order to minimise risk in the procurement process:

Know who your suppliers are. Due diligence is as important in procurement as it is in any other area of the business; in some cases, more so. Services like Third Party Risk Management (3PRM™)help organisations proactively mitigate risks from third-party affiliations, protecting organisations from liability, brand damage and harm to business. As part of this service, experts check supplier backgrounds to verify their financial viability, quality control, compliance standards and – most importantly – any prior legal or criminal action. Taking this step before you engage with a supplier or vendor can save some serious headaches down the road.

Consider your organisation’s reputation. The horse meat scandal showed how quickly and how drastically a well-respected organisation’s reputation and brand can be damaged. Your procurement team should know that while the bottom line is important, nothing is more critical than protecting the image and brand of the company. Cutting due diligence corners in order to secure the lowest price is not only unwise – it should be strictly against company policy.

Find sustainable lines of supply. Seek out suppliers with long, successful backgrounds in their business. Find companies that are economically sound and also socially conscious, using fair labour practices and promoting the use of sustainable resources. Organisations have been harmed when it was discovered that a supplier was using child labour or other unethical or illegal practises to produce their goods. Implement a code of conduct with expectations for your contractors, suppliers and vendors, and review them regular to ensure they are following your guidelines.

Have backup suppliers in place. What happens when your primary vendor is suddenly out of compliance? Or folds up completely? If your production chain grinds to a halt, the damage can be deep and lasting to both your organisation’s financial and reputational health. Make sure your procurement team has conducted due diligence on backup suppliers that you can turn to in crisis. Spending a little more to keep the production lines open will be a small price to pay compared to seeing your business come to a standstill.

Conduct a thorough risk assessment. Any organisation that hasn’t prepared a risk assessment of their procurement process should immediately do so. How else will you know what red flags or gaps are making your organisation susceptible to fraud, waste, risk to reputation, or all of the above? Third-party risk management experts can help you develop and put in a place an effective third-party risk assessment plan that keeps your organization protected, and minimizes your exposure to unseen or unknown trouble spots.

Every organisation needs a successful and efficient procurement process. It also needs to be safe from the risks that are inherent with connections to third parties, including suppliers, vendors and contractors. When it comes to procurement, let CRI Group help you put proper risk management processes in place so you don’t have to worry about your supply chain putting you in tomorrow’s headlines.