How SMEs can enhance risk management in purchasing management

Purchasing is a key aspect of operations for any small-to-medium enterprise (SME). Getting purchasing right can optimize costs and support profitable growth. However, purchasing decisions also come with risks that need to be properly managed. With limited resources, SMEs have to make the most of their purchasing activities.

Here are some practical tips SMEs can follow to enhance risk management in their purchasing management:

Perform due diligence on suppliers.

Take the time to research potential suppliers before committing to large orders or contracts. Check reviews, credentials, certifications and references to get a fuller picture of their reliability, quality standards and track record in upholding agreements. Look for suppliers with a strong financial position to minimize the risk of them going out of business before fulfilling your orders. Request samples when possible to trial quality beforehand.

Negotiate flexible terms.

Where possible, negotiate contracts that have change order clauses built in or clauses allowing for order cancellations or delays with minimal penalties if unforeseen situations arise. Ask for longer payment periods from suppliers to better manage cashflow without taking on excessive debt. Flexible terms give SMEs more breathing room to adjust purchasing if demand or other aspects of business change unexpectedly.

Diversify supplier base.

Relying on just one or two suppliers presents risks if those suppliers run into problems filling orders. SMEs should aim to have a minimum number of qualified suppliers for key goods and services as backup. If one supplier falls short, others are available to help avoid disruption. Supplier diversification also gives SMEs more negotiating power to get better prices and support.

Set supply contingency plans.

What happens if a preferred supplier can no longer provide a necessary material or component on short notice? Smart SMEs map out contingency plans for maintaining production and delivery. These contingency plans may involve last-minute substitutions from secondary suppliers or adjusting production methods temporarily. Advance planning makes it possible to avoid costly delays if primary supply sources are disrupted.

Insure against losses.

Purchasing insurance protects SMEs against potential losses from supplier bankruptcy, logistical errors like damaged shipments, or legal liabilities such as hazardous materials incidents. Common policy types include supplier failure coverage and cargo insurance. Affordable premiums are worthwhile for safeguarding purchasing investments and margins. Check availability of government-backed insurance plans and subsidies geared toward SMEs.

Inventory appropriately.

Excessive or inadequate inventory levels both introduce risks. Carrying too much stock ties up capital unnecessarily, while too little stock risks shortages. SMEs should implement inventory management practices like just-in-time replenishment informed by demand forecasting and optimal reorder points. Computerized inventory tracking also helps avoid shortages and surpluses that undermine purchasing goals. Don’t order more than is needed while keeping enough buffer.

Consider purchase order financing.

Finance purchases through purchase order financing plans offered by factors or banks to better synchronize payments with incoming customer payments. These non-recourse arrangements shift credit risk away from SMEs. Purchase orders are used as collateral for low-cost short-term financing rather than waiting to use cashflows. The working capital boost can assist with supplier negotiations too by providing upfront payment capabilities.

Audit purchasing process regularly.

Review purchasing SOPs, metrics and oversight at least annually, paying attention to areas where risks have materialized in the past. Strengthen procedures, checkout alternatives and refine KPIs accordingly. Purchase audits help close risk management gaps before they can lead to costly mistakes or missed opportunities like savings on inputs. Ongoing refinement enhances control over what is typically a major outlay and value driver.

Proactive risk management integrated into the daily purchasing routine is an important element for SME success. With disciplined application of the above approaches tailored to their unique needs and risk tolerances, SMEs can optimize purchasing outcomes while avoiding unnecessary disruptions that threaten profits and growth plans. Paying heed to potential risks and handling them strategically strengthens SME competitiveness over the long haul.