Procurement and Financial Risks: Analysis and Mitigation Strategies

This report provides an overview of procurement and financial risks, emphasizing the importance of contract management within the procurement cycle. It defines procurement risk, including cost, fraud, and quality issues, and highlights the role of procurement planning in risk reduction and value en...Read More

Running head: PROCUREMENT AND FINANCIAL RISKS 1
Introduction
One of the most critical parts of the procurement cycle is contract management. The
management plan of a contract aids the contract and project managers in managing the contracts
by focusing on transition management, monitoring performance as well as ensuring that all the
involved groups or parties achieve their contractual as well as commercial obligations. Contract
management entails the administration of contracts involving a given company and vendors
(Edquist, 2014). The contract management process follows a laid down criteria that ensure the
success of the entire process. Some of the steps involved include creation, negotiation,
adherence, the service level agreements, documentation as well as analysis of the advantages that
may arise from a given contract.
Procurement risk refers to the potential for the possible occurrence of failures associated with a
procurement process which is aimed at purchasing resources or products as well as services the
notable types of procurement risks include, cost, fraud as well as quality and delivery risks. The
process of procurement planning helps in reducing risks, high quality of service delivery and
better value for money.
Financial risks refer to the possibility of stakeholders and shareholders losing money through
investing in a company or organization that has debts. Such companies or organizations usually
have inadequate funds to meet its financial obligations. The new Royal Adelaide hospital faced
some specific financial risks during the project life. The financial risks faced by the organization
include the risks that occur as a result of financial transactions, risks associated with the capital
structure of the company, the loans of the company as well as great exposure to risks caused by
loan defaulters (Khan, 2012). Other specific financial risks that face the new Royal Adelaide
hospital include credit risk, liquidity risk, asset-backed risk, equity risk as well as currency risk.
Procurement and financial risks are detrimental to an organization and therefore needs to be
mitigated. There are various methods of mitigating financial risks, for instance, shortening the
repayment term for the customers so as to prevent cases of default on loans (Nicoletti, 2018).
The company or organization can also reduce financial risks by requesting longer payment terms
from the suppliers. A company or organization can also mitigate financial risks by issuing stock.
One of the strategies that can be employed in mitigating procurement risk is through creating
stronger relationships with suppliers (Kouvelis, 2012). There should also be a concerted effort to
increase the level of transparency and accountability in the supply chain management so as to be
able to detect potential risks. Compliance with the government as well as industry regulations
plays a critical role in mitigating financial risks. The prevailing global situation, as well as
market interconnections, ensure the existence of many procurement risks which can lead to
negative implications as far as the performance and the operational effectiveness of an
organization is concerned (Johnson, 2011).
The process of procurement and contract management is very vital for the success of any
organization or company. The identification of procurement as well as financial risks that may
hamper the process is also very crucial since the early mitigation of the risks helps the
organization or company to avoid problems caused by those kinds of risks.

Procurement and financial risks 2
References
Nicoletti, B. (2018). Procurement finance: the digital revolution in commercial banking. Cham,
Switzerland: Palgrave Macmillan.
Edquist, C., Vonortas, N., Iturriagagoitia, J. & Edler, J. (2014). Public procurement for
innovation. Cheltenham: Edward Elgar.
Kouvelis, P. (2012). The handbook of integrated risk management in global supply chains.
Hoboken, N.J: Wiley.
Johnson, P., Leenders, M. & Flynn, A. (2011). Purchasing and supply management. New York:
McGraw-Hill/Irwin.
Khan, O. & Zsidisin, G. (2012). Handbook for supply chain risk management: case studies,
effective practices, and emerging trends. Ft. Lauderdale, Fla: J. Ross Pub