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Mitigating Purchasing Risk During a Recession

It’s 2023; many businesses are still navigating through many uncertainties. Many products and services cost more and are in short supply. As a result, a shift in tactics and strategies is required to meet the new challenges.

Here are a few steps to help you mitigate some risk exposures in your business.

Action Item #1 – Elevate Your Relationship with your Suppliers

As a purchasing professional, maintaining a strong supplier relationship goes without saying. However, during these uncertain periods, it is time to take supplier relationships to the next level. 

  • Get to know your suppliers better – more conversation, understanding their business, challenges, and opportunities.
  • Maintaining a good relationship with alternate suppliers and other industry members (Have that occasional conversation and meeting, give them a portion of your business if possible).
  • Build a relationship (or at least be familiar) with your supplier’s supplier and other members of the industry

Leveraging a good relationship is especially important during these times. To do that, you will need to become an active friend of the industry that you are purchasing. The goal is to keep a pulse on the industry’s supply chain. 

It may take some work, but your effort will pay off significantly. Imagine if a major interruption is coming down the pipeline, you should be the first to be informed and be early to respond before others. Good relationships and being well-informed in the industry will help you navigate out of a challenge with minimum setbacks.

Questions to ask

  • How is the industry doing? What is the trend?
  • Are you seeing price shifts, supply shifts, or major interruptions to raw materials?
  • How is business? Are you growing, shrinking, or restructuring?
  • Are you at capacity? 
  • How is your staffing level, equipment availability, supply level?
  • If X happens, can your team step up?
  • What are you seeing in the industry? What’s the word on the street?
  • What’s keeping you up at night?

Action Item #2 – Stock Up and Be Proactive

Over the last few decades, the business world has pushed for lean, Just-in-time, ultra-efficiency operations. Many businesses were able to operate while minimizing their inventory. With the current environment, managers must re-evaluate the balance between minimizing inventory and managing risk.

For example, if your firm builds computers, the CPU is a critical and expensive component with very few alternate suppliers. Any delays or interruptions to your CPU delivery will be detrimental to your production. It would be beneficial to stock more CPU components during periods of unstable supply.

Consider carrying a bit more critical inventory to buffer potential delays and interruptions. 

Additionally, be willing to commit earlier to secure your shipment first. If you are concerned about volume commitment, try leveraging the relationship and negotiating some flexibility in your contracts.

  • Cancellation clause.
  • Change order clause.
  • Other priority to purchase clause.

Frequently share your forecast with your supplier so they may prepare for your needs as early as possible. The goal is to put your company in a better inventory position to meet the corporate objective while maintaining the flexibility of situation changes.

Lastly, always have a backup plan. If the primary supplier cannot deliver at the last min, you should have your alternate supplier on speed dial and ready to step up. Sometimes, this may mean that you would need to award a small portion of your purchases to that second or third supplier just to keep the relationship strong. 

Action Item #3 – Be ready for the Change

Changes can occur quickly. The entire initiative may take months or years in a larger purchasing project. It is common for needs to change during mid-cycle. It is a best practice to conduct frequent check-ins with the requesting team to ensure what was planned still meets the needs.

Common request changes:

  • New products & services that are needed.
  • Changes to current arrangements.
  • The current option no longer works; a need to cancel and conduct a new purchase.
  • The supplier/provider can no longer meet the requirements and need to seek out new partners.

Action Item #4 – Best over the Cheapest

To be clear, we are referring to choosing the best-fit option over the cheapest option in purchasing. It is essential to make a good decision out of good options. The mission is to select the best fit to help the team meet the final objective.

A large amount of procurement/procurement work is on the management of information:

  • Understand the needs. 
  • Know the market and suppliers.
  • Communicate the request to qualified suppliers.
  • Gather the options/proposals.
  • Use an evaluation tool to organize all the information, so it is easy for everyone to understand.
  • Share the proposals for evaluation.

When making the final decision, managers should focus on the best fit instead of only considering the lowest price.

Items to emphasize:

  • Provider’s ability to meet the needs (what was asked for on paper) and best fit to support the actual team objective.
  • Track record on service/performance/quality. 
  • Reputation and Stability of the supplier.
  • Competitive price (not necessarily the cheapest, but it should be competitive relative to the offer).
  • TRUST (do a good job and support our interest).

Be mindful of the cost of delays, and rectifying an issue resulting from a supplier dropping the ball will be far higher than a low cost supplier’s initial savings.

Key Takeaways

These best practices will help you mitigate risk in your purchasing operations during a recession. 

  • Elevate your relationship with your suppliers.
  • Stock up appropriately on critical needs.
  •  Be proactive in securing the volume you need. 
  • Be prepared for changes.
  • Choose the best fit over the cheapest.

Next steps

Applying these actions to your projects can mitigate risk while securing contracts.

Did you know Power RFP can help to facilitate these best practices?

Learn more about Power RFP today.