For procurement teams across the globe, it feels like they can’t catch a break. Despite the apparent benefits of globalization, vast, interconnected supply systems have made it challenging for businesses to adapt to the new normal. Procurement teams are still dealing with risk categories that they’ve been managing for a while: privacy, information security, compliance and contract risks. What’s changed are the circumstances around those risks and the implications for the broader business world. What, then, are the biggest risks procurement teams need to account for in the immediate future, and how can they mitigate them?

Ongoing volatility. Over the last several years, volatility has been the theme for everything from supply chain and economic systems (Brexit, anyone?) to politics and social progress. And that doesn’t seem to be changing anytime soon. 

The geopolitical landscape has kept procurement teams up at night, as previously stable countries have found themselves embroiled in wars, revolutions and upheavals. Under these circumstances, many are forced to rethink whether working with suppliers in those regions is worth the risk. Disruptions due to wartime activities and changing trade agreements can make delays in production more common.

Sanctions create an adjacent risk, which isn’t exclusive to companies working with volatile countries; ownership structures in some companies can mask the ultimate beneficial owner (UBO), which could unexpectedly be a sanctioned entity. A significant percentage of a supplier in, say, Canada, could be owned by a Russian oligarch or one of his companies. While the supplier might not be on any sanctions lists, that UBO could be. In the case of the Russian invasion of Ukraine, these sanctions lists can evolve quickly.

With a supply chain that is still battered by the pandemic and likely won’t be back to “normal” for some time, overall risk levels are heightened. Reliability is a commodity that is getting more and more expensive.

Ramp-up of ESG regulations. The need for effective ESG (environmental, social, and governance) policies has grown urgent. In the U.S., the SEC proposed new regulations earlier this year, requiring that companies disclose their ESG efforts. In the EU such regulations have already passed and will become enforceable in 2023 through the Corporate Sustainability Reporting Directive (CSRD). 

What does this have to do with procurement? Both the CSRD and the proposed regulations by the SEC require companies to disclose their Scope 3 emissions — that is, emissions tied to the organization’s supply chain. Scope 3 emissions can account for upwards of 70% of a company’s total emissions. 

Companies will need to put data-gathering and reporting capabilities in place across their supply chain, which for some could be a massive undertaking. But the risks of not preparing for these regulations are significant. It stands to reason that more may even come down the road, if not nationally than regionally or in specific industries. Not only could a company face hefty fines or penalties for not complying with the environmental requirements of their home country, but they could see similar punitive measures pile up across every country they do business with if they aren’t in sync with that country’s standards.

Recession and inflation. Cost pressures from global inflation are already starting to squeeze some companies. Add to that a likely recession on the horizon, softened consumer demand and the risk of key partners folding, and you have a risky situation for any business that isn’t already exceptionally stable or that hasn’t properly prepared.

Now is the time to take pre-recession measures to ensure stable supply. Delays in good times can be damaging; in economic downturns, it can be deadly. So how do you stay agile in this new globalized normal we’re entering?

Resilience is crucial in a world marked by such volatility. Procurement teams need to look closely at their supplier base and determine both the economic and geopolitical risks associated with a given supplier. For example, are they small or new, or financially shaky and maybe not able to operate at full steam during a recession? That’s a hefty risk. So is a company based out of a country that is engaged in, adjacent to, or allied with another in an armed conflict. 

Automation tools are gaining traction in the world of supplier management software, as they can provide constant monitoring, strategic sourcing and task-reduction capabilities that allow large decisions to be implemented quickly — and with better information. Different stakeholders need to be involved in major decision-making about suppliers. Automation shines here; with rapidly-evolving situations, decision trees and tasks automatically moving the process along to required parties will speed up reaction times without leaving anyone out. Crucially, digital procurement tools that allow for flexibility in workflow processes help companies take advantage of this automation on an ad-hoc basis. 

Procurement teams should prioritize the integration of their vendor management solutions with key data sources and systems. These automated solutions can catch red flags or problematic UBOs hiding in the data. They can also monitor for changes that might increase the risk of working with certain third parties. If these changes occur, the team will be notified and can assess.

After procurement has assessed the associated risks with a given supplier, a plan of action should be put into place. Hopefully most of the risks are low, but others might necessitate a partial pullback. If the situation doesn’t seem too unstable, it’s best to do this a bit at a time so that you can build resilience without sending any shocks to the overall system. A few percentage points of total production with that supplier moved to less risky partners each quarter will be effective, until the risk is resolved or the contract is small enough that the level of risk is bearable.

“Friend-shoring” is the term for what we’re seeing now, with companies choosing to work with suppliers in “friendlier” and less geopolitically fraught countries. This can be expensive, though; stabler and friendlier countries tend to cost more. In a recession, that can be difficult. But by looking at the data and deciding what risks are greatest and need to be mitigated, these costs can be smartly apportioned. Especially when procurement teams do these checks, starting with their most critical suppliers first, as those are the partners whose delay or disruption would have the most impact.

Once the decisions to shift production are made, whether for multiple suppliers or just a couple, the process of managing those relationships and changes should happen as swiftly and efficiently as possible to limit disruption. 

With recession storm clouds on the horizon, procurement teams are seeking shelter with tools that will both speed up onboarding (leading to lower costs) and provide more transparency into current and upcoming suppliers (lowering risk) as they arrange their relationships in strategically necessary ways. Automation tools powering robust third-party management will allow organizations to rapidly onboard new suppliers to increase resilience, ensure compliance with sanctions and ESG regulations and continually mitigate the risks of an increasingly volatile world.

Jag Lamba is founder and chief executive officer of Certa.