This research paper provides a systematization of risks that accompany the system of procurement of goods and also discusses the main methods of managing them. Risks can be different and specific both within a particular industry and within each specific company. All types of risks affect the competitiveness and financial position of an organization. This paper also deals with the current problems associated with the collection of receivables and the return of diverted funds into the turnover of enterprises. It provides several management solutions to minimizing exchange-rate, price of the input, and single sourcing risks, as well as measures to reduce the risks of non-repayment of receivables. Based on the review of current literature in the field of risk management, this paper demonstrates several approaches and strategies to the management of procurement and receivables hazards.
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One of the main features of modern business is the need to make a large number of decisions that depend on several different factors. Choosing a procurement proposal based on the lowest price criterion is not always the best decision since there are many other criteria to consider. As many experts in the field of supply chain risk management argue, an incorrect procurement decision can lead to the non-fulfillment of obligations for the delivery, significantly reduce profitability, and other indicators of the company (Ponis & Ntalla, 2016). Moreover, modern business conditions are characterized by a significant share of receivables and payables in current assets and short-term liabilities. Receivables risk experts claim that the deterioration of the financial condition at the enterprises is caused, first of all, by the problems of receivables management (Deng & Yu, 2017). Based on the literature review of recent research, it can be said that the development of practical recommendations for the effective management of procurement and receivables risks is put forward as a primary task.
Every business decision comes with risks, and procurement is no exception. Management of the procurement of goods or services includes planning, identification of suppliers, the conclusion of an agreement, execution of contracts, monitoring, audit, and control of procurement. This process consists of a set of methods that maximize the efficiency of meeting the needs of an organization for goods and services. However, the process of procurement can have various risks connected with exchange-rate, price of raw materials, and single sourcing. Companies should consider the potential technical and economic risks of interactions when purchasing (Ponis & Ntalla, 2016). It is important to learn how to manage these risks using specific approaches and strategies.
Exchange-rate risk is the risk of losses caused by changes in the exchange rate of foreign currency to the national one. Its peculiarity is that it can lead not only to big losses for the company but also to profit. As a rule, countries with low production levels and high inflation are more likely to have foreign exchange-rate risks than countries with stable economies (Liu & Wang, 2019). Many organizations are exposed to this type of risk, especially the companies that pay wages or rent in foreign currency or are engaged in foreign economic activity.
An example of this risk is an increase in the price of raw materials and supplies, as well as an increase in competition in the market. Besides, fluctuations in exchange rates are influenced by the interest rate, that is, when it rises, investment increases. Investors sell one currency and buy another for investment, which brings them more profit (Liu & Wang, 2019). As inflation rises, the national currency also decreases in comparison with the currencies of other countries with economic stability. The volume of exports also affects the risk, that is, the higher the country’s exports, the greater the demand for goods and the currency to pay for them.
Exchange-rate risk can be mitigated by using the correct currency selection method. It consists of setting the price in the contract in such a currency, the change in the rate of which is beneficial for the given organization. For the exporter, it will be a strong currency, i.e. a rate that rises during the term of the contract. For the importer, a weak currency is beneficial as the exchange rate falls (Liu & Wang, 2019). The method of regulation of the foreign exchange position can be used by those entities that have a large number of transactions with partners from different states. This method consists of balancing the structure of monetary claims and obligations under concluded contracts. This can be achieved by the simultaneous signing of contracts for export and import in the same currency and the approximate coincidence of payment terms.
Many companies are faced with exchange-rate risk, so the development of insurance in this area is relevant. Companies need to take into account all the factors due to which the currency may change and make a forecast. It is necessary to decide to choose a method of insuring this type of risk to secure the company’s stability in the market. To minimize exchange-rate risk, it is necessary to transfer funds from the branch to the head office as quickly as possible, or immediately invest them (Liu & Wang, 2019). As risks increase, it becomes necessary to reduce the amount of stock in the warehouse. When working with foreign consumers, it is always better for a firm to buy goods and services in countries with weak currencies, and sell them in strong ones.
Price of Inputs
Due to the specifics of raw materials procurement management for industrial enterprises, the tasks of a procurement service specialist are complicated by the need to take into account price risks. Risk management presupposes the availability of reliable information regarding the current market conditions and certain strategies, methods, and tools (Pellegrino et al., 2019). It is necessary to take into account the influence of the price volatility factor when purchasing raw materials. It is also necessary to make forecasts of the cost of inputs to use them in managing price risks when purchasing required resources.
Price volatility predetermines the need to analyze the known approaches to price risk management. This can be organized based on an agreement between the supplier and the consumer to take into account possible price changes when concluding a contract. Such an agreement on the price of the supplied raw materials is called the price fixing method. The price can be fixed in the contract at the time of conclusion, during the validity period, determined at the time of fulfillment of delivery obligations (Pellegrino et al., 2019). The choice of the price fixing method enables the specialists responsible for organizing procurement activities to choose the optimal payment terms as agreed with the supplier. In this case, the optimal conditions should be understood as a compromise, equally satisfying both parties. Thus, the choice of the price fixing method can be called an approach to price risk management aimed at reducing the level of uncertainty about future costs.
Another approach to price risk management is based on the principle of minimizing the total costs of purchasing and storing raw materials. It can be represented by the main procurement strategies: payment at the time of delivery, forward purchase, and price discount. The first strategy means to buy in equal lots, or at regular intervals, at the price determined at the time of delivery (Pellegrino et al., 2019). Its application is a classic example of procurement activity based on optimizing the level of stocks and minimizing total costs, while the price factor is taken into account. It is managed at the level of determining the delivery date, which is also the payment date.
Another common strategy is a forward purchase, which means the creation of stocks for a certain period at the current price. Such an organization of purchases allows the company to insure for a certain period against price increases but leads to an increase in the cost of maintaining additional stocks. It can be used only if the price drops significantly at the time of the contract. One more approach to minimizing the impact of price risks, also leading to the creation of additional stocks, is applied in the price discount strategy (Pellegrino et al., 2019). Raw materials are purchased in large quantities, which guarantees savings due to a lower price. The increase in inventory costs can eliminate the benefit derived from the price discount. Thus, the key task is to determine the optimal purchase volume taking into account the discounts.
Before agreeing with a particular supplier, the company should carefully study the market for the supplied goods, work performed, or services provided. This will help to avoid violating the principle of cost-effective spending of funds, especially during the economic crisis, when the customer needs to save money (Namdar, et al., 2018). A single supplier’s offer may not be the only one on the market, or even less preferable.
With all the convenience of this form of procurement, it has a serious disadvantage, which is insufficient cost savings due to the lack of competition. Single source purchasing is a non-competitive way of identifying a supplier, in which a contract is concluded with a specific person without a formal supplier selection process (Namdar, et al., 2018). When purchasing from a single source, the customer does not have the opportunity to choose more acceptable conditions among the offers, as it is implemented in competitive bidding. Thus, there is a high risk of purchasing services or goods at an inflated price.
When buying goods or services from a single supplier, the company has to divide large purchases into small ones, which are entrusted to individual performers. At the same time, a small part is allocated to competitive purchases (Namdar, et al., 2018). This approach to procurement can be interpreted as restricting competition. Therefore, when purchasing from a single supplier, it is necessary to be guided by the principle of targeted and cost-effective spending of funds for the purchase of goods and services.
Receivables Risk Management and Financial Strength of Customers
The work of many scientists is devoted to the problems of managing receivables risk. They offer various models for assessing this risk, taking into account the unequal influence of factors. The presence of receivables is always associated with the search for a compromise solution between risk and return. Effective management of the company’s receivables involves the development of a set of procedures and models of the organization’s behavior (Deng & Yu, 2017). This problem may arise as a result of the non-fulfillment of contractual obligations, overpaid taxes, levied fees, or penalties. Debts for goods and services that have not been paid within the period specified in the contract are overdue receivables. Therefore, understanding the reason will help to correctly assess the situation and take the right steps and measures to return overdue debt in the present and eliminate the causes of occurrence in the future.
Insufficient control over receivables can generate serious risks of functioning and even a threat to the existence of an economic entity. The financial service of the organization must organize a proper control over the status of receivables, which will facilitate the timely collection of funds (Deng & Yu, 2017). The development of an effective control system presupposes the existence of a credit policy, a system of motivation for debtors, accounting and analysis of receivables, as well as a procedure for collection of overdue debts.
One of the methods of reducing receivables risk is the optimization of the company’s credit policy. It means the provision of a commercial loan to customers. The provision of economically unjustified discounts or undefined loan terms leads to an increase in receivables risk, the cost of recovering funds, and a decrease in profitability (Deng & Yu, 2017). Expansion of credit terms, as a rule, raises the risk of debt default. In the event of non-repayment of the debt, the enterprise will receive a loss in the number of expenses.
The company’s collection policy should be based on the ratio of receivables and payables. Therefore, the company must develop a balanced credit policy towards its customers. Its formation is influenced by the purchasing strength of consumers, the solvency of the debtor, the stability of the financial market, and the economic ability of the enterprise to invest in current accounts receivable (Deng & Yu, 2017). The competitiveness of the company’s products and the ability of the enterprise to increase the volume of production when selling on credit should be also taken into account. When forming a credit policy, the management should choose between the additional profit from the growth of sales volumes and the costs associated with an increase in funds invested in receivables.
Regarding the system of motivation of debtors, it should be noted that information support is important in receivables risk management. It consists of analyzing and collecting information about potential and current partners, analyzing the market, and assessing the financial condition of a partner (Deng & Yu, 2017). The construction and regulation of the accounting and analysis systems are key tasks for each enterprise. Its main elements include the formation of a register of key debtors by types and segments, as well as the development of methodological approaches to the calculation and analysis of key indicators of receivables.
Accounting and analysis systems should be based on tracking the dates and amounts of receivables. If the buyer fails to pay for the goods on time, the first step should be to find out the reasons for the delay and the planned timing of repayment (Deng & Yu, 2017). In the future, this allows determining the methods of working with the debtor in such a way as to protect the interests of the company. At the same time, it helps to preserve the relationship with the customer. In case of delays, it is possible to use communicative or economic methods, as well as cash offset.
The company’s collection policy should contain a set of methods of cooperation with debtors to return debts or use forms of receivables refinancing. Separately highlighting insurance as a method of reducing the receivables risk, it is possible to agree with Jinlian Yan and other researchers who note that this model spreads the risk of bank trade financing (Deng & Yu, 2017). The presence of an insurance policy dramatically increases the company’s security. In this case, payments for the client’s obligations are guaranteed by the insurance company.
It is possible to maximize profits and minimize receivables risks only if a mutually agreed credit and cash collection policy of the enterprise is implemented. It is necessary to focus on preventive methods to reduce risk. In this case, the company should define the terms of sale that ensure guaranteed cash flow and limit the acceptable level of receivables (Deng & Yu, 2017). Thus, a systematic approach to reducing receivables risk, which consists of the integrated application of all the above measures, will reduce the financial risks of the enterprise. Skillful risk management will allow the rational use of available financial resources and strengthen the economic security of the organization.
The analysis of current strategies for procurement and receivables risk management has demonstrated that most of the management decisions offered by modern systems for calculating and controlling risks are future-oriented. The most successful risk management is a risk-free situation because the company has to take care of it beforehand. Strategic managers explain risk management as avoiding and limiting risks, which requires an early examination of all possible solutions, as well as the use of various guarantees and control mechanisms. Operative managers think differently: they perceive risk management as compensation for losses through the creation of insurance and reserve funds. For them, the main thing is the effectiveness of overcoming crises. All the reviewed approaches and strategies complement each other. The majority of management decisions, offered by modern systems for calculating and controlling risks, are oriented towards the future. Building contingency funds, predicting the impact of management decisions, or even finding an industry expert to evaluate the organization’s performance are all indicative of an attempt to minimize and avoid future procurement and receivables risks.