How To Leverage AI In Procurement

Does the term Artificial Intelligence (AI) evoke visions of futuristic landscapes filled with autonomous machines and intelligent robots? 

While this notion isn’t entirely far-fetched, AI’s transformative power isn’t just limited to sci-fi stories. As we’ve witnessed with the rise of ChatGPT, AI holds the concrete power to reshape various business sectors, and the procurement industry is no exception.

The numbers speak for themselves: a 2019 survey by Deloitte revealed that 51% of Chief Procurement Officers (CPOs) reported their use of advanced analytics. And, even more eye-opening, 25% have piloted AI or cognitive solutions for procurement, marking a noteworthy jump from the 19% recorded in the previous year.

In this article, we will delve into the multifaceted realm of AI in procurement, shedding light on how this technological marvel is streamlining supply chain processes, and bolstering supply chain intelligence.

Here are the topics we will cover: 

1. Types of AI in Procurement 
2. Benefits of AI in Procurement 
3. Examples of Artificial Intelligence Use In Procurement
4. AI Best Practices For Procurement Professionals 

Types of AI in Procurement 

In an era where buzzwords like “digital transformation” permeate the business landscape, it’s important for you to understand the mechanism that is driving this change. 

Artificial Intelligence (AI), essentially refers to any ‘smart’ software or algorithm that possesses the prowess to learn. It encompasses things like machine learning (ML), where systems can improve over time based on data; or natural language processing (NLP), which enables machines to understand and generate human language.

Here are the primary AI types you can implement into your procurement strategy:

Machine Learning (ML): At its core, ML is a treasure trove of algorithms that sift through past behaviours to recognize patterns. These patterns then inform decisions or forecasts. Imagine a scenario where your supply chain system preemptively analyzes purchase histories and forecasts future demands. With ML, instead of manually analyzing trends, systems can predict when stock levels might be low or which supplier can offer optimal costs based on past transactions, enhancing supply chain intelligence.

Robotic Process Automation (RPA): Think of RPA as your digital workforce. It’s software designed to follow instructions and execute repetitive tasks. While many experts might argue it’s not ‘true AI’, its impact is undeniable. Consider the mundane task of invoice processing. An RPA can be set up to scan, validate, and process invoices from various suppliers, significantly reducing manual labour and the possibility of errors. Moreover, RPA can handle order placements, shipment tracking, and much more, revolutionizing the efficiency of AI in supply chain procedures.

To conclude, with the right AI tool, procurement can transition from a functional necessity to a strategic powerhouse, driving operational efficiency and adding unparalleled value to organizations. However, you must grasp the distinctions between various types of AI before successfully integrating them into your procurement operations.

Benefits of AI in Procurement 

The ultimate goal of introducing AI into your procurement processes is to enhance and simplify labour-intensive tasks.

Historically, the procurement industry has been plagued by manual processes, sometimes gruelling in their complexity, such as manual invoice verification, paper-based RFQs, and time-consuming supplier assessments. Today, AI is decoding this intricate system, offering solutions that harness the power of algorithms to manage contracts, provide strategic sourcing insights, and streamline tasks like automated invoice matching and predictive demand forecasting.

The added benefit? The ability to process immense volumes of data with speed and accuracy that far surpasses human capabilities.

On a more concrete level, here are some advantages that AI can bring to your procurement:

• Increased Efficiency: Consider the time-consuming process of scrutinizing supplier bids to identify the most viable options. With AI, not only are these bids analyzed in a fraction of the time, but the system also remembers your preferences, leading to faster cycle times in future transactions, and allowing you and your team to pivot towards more strategic tasks.
  

• Enhanced Decision-Making: Picture a scenario where a company is deciding between multiple suppliers. Leveraging AI will help them get fast and reliable insights into each supplier’s historical performance, reliability scores, and feedback, ensuring a more informed and sound decision.
  

• Cost Savings: AI’s application in spend analysis is simply transformative. For instance, a procurement manager using AI can pinpoint recurring orders that qualify for bulk discounts, allowing negotiations for better rates and significantly reducing expenditure.
  

• Risk Mitigation: Supplier bankruptcies, shortages, and delays have the potential to disrupt entire supply chains. AI can predict such financial instabilities by analyzing market data, news, and financial statements, thus averting potential crises before they unfold.
  

• Scalability and Adaptability: For businesses that are expanding, the sheer volume of procurement data can be overwhelming. AI systems have the ability to handle and analyze vast data sets, providing real-time insights as the company grows and the market shifts.
  

• Continuous Improvement: Have you ever noticed a surge in a particular product category? AI can track this trend, predict its longevity, and suggest stocking strategies for upcoming seasons, ensuring you stay a step ahead and with a full inventory.
  

Examples of Artificial Intelligence Use In Procurement

AI will help you make smarter, faster, and more cost-effective decisions, ensuring your procurement processes stay streamlined and competitive.

But more specifically, which procurement processes stand to gain the most from AI?

• Sourcing: Are you tired of combing through heaps of databases manually? With AI you can gather and analyze external data and identify prospective suppliers in a fraction of the time. For instance, an AI-driven tool can be programmed to recognize suppliers that align with your company’s sustainability goals or pricing thresholds.
  
  
• RFQ Creation: Rather than lengthy meetings and manual drafts, AI systems can now generate RFQ documents based on simple questionnaires filled out by yourself and your company’s stakeholders. 
  

• Bid Evaluations: AI can meticulously evaluate bids from numerous suppliers, weighing pros and cons based on predefined scenarios. For example, you can utilise AI to assess bids for a major project, ensuring that the chosen supplier meets your sustainability, budget, and timeline criteria.
  
  
• Supplier Negotiations: Imagine walking into a negotiation room equipped not just with your expertise, but with real-time data analytics at your fingertips. That’s the advantage AI brings to the table. Instead of relying solely on intuition or past experiences, you now have a digital ally that analyzes current market trends, reviews historical negotiation outcomes, and even assesses the financial stability of the supplier in question. For instance, if you’re negotiating a bulk order of raw materials, AI can quickly provide information on global price fluctuations, enabling you to strike a deal that’s both competitive and in line with the current market scenario.
  

• Contracting & Negotiations: Contracts can be drafted efficiently using AI, ensuring compliance and highlighting risks. For example, you could implement AI to oversee your contract renewals, leading to fewer missed deadlines and breaches.
  

• Supplier Management: AI fine-tunes supplier onboarding, sending targeted communications, tracking supplier sustainability metrics, and offering performance insights. 
  

• Requisitioning & Ordering: A tedious task, such as creating requisitions can be simplified. An AI tool can flag potential policy deviations before requisitions reach your approver, reducing approval time exponentially.
  

• Invoicing: AI ensures compliance with country-specific rules, accurately calculates complex taxes, and facilitates buying channel validations. This can help you eliminate invoicing discrepancies.
  

• Payments: Imagine optimizing your payment routes using real-time data on conversion rates, fees, and payment methods. AI in procurement achieves this, offering benefits like payment term optimization – with the potential of saving transaction costs.

AI Best Practices For Procurement Professionals 

To sum it up, integrating AI into your procurement operations demands a detailed strategy. Think of AI implementation as you would a fresh business approach; every move should be deliberate, and every choice rooted in data.

Here are 7 common best practices we recommend you follow: 

1. Define Clear Objectives and Use Cases: Before integrating AI, you need to understand what could be your primary challenges. For instance, if your company struggles with manual invoice management, AI can provide solutions that automate and optimize this specific task.
   
   
2. Foster Cross-Functional Collaboration: Integrating AI into your procurement can affect various departments. Collaboration ensures that the IT department understands the specific requirements of your procurement team, while the finance team is ready to allocate necessary resources for AI tools.
   
   
3. Ensure High-Quality Data: Good data is the backbone of effective AI. For example, for AI to assist you in accurate demand forecasting, the historical sales data needs to be accurate, comprehensive, and consistently formatted.
   

4. Start with Small Pilot Projects: Before a full-scale implementation, we recommend you execute a small pilot. AI can initially be used to optimize the supplier selection process for a specific category of products. This trial run helps you identify potential challenges and refine your strategies.
   

5. Focus on Change Management: Transitioning to AI-enhanced procurement processes may require your team to adopt new tools. For example, regular training sessions can ensure that your procurement team understands how to use a new AI-powered contract management system.
   

6. Monitor, Evaluate, and Iterate: Continuous assessment is key. After integrating AI for spend analysis, for example, regular check-ins can help understand if the insights provided align with your company’s financial objectives.
   

7. Stay Ethical and Compliant: As AI starts assisting you in decision-making, fairness should remain at the forefront of your choices. For instance, when using AI to shortlist suppliers, your decisions should not be influenced by past preferences but based on objective performance data.
   

Conclusion  

In procurement, AI translates into the integration of advanced technology and algorithms that enable machines to take on roles once handled by humans, enhancing accuracy, speed, and efficiency.

While this evolution might appear overwhelming, embracing artificial intelligence will fundamentally transform your procurement processes. When implemented correctly, AI will introduce heightened diligence, thoroughness, and accuracy to tasks that were once laborious and manual, streamlining them for better precision, and making them more efficient and exact. 

Ultimately, AI offers a deeper analytical perspective, paving the way for procurement methods that are both innovative and robust.