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Artificial Intelligence in Procurement

Artificial Intelligence in Procurement

In order to compete effectively in an increasingly complex global market, many companies of all sizes have embraced a variety of technologies as part of their pursuit of digital transformation. But not every area of business has proven quite as eager to accept emerging technologies like artificial intelligence (AI), real-time analytics, or process automation. For many businesses, regardless of industry, one area in particular—the procurement function—has, until recently, persisted with traditional technologies and processes. In doing so, these organizations may be sacrificing essential gains in efficiency, accuracy, and strategic decision-making that could help them build or maintain competitive advantage.

Chief procurement officers (CPOs) have come to recognize the importance of integrating digital transformation into their procurement processes in order to drive their organizations as a whole to a stronger, more profitable footing. And at the heart of this movement is artificial intelligence, a core component of several emerging technologies that promise to radically enhance strategic spending, shift procurement away from cost savings and toward value creation, and deliver powerful insights.

The Case for AI in Procurement

Located at the heart of an organization’s financial processes, procurement (and its partner, accounts payable) have a substantial impact on the overall fiscal health and competitive performance of an organization. When procurement processes—including the entire procure-to-pay process (P2P)—are running at maximum efficiency, accuracy, and speed, procurement organizations not only save time and money, but generate value for their parent companies.

How? By finding ways to minimize the impact of major challenges every company faces, including:

  • Minimizing Costs in both overall spend and in supply chain management in particular.
  • Effective Data Management to optimize collection, management, and analysis of spend, inventory, and performance/compliance data.
  • Risk Management to combat needless risk exposure generated by internal (fraud, rogue spend, process inefficiencies, etc.) and external (quality/price/contract management issues, market risks, natural disasters and pandemics, etc.) factors.
  • Ensuring Business Agility and Supply Chain Resilience through optimized and accurate financial data and a fine-tuned, contingency-ready supply chain that help preserve business continuity when disaster strikes.

The problem is, in a world where Big Data is king and competitive advantage depends on optimal business process management as well as strategic spending, many procurement organizations continue to rely on paper-based, manual workflows, sacrificing profitability and agility.

Manual procurement in a digital world are enough to give any procurement professional pause:

  • Opaque, rather than fully transparent, spend data. Rogue spend is invisible and invoice fraud is all too easy for the enterprising thief. Actionable insights are few, and critical processes like cash flow management may be hampered by invisible spend.
  • Human error and performance limitations means more staff time and resources spent on chasing exceptions, correcting payment errors, and missing out on valuable discounts.
  • Paper and manual processes consume a large amount of not just time and labor, but physical resources. The company’s environmental footprint is substantial, as documents must be manually collected, reviewed, and stored, and the risk of documents being irretrievably lost to fire, flooding, and other disasters is significant.
  • Costs rise and value drops with manual approval workflows, susceptible to delay and error. Supplier relationship management may suffer if too many payments are late, incorrect, or missed.
  • Shuffling papers from location to location (risking errors and loss) and having to consult multiple parties, including legal, for every contract created can lead to suboptimal contract management.

AI solutions address these vulnerabilities by integrating digital enhancements to improve accuracy, security, risk management, efficiency, and strategic planning. Making the “digital leap” with artificial intelligence allows procurement organizations to move beyond the limitations of traditional processes and compete effectively in the modern marketplace.

Artificial intelligences may lack the intuition and creativity of their human counterparts, but they have speed and accuracy that no human could hope to match when performing repetitive tasks or tearing through oceans of data to find inefficiencies and opportunities.

Core Concepts for Artificial Intelligence in Procurement

When considering the importance of AI in procurement, it’s important to ignore the hype of a human-free workplace and do away with any lingering notions of Asimov-style robots or murderous HAL-9000s. Artificial intelligence is transformative, but has little to do with Transformers.

To understand the role AI plays in procurement (as it does many other areas of business), it helps to have a clear understanding of some essential concepts:

Artificial Intelligence refers to the ability of a software program to emulate human intelligence. Depending on the level of complexity, this can involve performing simple tasks, advanced decision making, or even interacting with actual humans to accomplish specific goals.

In procurement, this translates to the use of tools like robotic process automation to streamline and optimize high-volume, repetitive, and tedious tasks. Software robots can process purchase order approvals and invoices, monitor key performance indicators (KPIs) for both internal processes and important supplier relationship management factors like vendor performance and compliance. Automatic contingencies and alerts mean an end to delays, bottlenecks, and missed opportunities to capture early payment discounts or take advantage of a limited-time price break on essential materials.

AI can also help create a closed buying environment where contract data is leveraged to ensure every purchase is made from the right vendor, with the best terms, at the best price, automatically—kicking rogue spend and invoice fraud out on their ear.

Machine Learning is a more advanced method of AI, wherein the artificial intelligence is allowed to learn from iterative repetition, teaching itself rather than being explicitly guided by humans. Set loose on multiple, interrelated data sets, the algorithm learns to connect the dots (or data points, if you will) on its own, and improve its performance over time. 

This form of artificial intelligence has great potential for procurement organizations, as it allows for deeper needs analysis, more strategic supply chain management, and more nuanced spend analytics. It also supports technologies like natural language processing (NLP), which enables human beings to communicate more naturally with artificial intelligences, both in voice and text searches within applications and through the use of stand-alone, advanced AI tools like chatbots.  

Data Mining is used, along with deep data analysis, to review and analyze all the “Big Data” flowing in and out of an organization to identify patterns, reveal insights, and enhance the efficacy and accuracy of strategic planning and decision making.

Procurement professionals can use data mining and spend analysis to make sense of an ever-expanding set of information available to them. These tools allow you to connect widely disparate data sources—supplier data, market and materials trends, social media activity, consumer spending habits, and all the data already present in your existing accounting and enterprise resource planning (ERP) environment—and “slice and dice” it to generate practical and useful solutions for process optimization, product innovation, supplier relationship management, etc., as well as provide financial reporting and planning insights that can provide a leg up on the competition.

As you may have noticed, the primary application of artificial intelligence in procurement is data manipulation. Artificial intelligences may lack the intuition and creativity of their human counterparts, but they have speed and accuracy that no human could hope to match when performing repetitive tasks or tearing through oceans of data to find inefficiencies and opportunities.

Leveraging AI Solutions in Procurement

What does the procurement team of tomorrow look like? Research firm McKinsey and Company envisions a future procurement function in 2025 where machine intelligence and human intelligence work together to create a new paradigm for spend analytics, contract management, and risk management.

The surprising part is, that while it might sound like science fiction, companies who embrace digital transformation by choosing to implement a comprehensive procurement solution like PLANERGY are already well on their way to such an environment. Defined by the inclusion of artificial intelligence, data management, and other digital transformation technologies, cognitive procurement is rapidly becoming the new standard for spend management in best-in-class organizations.

Consider just a few of the ways artificial intelligence is already in use by procurement teams around the world:

  • Process automation generates immediate savings through massive gains to efficiency, accuracy, and speed, along with commensurate reductions in human error. Team members no no longer have to devote countless hours to low-value, soul-crushing tasks, and can devote their human intelligence to more strategic endeavors not so readily handled by AI.
  • The number of applications for machine learning in procurement expands daily. Real-time monitoring of (for example) every single supplier’s performance and compliance data, market-related risk (e.g., supply chain disruptions due to natural disasters or pandemics like COVID-19), and repetitive tasks like invoice matching is next to impossible for humans, but just another day at the office for a well-trained algorithm or bot.
  • Financial analysis, reporting, and planning all rely on clear, complete, and accurate spend data. Artificial intelligence not only makes it easier to corral and manage data, but analyze it in real time, then access it from multiple platforms and devices, regardless of location. Complete and reliable access to all spend data, whether stakeholders are in the office or on their mobile device somewhere around the world, makes it easier to collaborate and communicate effectively while making smarter decisions on everything from supplier management to spending to product development and marketing initiatives.
  • Advanced AI tools like chatbots, which can create a friendly face buyers can talk to when ordering goods and services. But it’s not just about improving user experience. These chatbots can draw on historical spend data, contract data, and other information sources to provide users with contextual selections that meet your procurement function’s standards for price, terms, and quality, simplifying the ordering process internally while keeping rogue spend and invoice fraud out of the equation.
  • Advanced contract analytics, along with contract templates and legal boilerplate, streamline the contract creation process. Not only are contracts created more quickly, but AI-driven data management tools make it simpler to import supplier information, terms and conditions, and pricing information automatically. In addition, contract negotiations are much more effective with complete historical spend data, vendor compliance and performance data, and other essential information available on demand.
  • The Internet of Things (IoT), along with the more niche Industrial Internet of Things (IIoT), uses artificial intelligence to bridge the virtual and physical realms. Procurement teams can track assets and orders through the use of special sensors that monitor location, temperature, etc., and use the performance data to make adjustments to their workflows and supply chains to replace underperforming suppliers or provide contingencies that will preserve business continuity.

AI Technology is at the Heart of Tomorrow’s Procurement—and Today’s

The intelligence may be artificial, but the results are real. Hype aside, integrating artificial intelligence into your procurement processes will give your team the tools it needs to support organizational goals while setting a new standard for transforming data into greater process efficiency, more robust financial health, and a business footing that’s agile, resilient, and ready to take on all challengers in the new data-driven marketplace.

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