AI in Procurement: All you have to know in 2024

You have heard it, we have heard it

Everyone has heard about the rise of artificial intelligence or AI, and while there’s still debate and futuristic-inspired speculation around the possibilities of AI, something remains.

Artificial intelligence is changing the way we live, so why wouldn’t it change the way we approach procurement?  

Yes, you have read that correctly, there’s already a relationship happening between AI and procurement operations, and the summary of it? It’s hugely beneficial for businesses. 

Let’s discover why 

What’s AI?

No, it’s not some bunch of robots with bad intentions ready to conquer the world. Not for the moment, at least. Jokes aside, we define artificial intelligence as a simulation of human intelligence, a combination of algorithms and artificial neural networks capable of performing tasks at higher speeds than humans. 

The Role of AI in Procurement

We don’t need to tell you that procurement is a complicated process as it involves a lot of documentation, requires the input and approval of many departments and, well, it’s just a long, long, long road.  What AI does is use those super powered algorithms to reduce the workload from procurement activities. Let’s say that instead of spending hours to obtain information from your company’s spending habits, AI gives you the exact insights you need in a matter of minutes. 

Strong vs narrow AI

In case you might wondering there’s a way to classify artificial intelligence, and that’s by making a difference between strong and narrow AI. 

• Strong AI: This one is the inspiration for our all sci-fi nightmares, the reason?It has cognitive abilities so it’s capable or more precisely is designed to learn independently.
• Narrow AI: A narrow system of artificial intelligence operates within pre-established parameters, this means that will only carry out programed activities. 

The good news is that we rely solely on narrow AI for procurement.

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What AI is not 

Despite our wild imagination, artificial intelligence shouldn’t be considered as a replacement for human intelligence or labor, it’s not like AI is suddenly going to take over the strategic actions happening in procurement operations. AI can assist us and make our lives simpler, that’s all. 

Examples of AI in Procurement 

First things first, let’s remember briefly what procurement is all about: 

The procurement process:

1. Identify needs: The very beginning of everything, the needs recognition stage in procurement helps businesses create a clear plan for acquiring goods and services efficiently while aiming to saving money all along. It lets you know exactly what your company needs.
2. Supplier selection: Once you know what are you looking for, you can move onto the next step by researching the best suppliers in the market, remember to create a list of options that go beyond price competitiveness, quality and delivery times are also important factors to consider. 
3. Purchase requisition: Purchase requisitions are requests made by the people that need to make a purchase to get assistance from the procurement team in meeting a specific need. These requests include important details necessary for acquiring the right product.
4. Solicitation stage: So the requisition was approved? Fantastic, now you have a green light, to send out multiple requests for quotation (RFQ) to suppliers. Once they get those quotation back to you, it’s evaluation time. 
5. Evaluation and contract: Yes, it’s the moment to assess supplier quotes and delivery times to find the best match for your needs.After selecting a supplier, contract negotiations and signing take place, followed by sending the purchase order. The contract becomes legally binding once the supplier accepts and acknowledges the purchase order.
6. Order management: Once you have chosen a supplier you are free to sent out  a purchase order based on the new contract or agreement. Your supplier then will deliver the agreed-upon goods or services on time. After receiving the items, check everything and let the supplier know if there are any issues.
7. Invoice approval: This step is vital in the procurement process, and odds are that you’ll be better off by implementing a digital solution for it, this way you can be sure that everything aligns and there are no discrepancies so payment can be made. 

Yeah, just like we mentioned, the procurement process is a long one. 

So why not see how AI can make it…better?

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Smart sourcing 

The word researching gives you goosebumps in a bad way? Then you need to read this.

With AI-powered procurement platforms, you can easily analyze supplier databases, historical data, market trends, and other relevant factors to find the best suppliers for your specific needs all in a nick of time. 

Analytics 

Those algorithms that make AI so special can be really helpful in analyzing past sales data, learning what’s going on in the market, and considering external factors like weather or economic indicators to create accurate demand forecasts.

Contract analysis 

Not everyone is a lawyer and you might not necessarily need one just to go over some terms. Contract management systems automatically review contracts for you, extracting key terms, clauses, and obligations while highlighting potential risks or compliance issues.

Supplier evaluation

It’s always a good habit to keep an eye out for any possible issues with your supplier’s performance, and this becomes another thing that AI can do for you. You can automate supplier performance evaluations to go over various metrics, such as delivery times, quality, pricing, and customer satisfaction.

Automated PO

Using AI, you can quickly extract information from purchase orders, stop worrying about whether the information is accurate or not, and overall increase the speed with which operations are carried out. 

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Feeling more convinced now? 

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Types of Artificial Intelligence in Procurement

Machine learning (ML)

Definition: A set of algorithms designed to spot patterns, used for prediction and help decision-making. 

The use in procurement: These algorithms reveal insights that may not be obvious to humans. Giving procurement leaders a push to make informed decisions, improve supplier selection, and better forecast demand.

Natural language processing (NLP)

Definition: Algorithms, all the same, the difference is that these folks can interpret and generate human language.

The use in procurement: One of the most common uses of NLP in procurement is that it can help procurement professionals gather valuable insights from various data sources.  As it can automatically sort and extract important information from supplier contracts, proposals, or other sources. 

Robotic process automation (RPA)

Definition: Not necessarily a form of AI, but it can copy human actions, with the purpose of reduce repetitive tasks. 

The use in procurement: It helps automate some of the most tedious tasks like invoice processing, generating purchase orders, and onboarding suppliers. 

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Benefits of AI for Procurement 

Efficiency 

The whole goal of using AI for procurement operations is to reduce manual tasks to give procurement professionals more time so they can focus on projects that increase productivity and profitability. 

Costs reduction 

And what happens when you have a team dedicated to the things that matter for the business? Well, you can start counting cost savings. Companies that rely on AI have reduced purchasing costs and improved budget management.

Better decision making 

AI uses complex analytics and algorithms to assess large amounts of data, offering valuable insights that help you make informed decisions.

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Risk mitigation 

No company wants to deal with a fraud case, AI can help early detection of patterns of fraud, evaluate the financial health of suppliers, and let you know about potential disruptions in the supply chain.

Scalability 

The cherry on the top? It’s given that AI can manage vast amounts of data and adjust to evolving business needs and market conditions. They easily scale with your growth and offer real-time insights to support agile decision-making.

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Challenges of AI in Procurement

While no one can deny that artificial intelligence represents a huge step forward for procurement operations, there are certain obstacles that some companies might face. 

The bright side? All of the following can be solved with a good and proactive approach. 

Data availability

That’s right, AI can handle incredible amounts of data, but to make that happen first, it needs to rely on high-quality information.  So if the data coming from procurement is scattered, incomplete, or inconsistent that could raise some potential red flags. 

To prevent this, companies need to invest in processes for cleaning, normalizing, and enriching their data. Implementing data governance practices and using tools for data integration and management are great measures. 

Integration 

Have you ever tried to download an update to an old system? Complicated is the word that summarizes the process. Integrating AI solutions with older procurement systems can be tricky. A simple way to solve this is by starting with smaller automated projects that fit well with your current systems.

Change management 

We are all humans, and that’s wonderful, but for some people changing habits might require a bit more intentionality and effort. So if your team has some doubts about bringing AI to the operations table, rest assured that’s completely normal. To make this transition smoother, you can use effective change management strategies. Like keeping open communication, offering training programs, and involving stakeholders.

Skills 

And speaking about training, AI might be amazing and built to help your company but it’s still something that needs to be learned. Your team needs the right skills and expertise to use these technologies effectively.

How to Get Started with AI in Procurement?

Assess the current procurement process 

Before getting all excited about choosing AI for your procurement activities, you’ll need first to draft a map of where your actual procurement process stands, perform an analysis of its strengths and weaknesses so you can Identify areas that could benefit from AI, and prioritize them based on potential impact.

Establish clear objectives 

No matter the context, goal setting is still a celebrated practice, why? Because it helps you to move forward to achieve what you want. Working with AI it’s the same, whether it's improving efficiency, reducing costs, or enhancing supplier relationships, having defined goals will guide your implementation.

Invest in training

As we saw some moments ago, people might feel reluctant to adopt new technologies, and with AI still being at the center of many debates, your team can be not totally on board with it. To make things easier for everyone, provide spaces for communication, workshops, and collaboration so no one’s left behind. 

Choose the right solution 

Select AI tools that align with your procurement objectives and integrate well with your existing systems. Consider factors like scalability, user-friendliness, and vendor support.

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Measure success 

There’s always space for improvement so once your AI structure is implemented, continuously monitor the performance and gather feedback from your procurement team. After all, they are the ones using them the most. Use this information to make adjustments if needed. 

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Best Tips to Implement AI

High-quality data 

Say it with us, AI works with predetermined data, and not just random data, to meet performance expectations and to get accurate and meaningful insights, it’s important to have high-quality data

Start small

No need to rush into big and overly detailed projects, small AI projects allow you to focus on use cases that promise quick wins and measurable results. Starting small also helps build confidence among your team and encourages broader adoption.

Collaborate with AI providers 

Why not open the doors to those who know the most about AI in procurement? Connect with vendors who specialize in procurement AI and understand the field.

Use their expertise to choose the right option, tailor solutions to fit your needs, and receive ongoing support and training.

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GENAI for Procurement

Generative AI or GENAI might sound like a complicated name but the reality is that it’s just a wide class of artificial intelligence designed to create text, images, or other sorts of media by learning repetitive patterns and structures. OpenAI, for example, is one of the largest achievements of Language Models, its star creation, ChatGPT, is well on its way to revolutionizing the way we write and communicate.

In 2023 OpenAI announced the launching of ChatGPT Enterprise so businesses could use it with the confidence that their information was secured under a private platform. This meant good news for procurement professionals, as privacy and security is one of their main concerns.

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Uses of GENAI for Procurement

Actionable insights 

We are constantly speaking about insights but insights without a context that matters to you, won’t do too much. With this kind of AI, you could receive tailored updates about your suppliers—think news articles and social media insights—summarized just for you and ready to go.

Create documents quickly

Does writing just take too much time? No need to worry, with just a click, you can obtain summaries of supplier relationships or even generate essential documents like Statements of Work (SOWs), Requests for Proposals (RFPs), and Purchase Orders (POs).

Organize data 

Nothing better than beign able to create a model with text from past chats with suppliers and various documents. This way, you can create smart alerts for important issues, easily summarize discussions, and do so much more.

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The Future of AI in Procurement

Just like everything else, artificial intelligence is still a work in progress and as we expected it to keep evolving, so its applications for procurement will remain growing. 

To wrap up our discussion about AI and procurement, let’s see what the future holds. 

Blockchain 

Yes, that’s right, at some point AI and blockchain will merge to transform procurement. Smart contracts powered by AI will automate how contracts are executed, while blockchain will work to make sure that all data is secure and easily traceable. This means greater transparency and trust throughout the supply chain. 

Conversational AI 

The rise of virtual assistants created by natural language processing (NLP) is not going anywhere. They will come in handy to help you with procurement and finance teams,interact with systems, manage suppliers, and oversee spending, all through simple chat-like conversations.

Smarter analytics

AI is ready to change the way we analyze procurement data. With its advanced capabilities, procurement professionals will be able to learn and do more from its insights. From predicting future demand to suggesting the best strategies for purchasing, you won’t have to worry no more about not beign prepared for the future. 

Intelligent automation 

With Robotic Process Automation (RPA) and AI-driven bots, time-consuming activities like data entry, processing purchase orders, managing contracts, and well, all the other tasks that make procurement a bit of a dreary activity, will be taken care of effortlessly. 

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Final Thoughts 

And that was it 

As we’ve seen AI is no longer just a trend, that will lose force once the excitement passes, it’s a completely game changer for the way procurement works , making processes faster, smarter, and more efficient. From advanced analytics that provide deep insights into spending patterns to intelligent automation that takes care of routine tasks. It’s hard to deny that artificial intelligence brings tremendous benefits to businesses. 

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