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AI in Procurement – The Ultimate Guide of 2023

Key takeaways

  • AI transforms procurement with cost savings, efficiency, and data-driven insights, reshaping traditional practices.

  • Procurement professionals leverage AI to streamline processes, analyze data, and enhance strategic decision-making.

  • Despite myths, AI in procurement enhances, not replaces, human skills, fostering collaboration and efficiency.

AI in procurement is growing in popularity due to the advancements in technology. But how does it change the procurement industry?

For this article, we will discuss how AI helps the procurement process. We will explore how it develops the procurement process in this modern age.

After reading this article, you will understand the huge role that AI plays in the field of procurement. You will know its importance and why many businesses utilize it in their procurement process

What isAI and AI in Procurement? 

Artificial intelligence is integrated into every device that is available today. But what is it?

When we think of AI today, we first think of robots that are capable of doing human tasks. We even think of Siri and Alexa when we talk about AI. However, this is just a part of the large scope of AI.

Artificial Intelligence (AI) is always used in every aspect of our lives. Almost everything that we use is AI-driven and AI-based.

Artificial intelligence (AI) is the ability of a digital computer to simulate or mimic human intelligence processes.

Artificial intelligence systems work by learning and analyzing the data for correlations and patterns to make predictions of future states.

AI programming focuses on three skills which are reasoning, learning, and self-correction.

AI is intended to help enhance human capabilities and to make tasks simple and fast to process. It does not intend to replace humans like what people think due to its integration into everything we use nowadays.

Here are some examples where AI is used today:

  • Self-driving cars
  • Manufacturing robots
  • Virtual Assistants
  • Chatbots
  • Natural language Processing tools
  • Facial Recognition
  • Navigation Apps
  • Media Recommendation
  • Online Banking
  • Smart Appliances
  • 3D Photography

Now, let’s talk about AI in procurement. AI in procurement is a software solution that intends to resolve tasks in the procurement process. Because AI is software, it has a huge potential to improve and adapt any work practices no matter the size of an organization.

Many people misunderstand AI. In terms of procurement, AI is not a sentient being that is capable of replicating human movements like what you see in movies.

AI should not be considered as a replacement for human expertise but as a thing to help the procurement process. Many AI software still require the active assistance of a procurement expert.

    Typesof AI in Procurement

    AI isn’t just one thing. It’s a varied number of things and here are some AI types below you may be interested to know bout.

    1. Machine Learning (ML)

    Machine learning is an algorithm that detects patterns. The detected patterns are used for prediction or decision-making in the procurement process.

    2. Robotic Process Automation (RPA)

    This algorithm copies human actions to reduce repetitive simple tasks. Although RPA offers many opportunities for procurement to improve, it should not be considered AI.

    Think of RPA as a software robot that copies human behavior while AI is the simulation of human intelligence.

    3. Natural Language Processing (NLP)

    Natural language processing is an algorithm that interprets, generates, and transforms human language. It can also analyze and understand the human language. 

    The Benefits of AIin Procurement

    The following are some of the benefits that you can gain by implementing AI in procurement:

    1. Cost optimization

    Through improved supplier selection, contract management, and demand forecasting, AI enables organizations to negotiate better deals, curtail uncontrolled spending, and realize significant cost savings.

    2. Scalability and adaptability

    AI systems can efficiently handle large data volumes and adapt to evolving business requirements and market dynamics, scaling to accommodate growth and delivering real-time insights for agile decision-making.

    3. Continuous enhancement

    AI systems continually learn and improve through machine learning algorithms, identifying patterns, trends, and anomalies to enable ongoing optimization of procurement processes and outcomes.

    4. Streamline operations

    AI’s ability to automate manual tasks boosts efficiency, accelerates processes, and reduces administrative burdens, allowing your procurement team to focus on strategic activities.

    5. Improved risk management

    AI can proactively detect patterns of fraud, assess supplier financial stability, and identify potential disruptions in the supply chain, allowing organizations to take preventive measures and safeguard against operational and reputational risks.

    The Challenges of AIin Procurement

    Although AI has a lot of benefits, many companies may also face the following challenges when implementing AI in procurement:

    1. Data challenges

    AI heavily relies on data quality and availability, and the scattered nature of procurement data can pose a challenge. To counter this, you must know how organizations can enhance data quality and ensure its availability.

    2. Overcoming resistance

    The successful implementation of AI in procurement requires overcoming resistance to change and addressing fears of job displacement. You must Learn about strategies to foster a positive mindset and gain buy-in from procurement professionals.

    3. Building AI Expertise and skills

    Effective use of AI in procurement needs a skilled workforce. Thus, you must invest in upskilling and reskilling initiatives and provide training programs that can equip procurement professionals with the necessary expertise.

    How Does AI Fit in the Worldof Procurement?

    We all know that in the past, many processes in procurement were done manually. The integration of AI in procurement has simplified the tasks in procurement. AI allowed procurement to comprehend complex data and solve issues using computer software.

    You can embed tasks like strategic sourcing, spending analysis, and contract management into an algorithm to do it efficiently and produce the actionable insights you desire.

    AI has helped many professionals to interpret data faster than ever. This allows them to gain an insight to fix the problems in the procurement process. This is something that humans cannot replicate due to its complexity.

    Applications of AI inProcurement

    With AI’s rise, procurement is witnessing a paradigm shift. Let’s explore the key applications of AI in procurement.

    1. Strategic Sourcing

    Strategic sourcing is the process of evaluating, selecting, and aligning with suppliers to achieve long-term business goals. AI can:

    • Supplier Discovery: AI can sift through vast databases to identify potential suppliers based on specific criteria, ensuring a good fit for the organization’s needs.
    • Bid Analysis: AI can automatically analyze bids from suppliers, comparing them based on various parameters such as price, quality, delivery time, and past performance.
    • Supplier Segmentation: Using AI, businesses can segment suppliers based on their importance, performance, and risk, allowing for tailored relationship management strategies.
    • Market Intelligence: AI can continuously monitor global markets, identifying trends, risks, and opportunities that can influence sourcing decisions.

    2. Supplier Risk Management

    AI’s ability to analyze diverse data sources can predict potential risks associated with suppliers, from financial instability to geopolitical issues, ensuring proactive supplier risk mitigation.

    3. Cognitive Procurement Advisors

    These advisors analyze vast amounts of data to provide valuable insights, recommendations, and trend predictions, guiding procurement professionals in their decision-making processes.

    4. Automated Data Entry and Invoice Processing

    Through Optical Character Recognition (OCR) and machine learning, AI streamlines the invoice process by automatically extracting and categorizing data, minimizing manual errors and expediting payments.

    5. Supplier Performance Analysis

    AI’s data analysis capabilities can aid in supplier management, evaluating supplier performance metrics, ensuring adherence to contractual obligations and identifying areas for improvement.

    6. Contract Analysis and Management

    AI can interpret contracts, highlighting key terms, obligations, and potential risks. This minimizes risk associated with non-compliance and aiding in renegotiation processes.

    7. Spend Analysis

    By categorizing and analyzing procurement spend data, AI identifies patterns, anomalies, and opportunities for cost savings, driving value for the organization. This is both useful for detecting fraud, and increasing cost-effectiveness.

    8. Ethical and Sustainable Procurement

    AI can monitor and evaluate supplier practices against set ethical and sustainability benchmarks, ensuring responsible sourcing and aligning with corporate social responsibility goals.

    How to Implement AIin Procurement

    Implementing artificial intelligence (AI) into procurement is an exciting prospect that demands careful planning and innovative thinking. Here are some helpful tips to guide you in adopting AI in procurement:

    1. Begin with small steps

    Integrating AI into your procurement processes might seem overwhelming, so it’s wise to start small. Launch a pilot program to test AI’s effectiveness before committing fully. This approach lets you identify and resolve any issues on a manageable scale.

    Starting small also boosts efficiency, accuracy, and productivity, providing a solid foundation for expanding AI’s role in procurement.

    2. Select the right technology

    Not all AI tools are the same, so it’s crucial to choose one that aligns with your specific procurement needs and can seamlessly integrate with your existing systems. Prioritize technology that caters to your unique business requirements.

    Avoid getting caught up in the hype of trendy AI tools; instead, focus on selecting the one that genuinely suits your needs. This choice is vital for unlocking AI’s full potential and gaining a competitive advantage.

    3. Emphasize data quality

    Data is the lifeblood of AI. To ensure AI operates effectively, maintain accurate, up-to-date, and consistent data. Quality data fuels AI-powered procurement processes, enhancing efficiency and enabling informed decision-making.

    By prioritizing data quality, you can maximize the benefits of AI technology and deliver greater value to your organization.

    Procurement AISoftware

    Now that we’ve talked about AI at length how about exploring its possibilities yourself? Here are some AI software that you may be interested in.

    1. Keelvar

    Keelvar uses machine learning to recognize bid sheets. It also has specialized category-specific e-sourcing bots. It is the ideal software for enterprise-level clients that want to remove complexity in supplier sourcing.

    2. Seal Software

    Seal Software is now acquired by DocuSign. It can automatically scan and interpret lengthy and complex legal documents.

    3. Tealbook

    Tealbook unifies your system and optimizes your suppliers by delivering a supplier data foundation. It uses machine learning to discover new suppliers found on the internet.

    4. ChatGPT

    ChatGPT is a large language model chatbot that was created by OpenAI. It is a trained model which interacts in a conversational way. The dialogue format makes it possible for ChatGPT to answer follow-up questions and reject inappropriate requests.

    Procurement professionals may use ChatGPT to generate responses that you can use for your customers when they are buying your products. Additionally, ChatGPT can help you write purchase requests to your suppliers without the risk of human errors.

    Best Practices of AI in Procurement

    To further narrow your search as a Procurement professional you should know the best practices of AI in our field specifically. Here is a list of AI’s best uses in procurement below.

    1. Start it on existing processes

    AI is not some kind of magic that can automatically grant your desires in the procurement process.

    The value of AI in your process will not come to new applications but by integrating it into your menial tasks that consume too much of your time.

    You can also embed it into your spending analysis and contract management to improve these processes.

    2. Capture all procurement data you can gather

    You should start collecting data even if your data quality is not yet perfect. The key is to gather data as much as possible because AI can help you interpret the data you have collected.

    3. Experiment with it

    AI has improved in a lot of ways in the procurement process. But, there are still many things that have not yet improved.

    Allow your AI technology specialist to experiment with ways to help your procurement processes. Make allowance for mistakes. After all, that is when you will learn.

    4. Enable collaboration

    You must know that AI in procurement demands the active support and guidance of a procurement professional.

    You should plan for human and machine collaboration. Do not replace your team with AI. Instead, use AI to increase the expertise and productivity of your team.

    Myths Surrounding AI in Procurement

    Myths make their daily rounds on weary ears every day. But as a good procurement professional you should know better than to listen to things without facts to back it up.

    Here are some of the myths about AI that you may have heard of.

    1. AI will replace human

    Many people fear that they will lose their jobs when AI is implemented. This fear is genuine and understandable but this is far from the truth. However, it can be offset by redirecting these people into other sectors that will contribute more to the organization.

    AI can perform many things but it cannot replace the cognitive and emotional intelligence of a human.

    2. AI requires great effort to adapt

    We know that letting go of something that you are used to is so hard because we have been there. But you must remember that all new things you will pursue require great effort to master which is also true in procurement.

    No one can deny that the initial step is hard. But once it has been employed, over time you will adapt it and you will see AI’s efficiency in the procurement process.

    3. AI is time-consuming and expensive

    AI can be expensive but over time you can see how it can reduce costs in the procurement by streamlining the procurement process.

    To answer if AI is time-consuming, it is with great confidence that we can say no. As a matter of fact, one of the benefits of AI is to eliminate time-consuming tasks in your procurement procedure.

    Procurement Expert’s Advice on AI in Procurement

    For this article, we asked an experienced procurement expert to share her insights to help answer common questions about utilizing AI in procurement.

    Faiza Iftikhar
    Co-Founder, Procura

    LinkedIn Profile:

    1. Can you give us examples of how AI can be integrated into procurement?

    Supplier Selection: AI streamlines the supplier selection process by analyzing criteria.

    Market Analysis: AI provides real-time insights for data-driven supplier negotiations.

    Spend Analysis: AI optimizes procurement strategies by identifying cost-saving opportunities.

    Contract Management: AI sends automated reminders and tracks contract milestones.

    Chatbots: AI-powered chatbots enhance supplier communication.

    Blockchain: Blockchain ensures supply chain transparency and product authenticity.

    Price Benchmarking: AI compares procurement prices against market benchmarks.

    Automated Purchase Orders: AI automates purchase order generation.

    These applications improve efficiency, reduce costs, and enhance supplier management in procurement.”

    2. What do most people get wrong about AI in procurement?

    “One common misconception is that AI replaces human professionals in procurement. In reality, AI enhances, not replaces, human expertise.

    Another mistake is thinking AI can provide instant solutions without data and training.

    Lastly, AI solutions should be customized; there’s no one-size-fits-all approach in procurement.”

    3. What should procurement professionals know when utilizing AI tools in procurement?

    1. Understand AI Basics: Familiarize themselves with AI concepts and terminology.

    2. Data Quality: Ensure data quality for accurate AI predictions and insights.

    3. Vendor Selection: Choose AI tools that align with procurement needs and goals.

    4. Integration: Integrate AI tools seamlessly with existing procurement systems.

    5. Ethical Considerations: Be aware of ethical and privacy implications in AI usage.

    6. Training and Skills: Invest in training to maximize AI tool utilization.

    7. Continuous Monitoring: Regularly assess AI tool performance and adapt as needed.

    8. Compliance: Ensure AI tools comply with procurement regulations and standards.

    In Conclusion

    To sum it all up, the integration of artificial intelligence (AI) into procurement processes holds immense promise for organizations striving to stay competitive in today’s dynamic business landscape. However, successful AI adoption in procurement requires a thoughtful approach.

    Additionally, you must remember that AI is still in its early stages. Thus, you must be ready for any updates or changes that can be integrated into your existing system.

    Frequentlyasked questions

    What is AI in procurement?

    AI in procurement bridges the gaps between systems and technologies to provide solutions in the procurement process.

    Is AI important in procurement?

    Yes. Modern procurement needs to have AI to ensure its efficiency and effectiveness.

    Who uses AI in procurement?

    Most businesses nowadays utilize AI in procurement to help them with their daily operations.

    About the author

    My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.

    Marijn Overvest Procurement Tactics