AI IN PROCUREMENT

Comprehensive Guide to Artificial Intelligence in Procurement

Table of Contents

Introduction

The modern world would be nothing without technology. In fact, Artificial intelligence (AI) development has allowed many industries to alter the way that they operate. Although AI has had a slow uptake within the procurement sector, many players are starting to realize its potential in procurement and supply chain processes.

There is much interest in AI when we look at procurement as a whole. Being a new concept, it has generated a lot of commotion for its laudable abilities, which eerily bears some similarity to the dot.com bubble of the late ’90s. Nevertheless, AI is a revolutionary technology that offers countless benefits for procurement businesses.

But how do you sift through the fanfare? Well, this guide is a great place to start. We will cover all aspects of AI in procurement, including definitions, benefits, and examples of implementing it in your business processes.

Brace up for a whole lot of learning!   

What is Artificial Intelligence in Procurement?

The History of AI

To understand where we are now, we need to start at the very beginning. While the hype over AI became mainstream two or three decades ago, Artificial Intelligence actually dates back as far as before the 10th century BC.

The first reports of an Artificial Intelligence program similar to what we know today came in 1951. Christopher Strachey and Dietrich Prinz created a checkers and chess-playing program to run on the Ferranti Mark 1 machine at the University of Manchester. Though not as sophisticated as the technology we have today, it was a game-changer.  

AI Today

When we think of AI-based programs today, images of Amazon’s Alexa or Apple’s Siri are what probably comes to mind. However, AI encompasses a lot more than these virtual assistant programs. Artificial Intelligence is used extensively in almost every aspect of our daily lives, almost everything we use is AI-based and AI-driven.

These types of technology can adapt its behavior and learn new things and processes. It is extremely valuable for all industries as it can bridge the gap between other systems and technologies and efficiently provide visibility in solving challenging tasks.

Examples of AI being used today include:

  • Manufacturing robots
  • Self-driving cars
  • Smart travel booking agents
  • Virtual assistants
  • Disease mapping
  • Automated financial investing
  • Conversational chatbots
  • Natural Language Processing (NLP) tools

Types of AI

Types of AI

Identifying the different types of AI can be difficult to navigate if you aren’t sure of what you’re looking for. A simple way to distinguish between AI software is to look at what the technology can do. Generally, there are four categories of AI which are: 

  • Reactive Machines

This type of AI is very basic and is programmed to produce predictable data based on the input it receives. AIl AI that falls in this category will respond the same way every time. It has no capacity to adapt its behavior or to comprehend things such as emotion. An excellent example of this is the Netflix movie recommendation software. 

  • Limited Memory

Limited memory AI can learn and can build knowledge derived from past actions or data. Usually, some pre-programmed information in the AI allows it to observe the past and make predictions or perform complex tasks.

  • Theory of Mind

This type of AI is slowly becoming a reality for us. AI under this category is programmed to mimic the decision-making capabilities that are found in humans. It can generally analyse, understand and remember emotions and then adjust its behavior based on those emotions as it interacts with people.

However, this type of intelligence is hard to mimic. We have only scratched the surface regarding the potential of these technologies. A good example of a theory of mind AI is self-driving cars.

  • Self Aware

This is the most advanced type of AI and includes software that is aware of its emotions as well as that of others. It requires a certain level of consciousness and mimics human beings’ intelligence, needs, and desires. For now, there isn’t sufficient or capable infrastructure to support this self-aware technology.

  • General (Strong) vs. Weak (Narrow) AI

The four categories of AI can be further classified as either strong or narrow AI. So, for example, a lot of the self-aware or theory of mind AI we see in movies like Terminator all depict intelligent software that is capable of thinking and performing like a human being. This type of AI is classified under the strong AI umbrella.

Contrastingly most of the AI we use and have access to in procurement falls under the narrow or weak classification of AI. This type of AI performs basic tasks and focuses on finding intelligent solutions for complex operational problems. 

Definitions of AI in Procurement

Definitions of AI in Procurement

All the buzz around AI and related technologies can create some confusion over what they mean and whether they have any differences. To truly understand something, you need to know what it means.

AI in Procurement refers to self-learning or smart algorithm software solutions that replace manual processes. 

AI not only simplifies these remedial tasks, but it can also decode complex systems and solve issues using computer software. Tasks like contract management, procurement assistance, strategic sourcing, and spend analysis can be embedded into an algorithm that does all the leverage and heavy lifting.

Additionally, AI is helping procurement professionals to gain insight into large amounts of data analytics at a faster pace. Something no human being can easily replicate.

Let’s begin our journey in AI for procurement by going through some standard terms you’ll come across:

  • Artificial Intelligence (AI): refers to any software and algorithm that is classified as ‘smart’ and has the capability to learn specific tasks.
  • Machine Learning (ML): is a set of algorithms that recognize patterns from past behavior and leverage them to make decisions or give forecasts.
  • Natural Language Processing (NLP): refers to specific algorithms that can analyse, read and understand human language.
  • Robotic Process Automation (RPA): is software that allows anyone to input a set of instructions for a robot to perform repetitive tasks. Most experts, however, don’t consider this form of software AI.

Types of AI in Procurement

Types of AI in Procurement

Cognitive Procurement

Cognitive procurement is a relatively new term that describes technologies that have the ability to mimic human behavior using self-learning processes. It is meant to aid in the management of procurement by processing large volumes of data. It includes AI processes such as:

  • Pattern Recognition
  • Natural Language Processing
  • Machine Learning
  • Automated Data Extraction

Challenges with Cognitive Procurement

Due to the fact that it is a relatively new concept in the procurement world, there isn’t a definitive definition of what this sort of technology would look like for procurement purposes. There is significant buzz around the topic, with many AI providers claiming that their software mimics human intelligence. Therefore, it is the magic solution for all your procurement woes.

A little bit of caution is required because, as it stands, there is no concrete evidence that such a technology exists for use in procurement.

AI vs. RPA

There is a great deal of confusion surrounding these two terms, which are often used interchangeably. While RPA offers many opportunities for efficiency in procurement, it is not necessarily considered AI. So what is the difference?

The simplest way to distinguish between the two is to think of AI as the umbrella term covering many things, including RPA. Additionally, AI is classified by its ability to simulate human intelligence.

On the other hand, Robotic Process Automation (RPA) is designed to mirror human beings’ physical behavior. It is characterized by its ability to perform a physical task repeatedly.

Machine Learning Spend Analysis and Classification

Different types of Machine Learning

Machine learning (ML) also falls under the AI umbrella. It is one step ahead of RPA. Many of the AI applications we see today in procurement fall under ML. This category of AI has the ability to learn and solve challenges based on past data. Although it still needs human supervision and input depending on its function.

Different types of Machine Learning AI are used throughout the procurement process. These are:

  1. Supervised learning ML: this subset of ML works by using input from past data and patterns. The machine is then supervised by humans providing correct answers to teach the AI. You will find this type of AI in spend classification, for example.
  2. Unsupervised learning: this ML algorithm is programmed to identify new and unique patterns in new data. It works without supervision and does not look for correct answers. Instead, its focus is on detecting patterns that make sense within the data. There is no use of this AI in procurement.
  3. Reinforcement learning: this category of ML is more theoretical than practical. The goal of the AI, in this case, is to decide how to behave in specific scenarios independently. Depending on what it selects, the AI is either rewarded or punished. That is how it gathers information on how to act.
  4. Deep learning: is the most advised type of ML, and the AI is designed to think and function like a human brain.

The Challenges with Spend Classification

Even before the arrival of AI, spend classification and analysis has always been a challenge for many in the industry.

While AI is lauded for its ability to increase efficiency, there seems to be a significant problem when businesses try to integrate AI and spend classification. One of the major causes of this challenge is that the AI is meant to seamlessly categorize millions of transactions into workable procurement categories based on large volumes of data from invoices, purchase orders, and so on. 

Other organizations have tried to get around the problem by designing complicated ranking systems for spend classification. This has proven difficult to maintain in part because of the high volume of data available from multiple sources. Additionally, companies have found it hard to be consistent in inputting quality data.

Traditionally procurement spend was analyzed periodically (either annually or quarterly), but that has been hard to do in this day and age because many businesses need accurate real-time data.  

Natural Language Processing in Procurement

NLP is focused on interpreting and understanding human language. This type of AI technology can develop insights from data or provide new processes that help with efficiency in procurement.

Some common examples you are likely to find in the procurement context include:

Contract Management

Contracts are an essential aspect of the procurement process because they contain important information. Traditionally, this data was not easily accessible for procurement professionals because it could only be accessed through various channels.

NLP has changed the game and allowed this valuable data to be extracted using text parsing algorithms. This AI technology can scan and interpret volumes of contracts and decipher important information. Some AI can take it a step further, such as the optical character recognition software. This AI uses NLP to identify texts from images or physical contract copies.

Word Embedding

Another excellent use for NLP in procurement is word embedding. The AI is able to map words and bridge the gap between human language and machine language, of which the latter usually comprises numbers. Word embedding helps the AI to classify and analyze texts in purchase orders and detect purchase items within a specific category.  

Natural Language Generation in Chatbots

This is perhaps the most popular or commonly-known use of NLP today. Voice and virtual assistants like Alexa or Siri are able to follow human language input thanks to the use of NLP.

So How does AI fit in the procurement world?

In the procurement sector, many processes were traditionally done manually. AI solutions not only simplify these remedial tasks, but can also decode complex systems and solve issues using computer software. Tasks like contract management, procurement assistance, strategic sourcing, and spend analysis can be embedded into an algorithm that does all the heavy lifting and provide all the actionable insights you require.

Additionally, AI is helping procurement professionals with data management as well as assist with gaining insight into large amounts of data at a faster rate. Something no human being can easily replicate.

Why do procurement teams need to leverage AI?

Data is one of the most valuable assets for businesses in today’s world, even in procurement. Without accurate and sufficient data, procurement teams will struggle to track spending and manage supplier and vendor relations. Increasing the number of precise data enables you to control costs and help you discern supplier or vendor performance risk.

For most procurement teams, purchasing decisions are often made in a scarcity environment. Ensuring that you are making correct decisions based on data you trust will help you deliver quality goods and services at a price your customers will appreciate. It gives you a competitive advantage over others in the industry.

AI is a good fit for procurement in this regard because, as we’ve mentioned before, it can provide insight that is useful for decision-making. Still skeptical? Well, others in the procurement industry have seen the benefits of leveraging AI.

According to a 2019 survey by Deloitte, 51% of CPOs reported their use of advanced analytics. 25 % of them indicated to have piloted an AI or cognitive solution for the procurement processes. This is an increase from the 19% that was reported in 2018.

What are AI applications in procurement and sourcing?

Having a clear understanding of how artificial intelligence fits into the procurement process is highly beneficial. This know-how is crucial, especially as technology continues to advance. 

Applying AI to your procurement processes may take some time to navigate. It is, after all a software that needs to run as smoothly as possible in every department. So we’ve put together a practical roadmap of AI in use below.

Examples of Artificial Intelligence use in procurement.

Examples of use of Artificial Intelligence in Procurement

Despite the fact that the application of AI in procurement is still in its early days, there are several examples of its use in procurement. Some of the most common uses you will come across include:

Data Analysis to Enhance e- Strategic Sourcing

AI can be applied in strategic sourcing using NLP to gather critical data such as supplier lists. AI has changed the way sourcing in procurement works using data and expenditure analysis.

One of the main functions of AI in procurement is the streamlining of sourcing. This allows businesses the ability to identify sourcing issues such as:

  • Uncompetitive or unprofitable payment terms
  • Duplicate suppliers
  • Bad purchases

Without the use of AI, these issues might take several man-hours to identify.  

Another way to use AI in procurement is to input specific markets that you want to expand into. The software will predict market prices, analyze and identify potential vendors and also help you to assess any of your existing suppliers. With a complete view of these processes, your contract negotiations are likely to become more accessible and more effective because you can easily access all the essential data.

Lastly, AI can be used to gather real-time automated data, whether it’s weekly, daily, or hourly. This allows procurement managers to make decisions faster with more accuracy. 

Spend Analytics

If there is an area that causes headaches for procurement professionals, it is spend analysis. Ensuring that your organization is managing risks and optimizing its buying power is exceptionally crucial for your bottom line.

AI can assist businesses to become proactive instead of reactive when identifying cost-saving opportunities. Detailed spend analysis data forms the foundation of effective sourcing, category, and spend management strategy. ML algorithms can be used to classify spend data into functional, structured, and standardized classes.

The data produced by AI offers a clearer and more detailed insight into an organization’s spending. In fact, Deloitte reports that the spend classification created by AI has achieved a 97% accuracy. This is very good news for the procurement industry.

Contract Management

Contract Management is an essential part of the procurement process, and it needs to be handled correctly. Managing contracts from all critical partners in the business can be time-consuming and, at times, difficult considering the legal jargon and implication that you have to sift through.

According to the Harvard Business Review report, disorganized contracting results in a loss of value for businesses that can be as high as 40%. This is due to issues such as:

  • Navigating through large volumes of contracts
  • Variance in wording
  • Compliance and different levels of expectations of value throughout the business

While contract management has had some form of digitalization over the years, the process still needs input and analysis from a human. This negated all the value that this method was meant to provide for businesses.

Using NLP can simplify the process and enable companies to automatically manage the terms and conditions, deadlines, and anything else that needs monitoring. AI systems can take it a step further and provide you with automated contract management solutions via companies like Simfoni.

Error Detection

There are just some errors that the human will inevitably miss. AI can automatically detect errors or anomalies such as price changes in your markets, compliance irregularities, and even fraud.

Automation of manual tasks

There is a myriad of time-consuming tasks within the procurement process. Artificial Intelligence can automate remedial manual tasks like invoice processing, where time is spent receiving, checking, and paying the invoice. AI can also assist with the procure-to-pay (p2p) process, which on average takes almost a month to process manually.

Chatbots

A chatbot is a text-based system that prompts dialogue from people that visit your website. It is there to answer questions, gather as much information as possible about the problem, and direct the person in the right direction.

Chatbots or procurement assistance are capable of mirroring and adapting to both the spoken and written human language. They use a combination of NLP, video, audio, and image processing to interact with humans.

Their goal is to simplify the communication between human beings and the computer, making an effort to personalize the exchange. It is programmed to learn and recognize specific patterns to tackle more challenging tasks and improve its interaction skills. 

For this interaction to occur, the chatbot needs to have a complete understanding of the meaning and context of human language. It is programmed to work through this using semantic analysis, i.e., it can interpret and analyze the context in the surrounding text or words. The AI looks at the text structure and attempts to accurately discern the proper meaning of words that might have more than one definition.

Chatbots have a number of uses when integrated with a company’s procurement systems. It can do all the dirty work by offering assistance and support to employees, suppliers, and customers. You can input any information you want the chatbot to process, like stock availability, contact details, stock prices, or supplier status. It is available 24/7 to answer all the queries you receive, so you will never lose any necessary information such as order status or shipment queries.

Despite significant advancements in this area, chatbots are not at the stage where they can fully replace people.

Guided Buying

In the average organization, procurement is part and parcel of every department. Many employees tasked with this responsibility find themselves spending many hours dealing with mundane tasks.

Issues such as negotiating better prices, establishing contracts, and finding suitable suppliers can take time. And, once these processes are completed, they have often been discarded in some filing system that neither party has time or energy to go chasing after. The danger in this type of process is off-contract spending.  

AI aims to address this issue by offering guided buying, which directs every employee in the organization to the proper buying channels. Usually, the AI will have a set of questions embedded in its algorithm. The user has to answer to get to the correct procurement channel.

AI reduces interruptions caused by one-off purchases.

AI can reduce the interruption caused by one-off purchases due to its ability to process high volumes of transactions without errors. Usually, when there is a one-off purchase, the process is interrupted by this anomaly and, at times, causes errors to be recorded.

So if for whatever reason you need to use a supplier once, AI will ensure that the process runs smoothly despite this one-off purchase.

Managing Supplier Risk

One strong application for AI in procurement is supplier risk management. Artificial intelligence can accurately and quickly identify sudden changes with a supplier or a vendor and then process whether this change increases or decreases the risk.

Traditionally this process would be reactive, but with AI, the system is able to help you weed out high-risk suppliers with ease. You can easily avoid the headaches that come with a continued relationship with these vendors or supplies. This makes AI an integral part of the e-sourcing strategy in the modern world. 

Inventory Management

Managing inventory is an essential part of the procurement business. Traditional methods tend to be time-consuming and require a lot of human resources, which can be costly. Artificial intelligence is able to identify which inventory practices suit your business so that you capitalize on the storage space you have available.

Impact of AI in Procurement

The impact of AI in procurement cannot be denied, and it has disrupted the way things are done. However, every disruptive technology brings with it a myriad of concerns. There are a lot of myths that surround the exact impact of AI in procurement. So, before we discuss just how disruptive AI has been in the industry, we need to dispel certain myths.

Dispelling AI Impact myths in procurement

Myth Number 1: AI will reduce Human Resource requirements

The number one question on anyone’s mind when AI is introduced is will it replace me? Granted, these fears are genuine because people have lost their significance on the job due to AI. Fortunately, this is far from the truth when we look at the procurement industry as a whole.

Although we do need to acknowledge that the removal of mundane tasks will impact the number of tactical roles available for low-skilled individuals. The good news is that this can be easily offset by redirecting these key personnel into other sectors. AI in procurement is capable of performing many things. Still, it cannot replace the human ability of cognitive and emotive reasoning.

Myth Number 2: AI involves a big learning curve

Letting go of old ways and adapting to new things, especially technology, has always been difficult. It explains the low uptake in AI that had plagued the procurement industry until a few years ago.

Every new process will have a big learning curve. This is especially true if the procurement process involves moving from a very antiquated process to a new one that needs a complete streamlined overhaul.

However, once the initial setup is over, the learning curve should significantly diminish as technologies change and update.

Although we do need to acknowledge that the removal of mundane tasks will impact the number of tactical roles available for low-skilled individuals. The good news is that this can be easily offset by redirecting these key personnel into other sectors. AI in procurement is capable of performing many things. Still, it cannot replace the human ability of cognitive and emotive reasoning.

Myth Number 3: AI is very time-consuming and expensive to manage

Depending on the complexity of the procurement process, AI can be expensive to set up; however, the costs reduce significantly after this stage. At the end of the day, investing in AI is a very cost-effective way of managing your business.

With regards to AI being time-consuming, the answer is a resounding no! In fact, one of the major benefits of AI that we’ve reiterated over and over again is its ability to cut down time-consuming tasks.

Myth Number 4: AI is still developing, so it's better to wait rather than jump onto the bandwagon

Suppose there is one thing the pandemic taught us. In that case, it is that technology is our best friend especially when leveraged correctly. The introduction of social distancing and the travel ban has had huge implications on the procurement industry. It’s safe to assume that the world will not be back to ‘normal’ anytime soon.

That said, it is clear that now is the time to jump onto the AI bandwagon. Many procurement businesses are losing their share of the market to competitors who were in the process of integrating their procurement processes with AI. Regardless of the updates and changes that are in the future, the AI that is available today is more than capable of making a significant impact on your business.

Myth Number 5: AI is hard to implement

This is incorrect because AI is designed to blend with any existing software or platform seamlessly. That is part of the appeal; there is no need to start from scratch and build new infrastructure to accommodate AI in your processes.

How AI Impacts Procurement in 2021

Most experts in the industry agree that there has been a significant shift in the way AI is viewed, especially in the procurement industry. The applications we have discussed in our ‘What are AI applications in procurement and sourcing’ section are the starting point for most companies.

There is, however, a new way of viewing AI in the procurement context. Firstly, many in the industry are beginning to see procurement as having more than just a transactional function. We are seeing a shift from focusing on cost-effective purchases and partnerships with low-risk suppliers to a more strategic outlook.

What do we mean?

Procurement is slowly being viewed as providing high-value addition by focusing on real-time analytics, intelligence, high-spend visibility, low tail-end spending, and continuous improvement on saving targets.

AI is seen as the digital lever that can effectively deliver such positive results in all areas of procurement.

Benefits of AI in changing sourcing and procurement

Benefits of AI in Changing Sourcing and Procurement

We probably sound like a broken record by now. Still, the benefits of AI to procurement are not something we desire to take lightly. The astounding abilities of artificial intelligence are unmatched.

A study by Harvard Business Review and Deloitte looked at the essential areas where businesses in procurement can expect to see the most benefits with the use of AI. Of course, each organization experiences different challenges and has access to different opportunities.

However, the study showed that the following key areas were the most likely in any business to experience the positive impact of AI:  

  • Supplier relationships: AI can optimize the management of supplier relationships and identify new suppliers.
  • New markets: With AI, any business can effortlessly shift through large volumes of data to uncover new opportunities worth exploring.
  • Decision-making: AI provides businesses with accurate analytics and data-based insights for improved decision-making.
  • Operations: AI can streamline complex business operations with minimal interruption of existing infrastructure.
  • Manual Tasks: AI can automate manual tasks allowing for better management of resources and time.
  • Acquiring Data: With the use of AI, any organization is able to have access to crucial new data from external sources.

Methods for implementing AI best practices in procurement

While we have bombarded you with lots of AI in procurement facts and figures, the best way to start the journey is by taking one small step. We’ve put together some of the best ways to implement AI in your procurement processes.

Step1: Start with the simplest tasks

It might seem exciting to go all-in at once. Still, AI in procurement can quickly become a tangled mess if not implemented properly. Take a thorough look at all your business processes and try to single out mundane or straightforward tasks that you can hand over to AI. You are likely to reap the benefits of AI if you integrate it with your existing processes.

Step 2: Ensure that you extract as much data as possible.

Useless or outdated data can wreak havoc on your procurement process. However, when you are at the beginning of the process, it is not crucial at this stage to capture quality data. The focus should be on having as much information as possible so that the AI has enough data to interpret and learn from. Ensure that you extract as much as you can before you launch your new AI software. 

Step 3: Avoid giving your AI complicated and unclear tasks.

At this stage, AI in procurement can handle a lot of complex processes. Still, if the instruction or challenge is not explicit, the technology might not be able to perform well. For example, AI can easily navigate narrow use-cases such as categorizing procurement costs based on invoice data. It is, however, doubtful that AI will be able to take over complicated contract negotiations completely.

Step 4: Remember to leave room for human input.

While AI is capable of many things, there are still limitations to what it can do, especially in the procurement process. You will need to collaborate with the technology from time to time to ensure a seamless process.

Simfoni’s AI Procurement Software

So by now you probably realize the power of AI software in procurement. With several choices on the market, it can be hard to pick a software that works well for your business. At Simfoni we understand the value that accurate spend analysis brings to your business.

We also understand the way the world is going and have positioned ourselves to help procurement businesses transform and digitalize their procurement processes. Our AI-powered spend intelligence solutions can distill and organize complex spend data to help you identify new opportunities and markets. It can also spot cost-saving opportunities within your existing systems.  

Additionally, our on-demand spend automation solution will get you up and running within days of installations.

AI Powered Spend Analytics Software

Our spend analytics software can be tailor-made to suit your business. You can select the modules you need, leave the ones you don’t. In addition to beautiful dashboards to visualize spend, you can orchestrate the entire savings lifecycle. Choose from our selection of modules to create synergies throughout the entire procurement process to boost profits.

We also understand the way the world is going and have positioned ourselves to help procurement businesses transform and digitalize their procurement processes. Our AI-powered spend intelligence solutions can distill and organize complex spend data to help you identify new opportunities and markets. It can also spot cost-saving opportunities within your existing systems.  

Additionally, our on-demand spend automation solution will get you up and running within days of installations.

Here is what we’re offering you:

  • Bottom Line Savings
  • Opportunity Assessment
  • Savings Tracking
  • Payment Term Analysis
  • Purchase Price Variance
  • Impact Assessment
  • Supplier Diversity Analytics
  • Negotiation Insights
  • Savings Pipeline
  • Contract Management

Spend Automation

Supercharge your procurement process with the world’s most accessible spend management platform. From tail spend to total spend, you can simplify the way your company sources and buys the materials and supplies that it needs.

Here is what we’re offering you:

Vendor Engagement: use our software for vendor registration, e-sourcing, and contracts repository.

Autonomous Buying: Manage your orders, get access to safe harbor sourcing, catalog hosting, category experts, and our pre-negotiated marketplace deals.

Invoice Automation: store all your invoices in our invoice portal and get access to an integrated one vendor payment system.

The Bottom Line

AI is here to stay, and there is no getting around this. The best way to not be left behind is to embrace the change instead of resisting it. Because whether you are on the bandwagon or not, the world of procurement will move on with AI.

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