Is AI the Key to Unlocking Procurement Cost Savings?

Summary

As more people experiment with using artificial intelligence (AI) for real-life use cases, many wonder if their approach could bring procurement cost savings. Applying AI in procurement could save time, promote efficiency and reduce errors, all of which could positively affect costs. Procurement AI tools are also increasingly available to customers, making them easy to try, or even customize for specific needs.
 

Achieving procurement cost savings through better efficiency

Procurement costs rise as a company’s procurement network grows. That was the case faced by executives associated with a cheese manufacturer. When the company’s supplier network reached 3,500 parties, it was spending $285 million on direct and indirect material costs. The supplier network was also becoming unmanageable.

However, once the company started using an automated sourcing platform and AI in procurement to provide better supplier visibility, leaders noticed promising, measurable results. One procurement leader working at the company specified that whereas it used to take two to three months to complete procurement requests, this task now takes a month.

Additionally, a procurement AI tool provides pricing recommendations and automates deadline-driven sourcing events, increasing the overall visibility and trust among suppliers. Artificial intelligence also supports process management, which is a huge help when procurement specialists must assess so many parameters and operate in an increasingly complex world.

As of 2022, the company achieved 25% faster sourcing speeds. After those early positive results, leaders began exploring how to use it for other consumable goods, ranging from spare parts to ingredients to lab supplies. Although decision-makers apply healthy skepticism when using the tool, they anticipate finding even more beneficial ways to rely on it.

If you’re thinking about using AI for cost savings and efficiency improvements, start by thinking about the most error-prone or time-consuming processes. Those may be some of the easy wins to focus on first. Even if it takes the better part of a year to see full results, the payoffs will likely be worth the effort.
 

Improving vendor negotiations with AI in procurement

Chatbots use a type of artificial intelligence called natural language processing to understand prompts and provide relevant responses. People can interact with chatbots by typing full phrases, almost as if sending text messages to their friends. Many individuals like chatbot interactions because they provide information quickly without waiting on hold for a customer service representative to pick up the phone. For example, people can book a table at a restaurant or track a package through a chatbot.

The executives of a multinational retail corporation recently learned that a procurement AI chatbot tool could allow the mega retail brand to have smoother supplier communications by automating vendor negotiations. This approach enables them to cut the average time frame to days when these arrangements used to take weeks or months. The business has more than 100,000 suppliers and started using AI in procurement for the Canadian market first. That pilot then expanded to Chile, South Africa and the U.S.

Statistics from the customer’s chosen chatbot vendor indicated the tool finalized deals with 68% of entities, causing an average of 3% procurement cost savings for the retailer. Additionally, 83% of suppliers described the chatbot as easy to use and appreciated how it let them make counteroffers. From the executives’ point of view, the company achieved procurement cost savings in other ways by allowing it to conduct 2,000 simultaneous contract negotiations with suppliers.

The system the retailer’s leaders selected offers lots of back-and-forth communication, too. For example, users can set certain parameters about prices they’ll accept and other details. The chatbot then works within those limitations, meaning humans do not need to have constant oversight over how things progress.

If you’re considering using AI to improve vendor interactions, aim to get direct feedback about what’s working well for them and what could be better. That way, you can use a targeted approach to facilitate vendor needs while supporting your company goals.
 

Using procurement AI tools for pattern recognition

One study found that 65% of business leaders ranked supply chain challenges as top obstacles. However, procurement AI platforms may reduce the identified barriers. In one example, a company that has won research contracts associated with the U.S. Air Force and Space Force has a tool that identifies procurement-related risks by examining historical records and finding patterns associated with past agreements.

The California-based startup already has a contract with the Air Force Nuclear Weapons Center to improve predictive maintenance for a fleet of intercontinental ballistic missiles. In addition to ensuring those assets get maintained at the correct times, the company’s procurement AI tool supports inventory management so that federal authorities have the appropriate spare parts and other necessary supplies.

Space Force decision-makers are eager to streamline their current processes, which could result in procurement cost savings. Artificial intelligence does well at finding trends in gigantic batches of data that humans would otherwise overlook. Many algorithms also learn and improve through use, encouraging people to adopt the technology throughout an organization instead of only for relatively limited use cases.

People associated with the California startup believe federal officials could save millions by relying on AI in procurement, using the technology to reveal hidden trends and identify red flags before it’s too late. After all, even the most observant humans typically appreciate assistance when digging through data and trying to make critical decisions under pressure.

Organizations might also achieve procurement cost savings by using AI to recognize fraud-associated patterns. Banks often do something similar by relying on artificial intelligence to decline transactions outside a customer’s usual spending behaviors automatically. Fraud looks different in the scope of procurement. People can use artificial intelligence to detect abnormalities such as unusual bidding prices or invoices generated without corresponding services rendered.
 

Is it time to start using AI in procurement?

Even though there’s a growing number of commercially available tools for procurement specialists, this is still a relatively niche market. The best way to dive into the options is to identify the most-wanted features from potential products. Narrowing those specifics makes it much easier to choose the most suitable products and expect a strong return on investment.