The Rise of AI in Procurement: Separating Hype from Reality

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Spend Matters welcomes this guest post from Dr. Alan Holland, founder and CEO of Keelvar.

Artificial intelligence (AI) is transforming industries and the pace of change is accelerating. AI can fly planes, trade stocks, perform ear surgery and, more recently, detect skin cancers better than dermatologists. AI can even out-perform teams of expert dermatologists.

The pace is accelerating because AI has a lead time of years to become competitive in many of these challenges, but as it supersedes human expert capabilities in each domain, its adoption rate increases — and so does its ability to learn as it receives more data. So the gap between AI and human experts then grows ever larger.

A first-mover advantage ensues for firms that reach the tipping point of attaining superior performance with AI over humans. But there is also a pre-emptive rush to be ahead of the curve. Businesses are trying to understand before their competitors which AI-backed solutions will offer most value. It’s important to separate the hype from reality.

How Will AI Impact Procurement?

The potential benefits of AI far exceed the automation of simple downstream functions. More strategic advantages lie in the upstream activities. Strategic sourcing is a concept that most large organizations have struggled to master. The importance of game theory, mechanism design and optimization are only fully understood by a tiny minority of companies that have been using sourcing optimization for several years now to gain a significant competitive advantage in their industry.

Educating sourcing managers to fully comprehend best practice has proven elusive. This is understandable, because most professional procurement training courses don’t include subjects such as game theory. The mathematical concepts of Nash equilibrium, incentive compatibility and efficiency are often too challenging for most sourcing managers, because their undergraduate degrees were in one of the silos of business, economics, supply chain or a science. Best practices rely on interdisciplinary knowledge that would take many years of education. It’s not realistic to assume that most sourcing managers can attain sufficient breadth and depth of knowledge to execute best practices in what is a complex challenge.

AI to Make Best Practice Easy

AI is better at:

  1. Automatically conducting simple repetitive tasks. (e.g., factory automation and back office processing)
  2. Detecting patterns in large data sets (e.g., dermatology and spend analytics)
  3. Strategic reasoning in large and complex decision spaces (e.g. chess, poker and strategic sourcing)

The final point above, strategic reasoning, is the most difficult AI challenge but also the most rewarding in terms of benefits. To master strategic reasoning, the investment in AI requires years of effort, training, improvement and iterative refinement. It also needs to be designed by AI experts with doctorates in relevant subfields, including computational mechanism design and optimization. True AI-powered applications that offer major advances are developed by teams hired from AI research labs. Only advanced AI truly captures the nuances of human decision-making. The engineering teams developing AI-powered applications should no longer consist of just software engineers. It is essential that they are scientists that have researched the various machine learning techniques, combinatorial optimization algorithms and have a deep understanding of what approaches are appropriate in a given domain.

This concept is lost on most marketers that effuse the greatness of AI but underestimate the scale of the technical challenges associated with the most strategically important advantages. Some crazy extrapolations are made when the boundaries of possibilities are poorly understood. Marketers can sometime over-promise or make mistakes about which challenges are reasonable and which are still out of reach.

But there is a core truth in much of the hype: AI is transforming the way we work, and procurement is ripe for change. Strategic sourcing is where the most significant change lies ahead because the core data can be captured in structured tables and used to build a corpus of knowledge.

Keelvar will be hosting seminars in Chicago and New York on the topic of AI and procurement: register to hear from speakers from Spend Matters, AT Kearney, Forrester and Chainalytics here.

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