How Generative AI is changing the Landscape of Sourcing

In today’s rapidly evolving business landscape, businesses stand at the brink of a digital revolution. The procurement landscape is no exception to this paradigm shift. Fueled by transformative capabilities, Generative AI is emerging as a game changer for sourcing and procurement. Since the advent of ChatGPT last year, generative AI has been a popular topic of discussion among leaders. The value for the Generative AI global market stands at US$ 44.89bn for 2023 and is projected to reach a market volume of US$ 207 bn by 2030.  

It is critical that businesses understand and explore the impact of generative AI in core sourcing functions like RFP creation, supplier selection and tail spend automation. In the current business landscape, being innovative and precise becomes critical. In this aspect, the disruptive ability of Generative AI will help businesses get ready for the future of procurement with confidence. 

 

What is Generative AI? 

Before delving into the specifics of how Generative AI is revolutionizing procurement, let’s first take a moment to understand the fundamentals. What exactly is Generative AI and how does it work?

Generative AI, represented by models like GPT-4, belongs to a class of AI that uses machine learning algorithms to generate data similar to the data it was trained on. This means it can look at information it has seen before and generate new things that are like that information. Imagine having a friend who can draw a picture just by looking at it once! That’s what generative AI can do with data. 

It is like a super-smart helper that can find the best products or services, compare prices and quality, and even manage contracts, all by learning from past information and making smart decisions.

Today, Generative AI is moving ahead of other tech innovations in terms of reach and impact. According to research by Accenture, 95% of respondents say that advancements in the field of Generative AI signify a new era of enterprise intelligence.  

Similar to other business areas, procurement also stands to highly benefit from using Generative AI. It can transform a wide range of procurement capabilities, acting as a co-pilot by automating non-strategic tasks. With its ability to hold human-like conversations, Generative AI goes beyond simple automation to infuse a new level of intelligence in the sourcing process. The capabilities extend to understanding and learning from vast amounts of data and generating nuanced insights that aid in more complex aspects of procurement. 

In the context of procurement, it is trained on large datasets to vendor information, contracts, purchase orders, etc. As a result, it’s capable of not only understanding and learning from this data but also generating content like RFPs, contracts, as well as negotiating with vendors for low value purchases.

Recent survey indicates operational efficiency, risk management and digital transformation as top procurement priorities for enterprises moving forward . It is not surprising that Generative AI is going to be a key catalyst to deliver operational value in the field of procurement. 

 

How is Generative AI Reshaping the Sourcing Function?

Generative AI is transforming the way businesses handle sourcing, making it smarter and more efficient. It’s like having an expert team working round the clock, but without the high costs or human error. From creating RFPs to managing contracts and guiding purchases, AI is making these processes faster and more reliable. This revolution in sourcing is allowing leaders to focus on what really matters- the strategic goals and improving the ROI. 

This section outlines how Generative AI can enhance key areas in sourcing, driving greater efficiency, increased savings and reduced human dependency. 

 

RFP Creation 

Generative AI, like GPT-4, can significantly assist in RFP creation in several ways:

1. 1. Template Generation: AI can generate basic templates for an RFP by analyzing past successful RFPs and learning from them. This saves time for the creators who would otherwise have to start from scratch. 

2. 2. Personalization: Each RFP often needs to be adjusted based on the specific needs of a project. Generative AI can take basic information about the project (like project goals, budget, timeline, desired qualifications of the vendor, etc.) and personalize the RFP template accordingly.

3. 3. Vendor Profiling: AI can help in profiling potential suppliers or service providers based on their past performances, qualifications, and other criteria to match the most suitable ones for a specific RFP.

4. 4. Compliance Checking: Generative AI can ensure that all compliance-related points are included in the RFP. It can cross-verify with standard protocols and norms in a particular industry or sector and incorporate them into the RFP.

 

RFP Evaluation 

Evaluating vendor responses to a Request for Proposal (RFP) is a crucial task that demands significant time and effort. Generative AI can provide substantial assistance in this regard, streamlining the process and improving the quality of evaluations.

1. 1. Automated Evaluation: AI can directly compare different vendor responses based on set parameters. This helps in identifying which vendors best meet the project needs. It can also point out any anomalies, shortcomings, or areas of concern.

2. 2. Automated Scoring: AI can analyze each vendor’s proposal and assign scores based on predefined criteria. This could include factors like the vendor’s proposed price compared to the budget, the comprehensiveness of their response, their previous experience with similar projects, past performance, their proposed timeline compared to the project schedule, and so on. AI can look into the past performance of a vendor, including analyzing data from online reviews, past project results, and any available performance metrics. It can use this information to predict the vendor’s likelihood of successfully completing the project. AI can also analyze the semantics and context of the vendor’s response. This can include understanding the vendor’s commitment, confidence, and certainty in their ability to fullfill the project requirements based on the language they use.

3. 3. Generating Summary Reports: The AI can generate comprehensive summary reports of each vendor’s response, highlighting the strengths and weaknesses, potential risks, and how well they meet the project’s requirements. 

Automated Sourcing of Low-Value Products 

Low value products, while seemingly trivial, often consume significant administrative time and resources. Generative AI not only automates these mundane tasks but also makes the processes more efficient and cost-effective. 

1. 1. Omnichannel intake: AI can facilitate users to share their requirements in free text and from the channel of their choice like using Microsoft teams, Slack, Whatsapp, Gchat, email etc. It can analyse the unstructured data & create the Purchase Requisition automatically. If needed, it can also ask users for more information about the requirements.  

2. 2.  Identifying Suppliers: The AI can analyse purchase history, existing rate contracts, various databases and online sources to identify potential suppliers. It can also consider vendor rating, recent delivery performance, responsiveness & other parameters for shortlisting the suppliers

3. 3. Automated processing of PR: The AI can automatically raise a PO or RFQs to the most suitable suppliers based on existing contracts, recent purchases or other data points. It can also evaluate the responses to RFQs and ask more details from the vendors if necessary. 

4. 4. Autonomous negotiations: Generative AI can facilitate automated negotiations by generating appropriate communication based on predefined business rules or by learning from the professionals in real time. It could, for example, ask for a discount based on order volume or inquire about faster delivery options and get the best deal. 

5. 5. Order Generation: AI can automatically generate orders based on predefined rules and criteria. For instance, when inventory levels of a product drops below a certain point, the AI could automatically generate an order to restock that product. Or based on previous consumption patterns & taking demand into consideration, it could alert or place order automatically.

 

AI Guided Buying 

Guided buying is a procurement strategy that aims to guide employees towards making compliant, efficient, and cost-effective purchasing decisions. It’s an area where generative AI can be extremely helpful.

1. 1. Chat-based guidance: Users can chat with AI and place orders. The AI will ask all relevant questions to the users to guide them to the right product and place orders themselves. 

2. 2. Catalog Curation: AI can analyze large amounts of data from suppliers to create a comprehensive, easy-to-navigate catalog. It can also personalize the catalog based on the specific needs and preferences of each user.

3. 3. Smart Recommendations: Similar to how platforms like Amazon or Netflix suggest products or movies, generative AI can suggest products to employees based on their purchasing history, role, and needs. This can help them make more informed and efficient buying decisions.

4. 4. Policy Enforcement: AI can ensure that purchases comply with company policies. For instance, if a user tries to make a purchase that violates a policy (like buying from an unapproved vendor or exceeding a spending limit), the AI could alert the user and suggest an alternative.  

 

Contract Management

Generative AI can significantly improve contract management processes by automating routine tasks, streamlining workflows, and providing valuable insights. Here are some ways generative AI can aid in contract management:

1. 1. Contract Creation: Generative AI can help generate contract drafts by using templates and filling in the specific details of each agreement, like names, dates, amounts, etc. This can save time and ensure consistency across all contracts.

2. 2. Contract Review: Using natural language processing (NLP) techniques, AI can review contracts to identify potential issues, such as unfavorable terms, missing clauses, or non-standard language. It can highlight these areas for further human review, reducing the risk of unfavorable terms going unnoticed.

3. 3. Clause Extraction: Generative AI can identify and extract key clauses from contracts, such as termination clauses, liability clauses, or payment terms. This can make it easier to understand and manage the obligations and risks associated with each contract.

4. 4. Contract Negotiation: Generative AI can help in the negotiation process by suggesting optimal terms based on past contracts and overall company objectives. It can also generate responses during negotiation discussions.

5. 5. Automated Alerts: AI can track key contract milestones such as renewal dates, payment deadlines, or delivery dates, and send automated alerts to the relevant stakeholders. This can help ensure that deadlines aren’t missed and that contract obligations are fulfilled.