Direct Vs. Indirect Procurement: The Impact of AI

For too long, procurement departments have been drowned in high-effort, low-value tasks. Also, managing spend efficiently has become extremely challenging for procurement teams across both direct and indirect categories given the high inflation and never-ending supply disruptions.

Hurdles in Direct Procurement

Direct procurement includes purchases of raw materials, components, and services used in manufacturing products or delivering customer offerings. Optimizing this spend is crucial but hampered by:

Insufficient supplier data

Minimal pricing transparency and performance visibility weakens buyer negotiation leverage and inflates costs. Extensive manual sourcing is required to gather market intelligence.

Delayed supplier onboarding

Lengthy vetting and contracting processes for new suppliers lead to missed savings from innovative or niche partners aligned to business goals.

Static market monitoring

Without continuous monitoring, contracts fail to reflect changes in component pricing, supply risks, and evolving business needs.

Constraints of manual sourcing

Limited human capacity prevents adequate competitive bidding events to get the best market pricing from new and existing suppliers.

The Indirect Procurement Quagmire

Indirect spend like facilities, marketing, IT, HR, legal, and other services also pose challenges:

Long tail spend

Numerous fragmented purchases dilute economies of scale in negotiations. Consolidating this tail spend is difficult without spend analytics.

Maverick spending

Lack of compliance enforcement leaks savings away through rogue purchases made outside preferred agreements. Tracking this spend is near impossible with manual methods.

Invoice processing costs

Reliance on error-prone manual review of invoices increases overpayments and fraud risk. But automating processing has traditionally proven challenging.

Decentralized coordination

Suboptimal vendor selection and duplicative efforts drive inefficiency across categories. Reigning in rogue spending requires major organizational change management.

How AI is Transforming Direct Procurement

AI capabilities now enable solutions to overcome challenges and transform direct spend management:

• Algorithms handle repetitive sourcing events, RFPs, auctions, and contracts. This scales the quantity of structured negotiations for optimal pricing.
• Bots conduct supplier identification, due diligence, and audits. This accelerates vetting and onboarding of suppliers with lesser staff.
• There is ongoing monitoring of supplier KPIs and market movements. This enables proactive relationship management, risk mitigation, and renegotiation opportunities.

AI in Indirect Procurement

AI systems tackle indirect spend hurdles by:

• Consolidating long-tail spend for pooled negotiations for increased economies of scale and stronger supplier contracts.
• Detecting non-compliant purchases and off-contract spending. This institutes guardrails for compliance enforcement and savings capture.
• Automating error-prone invoice processing to eliminate overpayments and highlight anomalies to prevent fraud.
• Analyzing total cost drivers to identify savings opportunities by redesigning services, product specifications, and contractual terms.

Increasing Procurement’s Strategic Impact

With repetitive tasks automated, procurement leaders gain the capacity to deliver data-driven insights that influence C-suite and stakeholder decision-making:

• Advising product teams on balancing cost, sustainability, brand reputation, and innovation when selecting suppliers
• Providing enterprise-wide visibility into risks, dependencies, and savings opportunities across spend categories
• Forecasting future supply and demand shifts to proactively mitigate shortages or excesses
• Modeling different scenarios to optimize working capital, inventory, and fulfillment costs

The Path to Procurement Transformation

To fully leverage AI, procurement organizations must also focus on change management and skill development across teams. But willing procurement leaders can drive this transformation to elevate their function's strategic value.