Why You Need AI to Improve Performance Management in Procurement

As a procurement professional, how often do you engage in performance management? What are your key performance indicators or KPIs? Which ones are the top priority and how do you measure them? 

After all, if you cannot measure it, you cannot improve it. 

For some organizations, cost efficiency may be the biggest priority. For others, risk management can be the number one KPI amid prevailing economic uncertainty. For many in both these categories, achieving sustainability can mean successful performance. 

But while these KPIs may be varied, the biggest challenge for procurement is to devise ways to measure (and enhance) performance. 

Teams often struggle with a lack of visibility into procurement operations, which makes it tough to assess performance and spot opportunities for savings or risk management. Or perhaps they still rely on traditional, manual processes, which increase costs and lead to delays. 

Without a clearly defined performance management program, how do you know if you’re truly making progress? 

KPIs for Performance Management in Procurement 

To be able to accurately assess performance, it is important to first understand procurement metrics and KPIs. Here are the main KPIs for this function: 

1. Cost reduction:

 Has your procurement team succeeded in negotiating favorable prices and contract terms with suppliers? This means that it has delivered on its cost reduction KPI. In fact, lowering costs has always been a key priority for procurement, given that its key responsibility is to negotiate with suppliers. 

2. Cost avoidance:

 This can be combined with cost reduction to avoid potential extra costs in the future. Operations, for example, may identify machinery or parts likely to malfunction or damage other equipment in the future. By replacing these parts in a timely manner, procurement can ensure business continuity as well as avoid potential costs. 

3. Maverick purchases:

Do internal teams often have to buy goods or services at short notice? Is the volume of unplanned, maverick spend significantly higher during a period? This can increase unmanaged spend and strain procurement budgets. 

4. PO cycle time:

 How long does your business take to place a purchase order, once it identifies the need for goods or services? This can be a key indicator of how efficiently procurement is operating. The less the purchase order cycle time, the more efficient is the procurement function. It is measured in hours or days from when a purchase requisition is submitted to when it is transmitted to a vendor. 

5. Contract compliance:

 While procurement may have negotiated favorable prices and contract terms, it also needs to monitor compliance. In other words, procurement must check if suppliers are delivering as per agreed timelines and other terms. It must also check if prices in supplier invoices match the original purchase orders. 

6. Price competitiveness:

 At times, there are material shortages and a few suppliers that enjoy monopoly quote high prices. Here, procurement must shortlist suppliers who offer a competitive advantage. It can measure price competitiveness by comparing the prices paid with actual market prices. 

How AI-Powered Procurement Technology Can Simplify Performance Management 

Advancements in technology, particularly in artificial intelligence (AI), have made it easy for procurement to engage in performance management. AI-powered procurement solutions can address the key pain points by providing enhanced visibility, efficiency, and strategic insights. 

• Enhanced Visibility and Data Analytics 

A key advantage of AI in procurement is its ability to quickly analyze vast amounts of data. Advanced tools such as spend analysis provide visibility into critical areas related to enterprise spend. With complete visibility into enterprise spend, procurement can make the right sourcing and buying decisions, aggregate spend, consolidate suppliers, and utilize historical spend information to plan for the future. 

Analysis of spend data also provides actionable intelligence, which can be used to decide procurement strategies. Spend analysis allows procurement to dig deeper into spend data to uncover potential savings opportunities. 

• More Spend Under Management 

AI-powered procurement technology allows procurement to bring more spend under management. According to research by Ardent Partners, the procurement organization manages, on average, about 61% of the total spend. 

By managing more spend, procurement can increase its overall influence and impact on the business. For every dollar that is placed under the procurement team’s management, the average enterprise sees a benefit of 6 to 12 percent during the first contract cycle, suggests the Ardent Partners’ research. 

• Streamlined Processes 

AI can automate several repetitive tasks within the procurement cycle, such as order processing and invoice management. This not only reduces the time spent on manual tasks but also minimizes human error, leading to greater accuracy in procurement operations. With AI handling routine activities, procurement teams can focus on more strategic initiatives that drive value for the organization. 

• Predictive Analytics for Better Decision-Making 

AI-powered tools can utilize predictive analytics to forecast future trends based on historical data. For instance, by analyzing past purchasing patterns and market conditions, AI can help procurement teams anticipate changes in demand or price fluctuations. This foresight allows organizations to optimize their sourcing strategies and negotiate better terms with suppliers before market shifts occur. 

• Improved Supplier Relationship Management

Effective supplier relationship management is key to successful procurement performance management. Featuring centralized platforms that can track interactions, performance metrics, and feedback, AI solutions can facilitate better communication and collaboration between procurement teams and suppliers. This transparency fosters stronger partnerships and encourages suppliers to meet performance expectations. 

• Continuous Improvement through Feedback Loops 

AI systems can create feedback loops that continuously monitor supplier performance against established KPIs. By regularly assessing performance data, organizations can identify trends over time and make necessary adjustments to their procurement strategies. This iterative process promotes a culture of continuous improvement within the procurement function. 

Conclusion 

While there are several challenges in procurement performance management, the integration of AI-powered technology can help to overcome these hurdles. 

Not only can AI enhance operational efficiency, but it can also position procurement as a strategic partner within the broader business landscape. Leveraging advanced technology has therefore become increasingly vital for procurement organizations looking to optimize their performance management.