How AI can help procurement reduce supply costs in 2024
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As supply shortages caused by the pandemic and ongoing global disruption begin to ease for European businesses, ensuring cost-effective supply is again becoming a priority for procurement professionals. “The feedback we are receiving from procurement leaders in Europe is that in 2024 they expect suppliers to start to reduce their prices,” says Nicolas Olague, private sector leader, corporate, at Amazon Business. “We don’t yet know how fast this will happen or if it will be spread across all categories, but it is expected.”
For those working in procurement, it’s a welcome chance to get back to the basics of the job, ensuring that any supply cost reductions filter through into lower prices for businesses. But while the expectation for many organisations is to have discussions with core suppliers providing vital components and high-value items, procurement teams often have little insight into lower-value items.
Such non-controlled spend categories, though, can mount up to significant sums, says Olague, and typically represent 20% of a company’s total spend and around 80% of its supplier base. “If you have no control over the price and no strategy around approval then you can’t control your costs overall,” he points out. “The recommendation is to reduce the number of suppliers and concentrate your purchases on fewer suppliers. This will enable you to have more control, more visibility and get better pricing.” Pooling spend volumes across multiple countries can help with negotiating better prices, he adds, as a result of economies of scale.
A second piece of advice is to anticipate purchases ahead of when they are actually needed, and to buy in bulk if possible. “For instance, think about how many laptops you will need next year, based on your purchasing activity over the past five years,” says Olague. “This means you can save not just on the price of the laptops but also on hidden costs such as processing multiple invoices.” Putting in place rules around spend – such as mandating an increasing percentage of items coming from sustainable sources each year – can also help deliver wider goals, he adds.
The effective use of data, and particularly the use of artificial intelligence (AI), is central to the ability to get a stronger grip on such spend. “This will be key to managing the challenges of costs, and also meeting environmental, social and governance goals which are a key focus for businesses,” adds Olague. Many organisations currently do not have access to spend data, he adds, particularly if they are used to buying items locally as and when they need them. If they do have the data on-hand, traditional data management processes are often time-consuming and error-prone, presenting significant challenges for procurement teams. However, AI-powered spend analysis solutions, such as Amazon Business Analytics, can automatically analyse data and unlock timely analysis and data-driven insights for better decision-making.
Many organisations are now open to the idea of using AI to help with their buying activities. According to Amazon’s 2024 State of Procurement Report, which surveyed respondents from nine industries and across multiple countries including France, Germany, Italy and Spain, just under half (45%) would be willing to incorporate AI into their procurement efforts immediately or within a year, and 80% would be willing to do so within two years. Furthermore, almost every respondent (98%) believes their organisation will invest in analytics and insights tools, automation and AI for its procurement operations in the next few years.
As well as benefiting from the additional insight that AI can generate, procurement can also gain from having more time to engage in activities which can add more value to the business as a whole. “Developing procurement capacity, agility and innovation are top priorities,” says Aster Angagaw, VP, head of commercial, public and strategic sector at Amazon Business. “To achieve these goals, procurement leaders must streamline the time spent on low-value activities, like gathering information for reports, manually entering data into disparate systems and trying to contact suppliers for delivery updates.”
One challenge, though, is to identify how best to make use of such technology. A head of procurement at a multinational telecommunications company in the UK says knowing which digital tools to implement and how to do this is a major challenge: “They’re coming very quickly – you’ve got everybody using automation, machine learning and AI. Do I buy a tool now? Do I wait? Do I outsource those services? These are all questions that are coming at us.”
An easy place to start is through the use of solutions such as Amazon Business, which has expanded Amazon’s AI and ML capabilities – in development for more than 20 years – into procurement. Like Amazon, Amazon Business uses AI to improve the search experience and product discoverability, says Olague, allowing buyers to see different options in one place. Further, Amazon Business’s AI-powered product recommendations can help organizations find the same or comparable items at lower prices or with discount availability, either through the convenience of ‘Subscribe and Save’ or quantity discounts for bulk orders.
This can also be combined with other data around sustainability criteria or particular types of business, such as those owned by women or small firms. This can help procurement departments direct internal buyers towards particular products or companies, helping to meet wider ESG targets.
Over time, drawing on transaction information, it’s possible to build up a clearer picture of just where the organisation is spending money, and start to develop strategies to reduce this while also enhancing wider company goals. This could be through eliminating unnecessary purchases, negotiating with individual suppliers to provide a lower price in exchange for firm spending commitments, or seeking lower-cost or more sustainable alternatives.
The starting point, though, to ensure that purchases are being made through authorised channels rather than as individual transactions or through personal accounts. “It’s important to take a step back and understand where you are right now,” concludes Olague. “How is my company purchasing, and how can I help to concentrate that? Some small adjustments can have a big impact.”
To find out more about how Amazon Business can help you master smart business buying in 2024, click here.