Daily Archives: October 17, 2016

Just What Does Modern Sourcing Need?

Every year vendors, analysts, and even bloggers come up with their view of what next generation sourcing is, and what is going to get us there. This year, there is a big push towards AI (Artificial Intelligence) and not just predictive, but prescriptive analytics. Apparently, the Sourcing (and Procurement) of the future will be managed by computers, and not by experts. This is not only unnecessary, but a bit scary.

Why is it scary? Because computers run on algorithms and algorithms are not intelligence. Even though it’s theoretically possible for a sufficiently powerful computing platform to pass the Turing test*, all it does is point out the insufficiency of the Turing test for assessing the intelligence of a computer program. While computers can process significantly more data than we can, and modern predictive (trend) models, given enough data, can be more accurate than our intuition, they cannot detect when they are likely to fail or there is information or factors that need to be considered not baked into the model.

For example, if the prescriptive analytics relies on predictive analytics that relies on price trend modelling that simply takes into account price history, currency fluctuations, demand for related products or commodities, and demand for commodities that are usually used to hedge against price fluctuations in the product or commodity category, it will not detect when a natural disaster will result in a supply chain disruption that will result in less product or commodity availability in two months, which, of course, will have a drastic impact on price. As a result, the recommendation to spot-buy while the price is dropping is the wrong one, because as soon as supply drops, prices will skyrocket and it will be too late to lock in the current price.

But this isn’t the worst that can happen. If the AI that monitors multiple pricing trends, expiring contracts, and supplier performance not only ignores this blip but, instead, not only directs a resourcing for an expiring contract on an unrelated,but highly strategic, category, but encourages the inclusion of a supplier (that normally does not supply that category) that is currently in financial distress, the organization could end up blindly awarding a critical category (that is currently being served by a stable, reliable, reasonably low cost supplier) to a different supplier that is about to go bankrupt and then, seemingly without warning, stock-out on a critical product for months.

As you can probably guess, the doctor still believes that Sourcing and Procurement do not need AI and prescriptive analytics. What they really need are powerful and modifiable rules-based workflows, exception monitoring, suspicious transaction identification, and event monitoring.

The true power of a platform is to automate the tactical and streamline the strategic. Every minute of a professional’s time should be spent on strategic activities or issue resolution, not electronic paper pushing. Document matching, data collection and verification, contract monitoring, automated trend computation, etc. are all tasks that should be done automatically, but no actions with any strategic impact should be taken without intelligent human intervention.

A good rules-based workflow can allow tactical tasks, such as invoice matching and marketing monitoring, to be automated according to accepted rules and ensures that professionals only need to be involved when the parameters exceed the specified norms. Exception monitoring can insure that when something is out of expected norms, or exceeds ranges, or happens too often, it is immediately brought to the attention of the right individual. A suspicious transaction monitoring system, even if statistically based, minimizes the chances of duplicate payments, fraud, audit trail tampering, and so on. And event monitoring, even though it will produce a number of false positives, will enable a human to identify events that might impact the projected supply and cost trends for commodities and products purchased by the organization, and mark those for manual review and, possibly, re-sourcing if need be.

Modern sourcing does need better technology, but it doesn’t need artificial intelligence. It needs platforms that can help the sourcing professional focus appropriately, not guide the professional down a programmed path that will only give Sourcing and Procurement a false sense of security. The solution can track best practices for different situations, but the human still needs to determine if the system’s assessment is proper. Sourcing needs a system that empowers it with the intelligence it needs to make the right decisions, not a system that makes decisions and acts on those decisions (with automated contracts, orders, etc.) without human review and approval.

* A computer that is capable of sampling all conversations archived and currently taking place in real time, finding the one that best matches the conversation you are having, and providing that answer will provide a conversation indistinguishable from that provided from a real human, but it’s not intelligent. It merely proves the infinite monkey theorem.