Category Archives: Procurement Innovation

You Don’t Need an AI Operating System — But You Do Need a Definitive AI Rulebook

Not that long ago, Garry Mansell gave us a post on The Procurement Operating System for AI where he made a lot of very, very good points. Points we need to cover in detail because, while I don’t think you need an operating system (because you don’t and, even worse, you’ll misread that as put AI at the core of every product you use, and that’s, well, WRONG), you do need to get a detailed written rulebook in place on where AI can, and can’t be used, and how. But we’ll get to that. First, Garry’s points.

As Garry points out, there are two main reactions to AI in procurement.

BAN IT. Which, in my view is a great policy if your definition of AI is restricted to Gen-AI LLMs (but more on that later). But this usually results in people doubling down on using tools they find useful (which are usually the worst examples of such tools) and the wrong tools being banned from the organization.

IGNORE IT. Which results in rampant, uncontrolled spread of a myriad of systems of different quality and usefulness that produce vastly different results with different levels of explanation, auditability, correctness, and accountability.

And, as I’ll point out, an increasingly common secondary reaction to AI in procurement.

All In. In smaller departments behind on tech who have succumbed to the AI hype, they are convinced they can skip a generation of tech, go straight to AI, and reap instant benefits that took their peers months and years to obtain.

And, as Garry points out, all of these reactions make the same mistake: treating AI as a feature rather than a capability that changes how decisions are made.

The only way to progress without increasing risk is to adopt a small set of rules and mechanisms that make AI use safe, auditable, and commercially sensible without turning Procurement, or any department, into a compliance factory.

Moreover, these rules must take into account the following:

  • it’s not control, it’s repeatable judgement (because you need smart people who make good judgements)
  • you need clarity on whether AI is assisting or deciding (because there are only a few situations where AI can truly “decide”, and as per our prior posts, that’s where the impact of a bad decision are low and the cost of an occasional bad decision is less than wasting the precious time of a critical human resource)
  • you need evidence thresholds (that are appropriate for the cost of failure) regardless of where and how the AI is applied (and what AI is used)
  • auditability must be at the core of every workflow, not an after-thought
  • you need accountable owners (not committees) AND accountable users
  • AI drift must be treated like supplier performance because it’s just as critical
  • even the best AI will fail, so you need well defined escalations to humans who can respond quickly, even when the AI is just assisting

So what would a good set of rules look like?

  • no Gen-AI unless there is no other solution (and the risk has been pre-defined to be acceptable) — LLMs are overused considering they are under effective and hallucinate regularly and there are often other, better, solutions
  • integrate classic optimization, predictive analytics, and AI (ML, NN, etc.) anywhere and everywhere it makes sense, but only if any false positives or negatives can be detected and escalated to a human, and done so in a repeatable manner
  • document all of the rules used, the exception conditions, and the process changes when a human has to enter the loop (as well as what the human has to do)
  • don’t use any AI tech until it’s integrated into a workflow with automatic logging and audit trails
  • only let the AI “decide” where the cost of failure is low or the cost of failure is acceptable and the confidence the AI is right is high enough
  • make it clear that anyone who uses AI takes full responsibility for the outcomes, and will be held fully accountable for any use that falls outside the rules

While these can be adapted to your liking and comfort (but don’t get too comfortable with Gen-AI), the important thing is the set of rules you adopt allow you to move fast and do so safely wherever speed is possible while ensuring you slow down when you need to. And it ensures no one gets out of line because they will be held fully accountable for any negative effects that result from stepping out of line. Procurement can trust its processes and people in the organization can trust Procurement.

That’s what good AI rules look like. Procurement that functions repeatedly, reliably, and accountably in an auditable function with low rates of failure, lower rates of hallucination, and almost no machine judgement. (When the machine decides, the majority of the time it’s really executing a pre-defined action based on an identified pattern using A-RPA and patterns identified using optimization, analytics and classic ML.)

Sorry Garry, but you don’t need a Decision Ladder … you just need Busch-Lamoureux Exact Purchasing

because your decision ladder is baked in at the core! Even though we had no clue about it until you made your LinkedIn Procurement Decision Ladder post!

We reached the same conclusion you did — that decisions are not equal, especially in sourcing, and the cost of failure (and recovery, not reversibility — as recovery is never fully possible once a contract is signed, an order is made, or a shipment received, unless, of course, a Force Majeure event happens before any of that occurs) is paramount in how you handle the category in question.

Depending on the criticality of the category, and where it lies between low risk, low complexity, and low impact and high risk, high complexity, and high impact, you’re either going fast and fully automated with a high tolerance for failure (as one bad decision costs little and can quickly be recovered from) as per the first rung of your ladder or slow and methodical with decisions delayed until they are defensible and auditable at the top rung of your ladder (after all, you do have to climb up from the lower left of the lowest octant to get to the upper right of the highest octant if you are living in the Busch-Lamoureux Exact Purchasing Pocket Cube) or somewhere in between in the other six categories depending on the cost of failure and the cost of recovery.

When you know where every category falls, you know exactly how much planning, defensibility, and auditability is needed and, more importantly, how much human involvement. This makes it clear where you can play with experimental AI and where you can’t risk any decision not made by a human expert. (The machine should be used to do any and all analyses that are known and come to mind, but in high risk, high complexity, and high impact categories which have a high cost of failure and a high cost of recovery, as IBM wrote back in 1979, the machine should never make a decision because it can never be accountable for one — as that accountability always falls to you. And the courts globally are [becoming] in agreement with that.)

Proof You Don’t Need AI For Procurement

And that you don’t need modern procurement technology. (No SaaS. No fluffy magic cloud.)

Or classical technology. (No Microsoft Back Office. No ERP.)

All you need is pencil, paper, and a good old fashion fax machine based on the classic 1966 Telecopier (that compacted the Xerox LDX).

Last year, Asahi proved it when they were hacked by the Ransomware group Qlin. The hack took all of their factories offline, and when they managed to get them back online, their computer systems were still down. Most of their global competitors would have remained completely shut down until the computer systems came back online, but instead Asahi rolled up their sleeves, powered up the fax, took out a pad of paper and a pen, and got to work. They placed orders, took orders, shipped out what they were able to produce to their largest distributors, and kept going. While it was a slow start at first (with some customers only receiving about 20% of their usual orders), at least they were able to start up again right away and maintain part of their revenue stream.

Could your organization do the same? Likely not!

It’s shameful because we’re one of the world’s oldest professions, possibly the second oldest, and early professionals were doing their jobs with reed pens and papyrus just fine!

The fact of the matter is that if you can’t do your job without technology, you can’t do your job with technology. True Procurement is human judgement. Judgement requires the expertise necessary to do the job — the entire job. Technology is just the execution that automates the tactical drudgery which allows us to focus on what’s truly important and spend most of our time on strategic activities. Nothing more.

8 Signs You Were Forced Into Purchasing

Tom Mills, author of Procure Bites, recently gave us 8 signs you were meant for Procurement, which left some of you, in organizations where Purchasing is still treated as an old school function, and run by old-school die-hards who still think its the (19)80s, wondering where it came from because that’s NOT the personality profile you’re used to seeing.

Although Tom’s profile is the profile you want to see in Procurement, if your Procurement organization is still the Island of Misfit Toys, that’s not the profile you have. This post is for you and describes your Purchasing department where everyone there was put there because they didn’t belong (or want to be) anywhere else, and for one reason or another the organization can’t (or won’t) get rid of them just yet.

Enjoy!