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Decoding AI and Smart Contracts for Advanced Procurement Operations

Dec. 28, 2023
AI and smart contracts can automate many aspects of procurement for higher efficiency, fewer errors and lower costs. See how organizations can implement them successfully.

Procurement is a far faster-moving operation than it once was. As supply chain demands for cost-efficiency, speed and accuracy rise, procurement professionals must embrace new technologies to meet them. Artificial intelligence (AI) and smart contracts are among the most important to capitalize on.

Conventional, manual operations are time-consuming and prone to error. In the past, the only universal solution was to simplify where possible and train employees more thoroughly, but modern technology has unlocked new possibilities. AI procurement is slowly becoming the norm as more businesses realize this potential, and smart contracts promise similar disruption.

What Are Smart Contracts?

A smart contract is a blockchain-based program that executes automatically once pre-specified conditions occur. While AI has already become common enough that most professionals are familiar with it, smart contracts remain more obscure. However, that doesn’t mean they’re not equally advantageous.

Like many blockchain technologies, smart contracts are most popular in the financial industry, which accounted for 37% of all smart contract revenue in 2022. These companies use them to automate insurance claim processing, enable peer-to-peer transactions and make audits more transparent. Many of these use cases have potential in procurement operations, too.

Blockchains are fully transparent by nature, but their records are virtually impossible to change. Smart contracts add the speed, convenience and accuracy of automation into that mix, leading to easily auditable, automatic and trustworthy processing across various applications.

Applications of Smart Contracts and AI in Procurement

Together, AI and smart contracts could revolutionize procurement operations. Their impact begins in supplier assessments. AI can compare dozens—even hundreds—of vendors and their prices, locations and other factors to determine the benefits and risks of each. This thorough analysis is particularly valuable as many organizations seek to restructure their supply chains.

AI and smart contracts are also ideal tools for supply chain transparency. Many organizations can’t see past their Tier 1 suppliers, making ethical sourcing or responding to incoming disruption difficult. Procurement professionals could implement blockchain tracking to provide immutable, easily traceable records to reverse that trend. Smart contracts could automatically alert them of any noncompliance issues or other disruptions.

Similarly, these technologies can automate supplier and 3PL contract management. AI can use pre-made templates to help create custom documents in minimal time or review them for potential compliance issues. From there, smart contracts can automate their execution, including paying appropriate parties according to the agreement, informing stakeholders of important updates and filling out regulatory forms.

Procurement professionals can apply these technologies to internal operations, too. Filling an open position takes 44 days on average, so hiring and onboarding are ripe for tech-driven optimization. AI can pre-field applications or find passive job candidates to streamline organization’s hiring, while smart contracts automate payment, paperwork and other time-consuming onboarding tasks.

Benefits of AI and Smart Contracts in Procurement

Across all these use cases, smart contracts and AI-driven procurement have several key advantages, with time savings being the most noticeable. Employees lose 62% of the workday to repetitive tasks on average and contract management is particularly prone to this kind of work. Because AI and smart contracts automate the most mundane parts, they yield substantial efficiency improvements.

Similarly, these technologies reduce operating costs over time. Automation in physical supply chain processes can reduce labor costs by 60% and while procurement automation may not be that dramatic, it has similar effects. When it takes less time to find, make deals with and communicate with suppliers and 3PLs, fewer workers can accomplish more, reducing relative expenses.

Because smart contracts activate automatically according to pre-set conditions, they minimize errors in contract management and payments. As a result, procurement businesses avoid costly mistakes.

AI and smart contracts also boost transparency throughout the procurement process. Blockchain records are visible to all authorized parties, so using them for contract management ensures everyone involved has all the information they need. AI can improve visibility by consolidating data into easy-to-understand visualizations or reports.

Maximizing transparency has two major benefits in procurement. First, making timely, accurate decisions becomes easier, even amid rapidly changing supply chain trends. Secondly, it gives partner organizations more confidence amid growing concerns about supply chain fraud. This latter benefit is ideal for regulatory compliance, too.

Remaining Challenges

The potential of smart contracts and AI in procurement is hard to ignore, but these technologies are still fairly new. Thus, they’re far from perfect, so procurement organizations must account for a few obstacles.

Energy consumption is a significant challenge, especially as supply chains aim to become more sustainable. The blockchains that support smart contracts are highly energy intensive. Bitcoin alone—just one blockchain—consumes more power than Argentia, producing substantial carbon emissions. The data centers powering AI applications are often far from eco-friendly, too.

There are also significant skill gaps around both technologies. Procurement businesses may struggle to find workers who understand these innovations and how to implement and adjust them. Similar issues may hinder buy-in from leaders who don’t know much about or are skeptical about them.

Costs are also an issue. AI and smart contracts may require significant upfront investment, even if they lower expenses over time. That initial price may slow adoption.

There are solutions to these issues. Proof-of-stake blockchains can reduce related carbon footprints by 99% compared to conventional proof-of-work alternatives. Renewable-powered data centers are also becoming more common. 

As these technologies develop, more affordable options are emerging. Similarly, more people will pursue them in the workplace, gaining the necessary skills. Upskilling programs can prepare current workforces for their adoption in the meantime.

AI and Smart Contracts Will Shape the Future of Procurement

While challenges remain, AI procurement paints a promising picture of the future. Smart contracts will take these benefits even further by maximizing automation, transparency and efficiency. As both technologies mature and their obstacles shrink, more organizations will capitalize on them, eventually redefining the industry.

Procurement professionals should get ahead of this trend now. While it may take time for AI and smart contracts to reach their full potential, gaining familiarity with them today will make it easier to implement them tomorrow. Even if businesses don’t feel comfortable investing in them right now, it’s worth researching to prepare for a more tech-driven future.

About the Author

Emily Newton

Emily Newton has eight years of creating logistics and supply chain articles under her belt. She loves helping people stay informed about industry trends. Her work in Supply Chain Connect, Global Trade Magazine and Parcel, showcases her ability to identify newsworthy stories. When Emily isn't writing, she enjoys building lego sets with her husband.

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