McKinsey: The Power of Generative AI in Procurement

As sourcing leaders look to harness the power of emerging technologies to drive a competitive advantage, generative AI (Gen AI) has the capabilities to have a transformative impact across value chain operations.

But while today’s Chief Procurement Officers (CPOs) are capturing early value from the power of large language models (LLMs), research from McKinsey finds that implementing the technology is not easy.

Despite Gen AI holding almost endless potential within the global business landscape, McKinsey’s research has uncovered plenty of scepticism over its implementation. Its recent report, Making the Leap with Generative AI in Procurement, finds that two-thirds (66%) of CPOs believe Gen AI is still years from generating substantive business results.

Highlighting this, McKinsey suggests that many CPOs question the true impact that Gen AI can deliver, as organisations globally grapple with concerns over AI accuracy and security.

Flipping the script: Making AI a strategic advantage

According to research by Gartner published in January 2024, more than half of supply organisations have plans to implement Gen AI over the next year. With the report finding that just 14% of procurement leaders currently have confidence in their talent’s ability to meet future business needs, McKinsey envisions AI offering myriad digital benefits to implementing AI technology.

AI can help procurement departments to foster greater innovation throughout their products and services. This can involve harnessing Gen AI for market research on new supply market trends, technology disruptions and emerging value chain models.

With greater strategies in place, companies can work to reduce costs and improve operational efficiencies at a much larger scale.

CPOs must evolve to integrate AI

Whilst it is an exciting time for procurement professionals in this regard, the full extent of its impact is yet to be realised. As procurement currently sits at the forefront of technological disruption, the sector still struggles with challenges of efficiency optimisation, risk management and cost management.

However, McKinsey’s report is optimistic about how Gen AI can revolutionise these issues, by being able to retrieve, summarise and extract insights from data sources simultaneously. Within procurement, the technology can quickly be deployed in category strategy and supplier sourcing.

The company’s findings also suggest that Gen AI can enhance internal and external enterprise relationships by aiding conversations with talking points that better reflect company priorities. It suggests that, although chatbots are becoming more useful within business operations, CPOs are finding that they cannot replace relationships within procurement.

Co-authors of the report and McKinsey Partners, Aasheesh Mittal and Jennifer Spaulding Schmidt, state: “To a sceptical, untrained eye, Gen AI applications in procurement may appear niche or gimmicky. In reality, LLMs are trained across multiple knowledge domains, which allows them to handle broad, layered questions and draw implications that lead to good conclusions. 

They continue: “It is one of the key capabilities that procurement organisations need to evolve and strengthen, moving from a pure executing function to a strategic, business-leading function.”

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