Risk Management in the Age of AI: Understanding the Limitations of Modern Technology

November 15, 2024

In a world where technology is king, artificial intelligence (AI) has emerged as a powerful tool for managing risks and streamlining supplier and contractor relationships. However, as organisations increasingly rely on AI-driven solutions, it’s crucial to examine both the benefits and limitations of this technology, especially in the critical domains of risk management and supply chain operations.

What is Artificial Intelligence (AI)?

Artificial Intelligence refers to computer systems or machines that can perform tasks which usually require human intelligence, such as visual perception, speech recognition, decision-making, and language translation.

In recent years, AI has become increasingly prominent, especially in new software systems and technologies. AI can be an extremely useful tool as it can save time, reduce the risk of human error and streamline business operations by cutting out administrative work.

In the realm of risk and supplier management, AI can be used to analyse vast amounts of data, predict potential issues, and automate routine processes.

What is the significance of AI in risk management?

AI has revolutionised risk management practices across many different industries. For example, in facilities management, machine learning (ML) is often used to monitor the efficiency and quality of equipment across buildings. Machine learning is a subset of AI and has been used for many different purposes in various businesses and organisations.

When it comes to ensuring compliance and meeting regulatory standards, AI can be a beneficial tool in identifying potential risks and putting measures in place to effectively mitigate them. Machine learning algorithms can now process enormous datasets to identify patterns and anomalies that might indicate potential risks. This capability allows organisations to:

Reduce the risk of manual error.
Ensure continuous improvement in risk management processes.
Identify potential compliance issues before they escalate

By automating processes and driving innovation through AI, risk management can help organisations save time and streamline operations.

How can AI support supplier management?

Effective supplier and contractor management requires a thorough and detailed vetting process. Finding compliant suppliers with the right skills and qualifications can be challenging.

But it’s vital for protecting an organisation’s brand reputation and controlling quality across the board. It’s all about looking at the evidence and assessing which suppliers and contractors would be the best fit.

When it comes to supplier management, real-time data is the key to success. Businesses need to be able to analyse supplier insurances, qualifications and memberships in order to make an informed decision about who to work with.

So, as you can imagine, AI can be a useful tool for going through supplier and contractor data. AI is transforming supplier management processes by:

Identifying non-compliant suppliers and contractors.
Collating the latest supplier and contractor data.
Tracking supplier and contractor performance over time.

Although AI sounds like an ideal solution in supplier management, there are still many limitations and a need for the human touch.

The human element: why do we still need people?

While AI offers impressive capabilities, it’s essential to recognise that human expertise remains irreplaceable in risk and supplier management. Technology can make our working lives easier, but maintaining the human touch is crucial – especially when it comes to mitigating risk. Here’s why:

Contextual Understanding

AI systems excel at processing data but often lack the nuanced understanding of complex business environments that humans possess. A seasoned risk manager can interpret AI-generated insights within the broader context of the organisation’s goals and market conditions.

In the same way, a procurement director can better understand which suppliers and contractors would work best for their business. Although they need the data regarding supplier and contractor insurances, human judgement is still required to align company values and make the final decision.

Ethical Considerations

AI algorithms make decisions based on data patterns, but they can’t make ethical judgments. Human oversight is essential in deciding which suppliers and contractors to work with and ensuring they align with the company’s ethical standards.

Relationship Management

While AI can analyse supplier performance metrics, it can’t build and maintain the personal relationships that are often crucial in effective supplier management. Trust, negotiation, and conflict resolution still require the human touch.

Ultimately, even though AI can gather data, you still need people to analyse that data and make an informed human decision.

What are the limitations of AI?

Despite its potential, AI does have many limitations when it comes to addressing risk and supplier management challenges:

Data Quality Issues

Unfortunately, AI systems are only as good as the data they’re trained on. Inaccurate or biased data can lead to flawed analyses and poor decisions. When choosing suppliers and contractors, having accurate and up-to-date information is critical to the decision-making process. Not to mention, effective risk management also depends on real-time data.

Lack of Common Sense

Although AI systems are often trained by humans, they still don’t possess human understanding and common sense. Despite being able to track data patterns, they do not have human awareness, meaning they cannot be left to make the final decision when it comes to supplier procurement.

Inability to Handle Unprecedented Situations

AI excels at identifying patterns in historical data but may struggle with unprecedented events or rapidly changing circumstances, such as global pandemics. The world of risk management and supplier procurement is constantly changing with new legislation, higher expectations and evolving regulatory standards.

AI systems may be intelligent, but they cannot predict or understand the complexities of unprecedented situations. As AI becomes more prevalent in the modern world of business, there is a growing concern about overreliance on these technologies. Organisations must strike a balance between leveraging AI’s capabilities and maintaining critical human judgment and oversight.

Supplier Management Software: A Reliable Alternative

While AI offers exciting possibilities, purpose-built supplier management software presents a more reliable and customisable solution for many organisations. These platforms offer:

Customisation

Unlike generic AI solutions, supplier management software can be tailored to an organisation’s specific needs and processes. That’s why we designed our supplier management software, Prosure360, to provide a level of customisation unlike any other platform. With Prosure360, we wanted to be able to offer the standard verifications, but also provide questions and assessments tailored to each client.

Prosure360 also allows you to set bespoke questions with our pre-qualified assessment. This gives you the background knowledge needed to make an informed choice about the suppliers and contractors work with.

Transparency

These systems provide clear audit trails and decision-making processes, crucial for compliance and risk management. With Prosure360, you can gain access to real-time data which gives you total transparency of your suppliers’ insurances, professional memberships, and financial status.

Partnered with Red Flag Alert, we give the service providers a financial risk score of gold, silver, or bronze. This system ensures you can track your service providers’ performance and make an informed choice about whether to work with them.

User-Friendly Interface

These platforms are designed with end-users in mind, offering intuitive interfaces that don’t require extensive technical expertise. Our supply chain management platform is intuitive and easy-to-use, meaning there is no need for complex training.

To ensure accuracy, suppliers and contractors are required to upload accurate data to the system, and the platform ensures it comes from a viable source.

As we navigate the age of AI, it’s crucial to approach risk and supplier management with a balanced perspective. Organisations must critically evaluate their use of AI, ensuring it aligns with their strategic goals and risk appetite. At the same time, investing in robust supplier management software can provide the benefits of advanced technology without the potential pitfalls of over-reliance on AI.

Ultimately, the most effective approach combines cutting-edge technology with human insight, leveraging the strengths of both to create a comprehensive and resilient risk and supplier management strategy.

Unlike others and with our incredible tech team, we built Prosure360 ourselves. As owners of this intelligent software, we’re able to take on client feedback and put it into action, always improving and evolving our software.

With full control of your supply chain, Prosure360 helps you drive efficiencies and streamline operational processes.

Step into the future today and book a demo with Prosure360 today!

November 15, 2024

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Arming you with understanding

Risk Management in the Age of AI: Understanding the Limitations of Modern Technology

What is Artificial Intelligence (AI)?

What is the significance of AI in risk management?

How can AI support supplier management?