Manufacturing Compliance: 3 Ways Manufacturers Can Use Contract AI to Mitigate Risk

Manual management of obligations across suppliers, regulatory agencies and distribution channels is time-consuming and labor-intensive work, especially with thousands of non-indexed legacy contracts. Thankfully, AI can help lighten the load.

June 28, 2023 Susan Becker

Trends over the last several years have created a risk and compliance environment for manufacturers like one we’ve never seen before.  

New expectations around environmental and social, and governance (ESG) priorities are adding to the already acute pressure to survive: 50 percent of manufacturing firms fail within their first five years, with 10,000 to 20,000 manufacturing companies falling by the wayside every year. 

The list of risks facing manufacturers is a long one: supply chain disruption, inflation and economic uncertainty, cybersecurity threats, worker shortages, reputational hazards, ESG compliance, and an endlessly shifting regulatory landscape.  

These risks might seem like standalone issues that each require a separate action plan, but in fact there is a common thread across them: contracts. 

Contracts define how manufacturers do business with third parties in a compliant and profitable way.  

In a perfect world, manufacturers would have proactive visibility into all the risks and obligations established in their contracts – with actionable insights into what they need to do to fulfill those obligations so they could avoid penalties for non-compliance. Such visibility would also enable them to identify which contracts need to be updated when regulatory or risk environments change. Contract compliance, in such a world, would become automatic.  

We are well aware that we don’t live in a perfect world, and many manufacturers’ approach to contracts are more imperfect still. Rather, organizations treat contracts and the risks they are meant to manage as stand-alone objects subject to manual management via emails or spreadsheets. 

In this risk environment, it’s crucial for manufacturers to have a centralized view of their contractual agreements with third parties, so they can monitor both their own performance and the performance of their suppliers against regulatory and financial benchmarks.

As a just-released report from IDC noted: “We spoke to a very well-known, large U.S. megacap company recently that informed us it manages its contracts — thousands of them — via a single contract manager and one great, big spreadsheet. No entity should take on such risk in this manner when there are so many solutions available to them.” 

Put another way – rather than managing risk, a manual approach to contract management can actually create risk. 

The need for CLM in obligation management 

In this risk environment, it’s crucial for manufacturers to have a centralized view of their contractual agreements with third parties, so they can monitor both their own performance and the performance of their suppliers against regulatory and financial benchmarks. 

Manual management of obligations across suppliers, regulatory agencies and distribution channels is time-consuming and labor-intensive work, especially with thousands of non-indexed legacy contracts.  

Thankfully, artificial intelligence can help lighten the load. 

While contract obligations are often written in ‘legalese’ that standard technology can’t distinguish from other contract language, AI trained on contracts can scan and extract obligations from across large bodies of contracts. 

AI search can do this work across thousands of agreements in a mere fraction of the time a manual review would take. AI can do in minutes what might take human teams thousands of hours (or, more likely, not complete at all). 

AI search can do this work across thousands of agreements in a mere fraction of the time a manual review would take. AI can do in minutes what might take human teams thousands of hours (or, more likely, not complete at all). 

This is a big deal for risk management: Once obligations are extracted and categorized, they can be proactively managed. Managers can get a view on how many outstanding obligations exist in a relationship or across a category of contracts and take steps to ensure unfulfilled obligations get addressed.  

3 ways to cut risk through AI 

There are a lot of strategies for improving governance and reducing risk, but these three will serve manufacturers well as obligation management becomes more integral to their operations.

  1. Connect contractual commitments to actuals — Contracts are the foundation of commerce, defining your negotiated pricing, obligations, and other commitments. Creating an AI-powered central repository that integrates contract data (pricing, delivery volumes, terms, amendments, etc.) with existing enterprise systems of record (ERP, CPQ, SCM) can identify variances that may need to be addressed.
  1. Leverage AI discovery — Use AI-powered contract management software to review and approve contracts before they are signed to reduce risk and ensure compliance with regulations and company policies. Have a legal or procurement team create attributes to train the AI to identify the areas of concern within your contracts and incorporate automated tools to flag potential issues before they become problems.
  1. Use advanced AI search and trace — Regular audit of contracts helps identify potential compliance issues and ensures contractual obligations are being met. This can include everything from expiration dates to performance metrics to, importantly, amendments around regulatory changes. Legacy pen-and-paper contracts can take advantage of AI by being scanned using the latest optical character recognition (OCR) technology, so they become searchable by critical keywords, regulatory phrases and codes, and even entire clauses.

On top of the many risks manufacturers face from a regulatory and financial standpoint, a major competitive risk arises from not looking at the transformative power of AI. AI is transforming the industry, bringing in new, tech-savvy entrants armed and the latest in advanced technology to challenge incumbent players.

AI-powered contract management software gives emerging and established brands alike critical capabilities that cut across their systems and processes, delivering vastly improved performance in their business relationships.

With AI, risk associated with missed obligations and third-party agreements to be an “x factor” in your organizational success and instead become dials for strategic advantage.

To learn more, and see how Icertis delivers better contract compliance and less risk via contract intelligence to some of the world’s most iconic manufacturers, visit our manufacturing solution page today.

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