AI in supply chains: Risk or revolution?

In my work as a consultant, I have observed a concerning trend in how organisations approach the integration of AI within their supply chains. Too often, AI functionalities are simply switched on by suppliers without sufficient scrutiny from the businesses that engage them. This raises fundamental questions about the nature of initial contractual agreements, the risk implications of unchecked AI implementation, and the governance structures, if any, that should be in place to manage these evolving capabilities.

At the outset, when companies negotiate contracts with suppliers, the focus tends to be on deliverables, pricing structures, and compliance requirements. AI is rarely, if ever, explicitly accounted for in these agreements. What happens, then, when a supplier decides to enhance its service with AI-powered functionalities? Has the client given implicit permission, or does this represent an overstep of the initial contractual scope? In most cases, businesses only become aware of AI usage after it has been implemented, raising significant concerns about transparency, data governance, and regulatory compliance.

The risk implications are not theoretical. They are operational, financial, legal, and reputational. AI systems, especially those deployed without direct oversight, introduce new layers of liability. If a supplier’s AI functionality makes decisions that result in discriminatory outcomes, erroneous transactions, or data breaches, who bears responsibility? The supplier may argue that their implementation was an enhancement rather than a material change, while the business using the supplier’s services may face direct accountability under various legal frameworks, including GDPR and other emerging AI regulations e.g. EU AI act.

Beyond compliance, there is the issue of systemic risk. When AI is deployed without oversight, organisations relinquish control over the logic governing key decisions. It is no longer simply a matter of outsourcing a service; it becomes an implicit delegation of judgement to an external algorithm. Without a robust governance framework, businesses expose themselves to risks they neither fully understand nor control. The opacity of AI-driven decision-making, coupled with a lack of contractual safeguards, creates vulnerabilities that could be exploited, whether by malicious actors or simply by the unintended consequences of poorly implemented automation.

This is why a deep, structured approach to AI governance is imperative. It is not enough to recognise that AI is beneficial, as few would argue against its potential. The challenge is ensuring that AI is integrated in a way that aligns with corporate risk tolerance, regulatory requirements, and ethical considerations. The assumption that AI can simply be turned on, as though it were an inconsequential feature upgrade, is a fundamental miscalculation. AI is not just another tool. It is an embedded layer of intelligence that transforms the very nature of business operations.

Organisations need to revisit supplier agreements with AI explicitly in mind. Contractual frameworks should specify whether AI functionalities are permitted, what controls must be in place, and how risks should be mitigated. There must be clear stipulations about data ownership, liability in the event of AI-induced failures, and a requirement for transparency in algorithmic decision-making processes. Companies must demand clarity from suppliers on how AI systems operate, what data they use, and what guardrails exist to prevent unintended consequences.

This level of scrutiny is not about stifling innovation but about ensuring that AI deployment does not outpace governance. Regulatory bodies are moving swiftly to establish AI-specific compliance standards, businesses cannot afford to be reactive. They must anticipate the regulatory landscape and align their contractual and operational practices accordingly.

Leadership must take ownership of this issue at the highest levels. AI governance cannot be relegated to technical teams or legal departments in isolation. It requires a multidisciplinary approach that incorporates legal, compliance, technology, and strategic business considerations. Without this, companies risk finding themselves at the mercy of suppliers who, with the best of intentions, implement AI-driven processes that introduce unforeseen complications.

The reality is that AI, when properly managed, offers immense value. However, its adoption must be intentional, structured, and governed. It is not a switch to be flipped at will. It is a strategic shift that requires rigorous oversight, informed decision-making, and a contractual foundation that reflects the complexities of AI-driven operations. Organisations that fail to recognise this reality are not just exposing themselves to risk. They are abdicating control over their own operational destiny.

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