Background: AI in Purchasing and Supply Management (PSM) enhances business operations but faces challenges in adoption due to limited research and AI readiness assessment. Although existing research explores AI's potential, the issue of assessing and achieving AI readiness in PSM remains underexamined. Exploring this gap is crucial to understanding how AI can effectively transform procurement processes and improve strategic operations. 

Purpose: This study aims to identify and evaluate the essential capabilities that PSM organizations need to develop for AI readiness, using a dynamic capabilities framework to provide insights for both academia and practitioners. 

Method: Grounded theory is applied for its flexibility and constructivist principles, allowing theories to emerge from the data collected through semi- structured interviews, providing a comprehensive understanding of AI readiness in PSM. The primary data consisted of 13 interviews with AI users, implementers, and developers. 

Conclusion: Identified capabilities needed for successful AI implementation in PSM, include robust technological infrastructure, effective AI governance, and the importance of communication and continuous learning. The study concludes that AI readiness in PSM requires a holistic strategy and dedicated leadership to align technology, strategic goals, and people.