Supplier Negotiation: Time To Begin Automating The Process

Supplier Negotiation is a crucial and strategic function to any business. But the leaders in this function are often challenged by the cumbersome process. The process of supplier negotiation has mostly remained unchanged, and its legacy approach has hardly been critically looked at. As per a?report ?in KPMG, anywhere between 17 percent and 40 percent of the value of the vendor’s contract is not realized due to inefficiency in contract negotiation process. A good amount of a buyer’s time is invested on maintaining transactional relationship with the supplier. Thus spending minimal or no time on important aspects like supplier development and holistic view of supplier’s performance. The report from KPMG also highlights that up to 80 per cent of the supplier management time is exhausted in data management and reporting, leaving less time for portfolio management and strategy development.

Dealing with Large Number of Suppliers

It’s hard to find any data around the number of suppliers a Multi-National Business uses on average. I am quite confident the number is bigger. A?report in Forbes ?suggests that the fast-moving consumer goods company Proctor and Gamble (P&G) has over 75,000 suppliers. Similarly, Walmart deals with 100,000 suppliers and the French oil company TotalEnergies buys from over 150,000.

One can understand that P&G and Walmart are consumer goods companies and the supplier base of consumer goods companies are relatively higher. But TotalEnergy is a Energy and Petroleum company and yet, it deals with approx. 150,000 suppliers. So, I think it would be safe to say that a multinational company with its active presence in more than 120 countries deals with 100,000 suppliers on average.

Automating Supplier Negotiation Process

Human Intelligence, indeed, has distinct benefits over Artificial Intelligence. Strategic negotiation or the negotiation which has far reaching impact must be taken care of by a human being since human understand the cultural difference and can get an instinct or gut feeling. The machines are yet to reach this level.

But the machines have different capabilities which companies can benefit from. For instance, a machine can learn different scenarios and can negotiate with 100 of suppliers at the same time in different time zones in different languages. It is often considered as non-value-added activity to negotiate with tail-end suppliers as the cost of hiring a human being to negotiate with these suppliers will exceed the value a company might get out of it. As a result, most of the companies only focus on the 20 per cent of their suppliers who are strategic in nature.

How Walmart uses Artificial Intelligence to negotiate with suppliers

Walmart has recently deployed an AI-Powered software to negotiate with its tail-end suppliers. This software is developed by Pactum. Martin Rand is the CEO of Pactum. Martin writes in a?blog ,” Our technology employs a chatbot to reach out to suppliers via email to start a negotiation conversation. It leads the interaction, asking the supplier questions and offering options aimed at better understanding the supplier and what matters to them. It then negotiates contract terms that are important to both the company and the supplier, reaching a mutually beneficial agreement.”

Harvard Business Review (HBR) published a detailed?report ?on how Walmart automated its supplier negotiation process. The report reads, “The pilot, which lasted three months, included a variety of stakeholders — 89 suppliers, five buyers, and representatives from Walmart Canada’s finance, treasury, and legal departments — and Pactum, the company that had created the underlying AI technology.”

The report further mentions that Walmart International invited 100 tail-end suppliers to try this solution. Eighty-nine agreed to participate. Walmart was aiming to reach an agreement with at least 20 per cent of the total participating suppliers. But the result was beyond their expectations.

The chatbot was successful in reaching an agreement with 64 per cent of them — well above the target of 20 per cent. The Chatbot took an average of 11 days to close the deal. On average, the chatbot saved Walmart 1.5 per cent on the spend negotiated and an extension of payment terms to an average of 35 days.

The Chief Executive Officer of Pactum writes, “In negotiations, the amount of complex data or the pace of changing information is too fast for humans to comprehend — machines can do a better job. Pactum can reach better deals for both sides compared to humans and provides several advantages.” He further adds, “The (Pactum) chatbot goes through an equivalent of 100 human hours of preparation time, sifting through all historic and forecasted information in internal and external databases for every negotiation. It tracks all negotiations in parallel, learning from all interactions and keeping terms dynamic — meaning the value of terms changes based on how other parties accept or decline them.”

In post-pilot interview with Walmart, 83 per cent of the suppliers described the system as easy to use and liked the ability to make a counter-offer.

Walmart has now extended the solution to its suppliers in the United States, Chile and South Africa. So far, the chatbot has closed deals with 68 per cent of the suppliers approached and generated an average savings of 3 per cent. Now the company is planning to roll it out in Mexico, Central America and China.