It had to happen. Walmart
A team of experts explained that it is often not optimal to engage with what they refer to as “tail-end suppliers.” The cost of hiring more human buyers to negotiate with them would exceed any additional value. However, if these negotiations can be managed with minimal buyer time commitment and rely on cookie-cutter terms that have little negotiation they can end up as profitable new business opportunities worth pursuing.
Walmart solved the problem by using artificial intelligence-powered software that included a text-based interface that negotiates with Walmart suppliers directly on behalf of Walmart. The agreements follow cookie cutter terms and are often not negotiable. The concept was pioneered in Walmart Canada in 2021 and supplier’s feedback was used to better the system.
Initially Walmart began piloting this new supplier management tool with vendors who supplied “goods not for resale.” It then focused on pre-approved suppliers so the need to validate new suppliers would not delay the start of the pilot.
That initial pilot program involved suppliers that sold “goods not for resale” such as fleet services, carts, and other equipment used in retail stores. Here management saw clear opportunities to improve payment terms and secure additional discounts. The company was successful in reaching agreements with 64% of the suppliers, well above the 20% target it had set. Results showed an average turnaround of 11 days, and Walmart gained, on average, 1.5% in savings and an extension of payment terms to an average of 35 days.
After the pilot success described above, the company moved quickly. Walmart decided to go straight to a production pilot focused on business goals. Walmart’s “business owners” – people in charge of budgets and responsible for managing relationships – helped create negotiation use cases and scenarios. Walmart’s buyers provided a list of supplier prospects who (1) conducted enough business to warrant a negotiation and (2) who would welcome a chance to negotiate this way. The legal team then made sure that the Chatbot script used in the negotiations and resulting contract conformed to Walmart’s contracting standards and policy.
According to the company, automated procurement requires precisely defining the boundaries of what the buyer is willing to concede in exchange for what it wants. For example: The AI Chabot needs to know the specific trade-offs the buyer is willing to give for, say, moving from full payment in 10 days after receipt of the invoice to receiving payments 15, 20, 30, 45, or 60 days after receipt of invoice in exchange for improved termination terms and the opportunity for suppliers to expand their business with Walmart.
Successful production pilots have helped Walmart sell the solution to other parts of its business. After the pilot in Canada, deployments in the United States, Chile, and South Africa, as well as Mexico, Central America, and China are imminent. Categories have also been expanded.
One can see the trajectory emerging here. As terms and conditions become more algorithmic, use of AI Chabot and other negotiating tools will mean fewer suppliers and other parts of spending pools will go unmanaged. Just as importantly, procurement professionals will focus less on negotiating agreements and more on building strategic relationships, addressing exceptions, and pursuing continuous improvements.
This report is based on facts published in an article in the Harvard Business Review. It was authored by Remko Van Hoek, Professor of supply chain management at the University of Arkansas’s Sam M. Walton College of Business along with Michael DeWitt, VP of strategic sourcing at Walmart International, Mary Lacity, distinguished professor and director at the Blockchain Center of Excellence at the University of Arkansas’s Sam M. Walton College of Business, and Travis Johnson, senior director of procurement enablement solutions at Walmart International.
POSTSCRIPT: Walmart’s leadership in developing new ways to have a mutually productive working relationship with its numerous suppliers is a great guide for the rest of the industry. Obviously, there is need for legal watchdog oversight to make sure that strict Walmart rules are followed, but the resourceful thinking behind this opens up exciting new possibilities that can redefine buyer-supplier partnerships.