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How Walmart Leveraged Pactum’s AI-driven Chatbot to Negotiate with Suppliers

by Ant Sh
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Harvard Business Review recently published an article written by Remco Van Hoek, Michael DeWitt, Mary Lacity, and Travis Johnson in which the authors share Walmart’s automation story of successfully deploying AI-based negotiation software with a chatbot to connect with suppliers. In addition, the article also offers four lessons for other companies that may be interested in automating procurement and can apply these lessons to design and implement such a system, as Walmart did. Here is a digest of the story.

CHALLENGE

Walmart, like most large-scale purchasing organizations, cannot engage in focused negotiations with all of its 100,000+ suppliers. As a result, about 20% of its suppliers have signed agreements with terms that are often not discussed. It’s not the best way to deal with these “end-suppliers”. But the cost of hiring more human buyers to negotiate with them will outweigh any added value.

SOLUTION

Walmart solved the problem with AI-powered software that includes a chatbot that negotiates with human suppliers on Walmart’s behalf. Walmart Canada piloted the solution in January 2021 and used supplier feedback to hone the system. Since then, the retail giant has rolled out the solution in three more countries, and Walmart, which operates in other countries, plans to roll out the technology soon.

AUTOMATION DETAILS

Thanks to the development of AI, Walmart began to explore the possibility of automating purchase negotiations for end suppliers, and in 2019 paid its attention to a software product called Pactum AI. The rollout was delayed due to Covid-19, but the initiative was revived in January 2021 for Walmart International.

Because Walmart already had experimented with the software in a sandbox environment, Walmart International moved directly to a small pilot in the company’s Canadian business. 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.

Walmart International estimated that the system would yield a positive ROI if the chatbot could close deals with 20% of the suppliers involved in the pilot. The retailer selected “goods not for resale” — categories such as fleet services, carts, and other equipment used in retail stores — and not products sold to Walmart customers. It decided to focus on suppliers for whom there was accurate data on payment terms and where there was clear opportunity to improve payment terms and secure additional discounts.

Walmart International targeted payment schedules, hoping to negotiate early payment discounts or extended payment terms without discounts. In exchange, Walmart would offer suppliers the option to change Walmart’s right to terminate contracts immediately without cause (known as “termination for convenience”) to providing a 30-, 60-, or 90-day written termination notice. Walmart would also selectively offer suppliers opportunities for growth in assortment and sales volume in exchange for price discounts.

Internal buyers selected the suppliers to target and created training scenarios for Pactum AI’s machine learning algorithm. The scenarios were used to create structured scripts to guide suppliers through negotiations. Suppliers could respond to scenarios at their own pace.

Walmart International invited around 100 tail-end suppliers to try the solution. Eighty-nine agreed to participate. The chatbot was successful in reaching an agreement with 64% of them — well above the 20% target — and with an average negotiation turnaround of 11 days. Walmart gained, on average, 1.5% in savings on the spend negotiated and an extension of payment terms to an average of 35 days.

In post-pilot interviews with suppliers that engaged in successful negotiations, 83% of them described the system as easy to use and liked the ability to make a counteroffer and the time the system gave them to think about the negotiation at their own pace. After the production pilot, Walmart improved the scenarios and scripts and extended the solution to suppliers in the United States, Chile, and South Africa. So far, the chatbot has closed deals with 68% of the suppliers approached and generated an average savings of 3%.

LESSONS

The four lessons to deliver results from automated procurement negotiations, which were mentioned above, are the following:

  • move quickly to a production pilot;
  • start with indirect spend categories with pre-approved suppliers;
  • decide on acceptable negotiation trade-offs;
  • scale by extending geographies, categories, and use cases.

The Source