Procurement in the Age of Automation

Executives are often skeptical about automating procurement processes, particularly when they involve negotiations, but automated negotiation tools offer considerable value for all stakeholders and can be used effectively throughout many businesses.

Over the past three years, we have studied modern automated procurement practices at dozens of organizations. We studied technologies that have been around for a while but not widely adopted, such as e-auction technology, as well as newer technologies, such as AI chatbots. Companies in our study that had automated procurement negotiations consistently saved money compared with those engaged in traditional person-to-person negotiations and improved supply chain resiliency by identifying more qualified suppliers. Automated negotiations also increased buyer productivity, allowing buyers to spend less time and energy on tasks that are now handled by software. Suppliers benefited from clarity on how they would be assessed, shorter sales cycles, real-time feedback on their current standing, and confidence that they would be treated fairly, even in situations that involved entrenched incumbent suppliers.

However, implementing a new procurement model and a different approach to relationships isn’t easy. Stakeholders often have legitimate concerns. Business unit heads paying for goods and services worry that automated negotiations will land them the cheapest suppliers (chosen based on costs only), leaving them to deal with shoddy quality, inferior services, and broken supplier relationships. Buyers often reject automation tools because they view negotiations as their specialty and worry about being marginalized or even replaced. Suppliers want opportunities to differentiate themselves on more than just price; nonincumbent suppliers often suspect that buyers use automated negotiations merely to pressure incumbents to lower their prices and thus fear that they do not have a legitimate chance of winning the business.

In this article, we detail the substantial benefits organizations have derived from automated negotiations, what it takes to persuade stakeholders to use the technology, and how to incorporate automation into your procurement processes.

Reaping the Benefits of Automated Negotiations

Both large and midsize companies in our study achieved notable savings with automated negotiations. Danish global shipping company Maersk uses various automated negotiations for $1 billion in annual spending and has saved 7% to 8% during the past few years compared with manual negotiations. Walmart International automated negotiations for over $7 billion worth of spending, gaining 5% or more in additional value compared with traditional negotiations. Google has seen good results from its large-scale e-auction program and has embedded the technology into its procurement toolkit and processes.

Smaller companies have also generated savings. Walker’s Shortbread, a family-owned baked-goods manufacturer in Scotland, buys 80 million British pounds’ ($105 million) worth of ingredients and packaging materials each year. It used automated negotiations for 90% of its spending on raw ingredients in the first half of 2023, saving between 1.5% and 7%, depending on the category. Mexico-based Grupo Herdez, another family-owned food-product manufacturer, has been using e-auctions for a fraction of its annual purchase of raw materials, saving around 8% on items like spices and seeds. The company is planning to expand e-auctions to other procurement categories this year.

Walmart, Maersk, and Google have scaled automated negotiations across procurement categories as varied as marketing media, food for vessel crews, transportation services, general contractor services, e-commerce small-parcel delivery, supply chain equipment, and even marketing agency services. Through June 2023, Maersk had conducted over 10,000 e-auctions. In 2022, Walmart applied e-auctions to 65% of its total indirect spending. While the number of auctions Walker’s Shortbread conducts is minuscule compared with Maersk’s or Walmart’s, its default procurement option is now e-auctions.

Automating negotiations dramatically increases the number of suppliers and negotiation rounds that a company can include while significantly decreasing the amount of time the process takes. In a wide range of e-auctions, Walmart had up to 150 suppliers participating simultaneously, conducting multiple rounds of negotiations in about two hours. “It would take a buyer months to complete a negotiation like that in person,” said Michael DeWitt, vice president for strategic sourcing at Walmart.

Such efficiency benefits companies of all sizes. “It’s the speed of e-auction execution that drives value,” said Kees Bressers, head of procurement at Walker’s Shortbread.

Companies that have scaled their automated negotiations have matched the procurement strategy for a particular spending category and market conditions with the best automation processes and tools. (See “How Automated Negotiations Work.”) They work to win over members of the three stakeholder groups — business unit heads, buyers, and suppliers — by promoting the benefits each will gain.

• Business unit heads get access to an expanded base of qualified suppliers at the best price. They continue to define requirements, desired terms and conditions, and budgets, so their roles do not change. However, they must accept that their favorite incumbent suppliers might be replaced.
• Buyers aren’t eliminated; rather, their responsibilities expand, and they use their expertise more strategically. They will consider more procurement options, formalize business unit heads’ needs into templates or scorecards, find more qualified suppliers, and leverage new automation tools. Instead of having face-to-face negotiations with suppliers, buyers organize and qualify suppliers to participate in automated negotiation events.
• Suppliers will need to be trained in the new automated tools and processes. They benefit from rules that increase fairness, real-time feedback on the competitiveness of their bids, and a reduced administrative burden. Compared with the experience of face-to-face negotiations with buyers, suppliers spend more time planning for automation events but much less time negotiating, reducing their overall sales cycles.

By studying companies that have successfully transitioned to automated negotiations, we’ve identified six key practices to help leaders overcome stakeholder resistance and deliver value.

1. Mandate consideration, not use. While executives might be tempted to mandate adoption of automated procurement, it’s generally a poor way to get buy-in from business unit heads and buyers. Instead, executives of large procurement organizations might mandate that buyers consider participating in automated negotiations. This practice allows the buyers to use their subject-matter expertise and relationships with business unit heads to identify the best automation opportunities, which helps with stakeholder buy-in and optimizes the effectiveness of automations.

Times were tough for the shipping industry in 2009, so Maersk saw cost cutting as crucial to ensuring its competitiveness in the market. The chief procurement officer (CPO) at the time mandated that buyers consider adopting e-auctions and set minimum yearly targets for each buyer as part of their annual performance evaluation. The CPO recognized that there could be valid reasons for not using e-auctions, such as an insufficient number of bidders, so the business unit heads and buyers selected which deals were best suited for automated negotiations to meet the targets.

Like Maersk, Walmart requires that all buyers consider automating all negotiations. Initially, the procurement leaders did road shows with business unit heads and buyers to communicate the potential value and make it clear that buyers could opt out by documenting their rationales.

“By making auctions the preferred default, it forces a better procurement strategy,” said Walmart’s DeWitt. “It encourages buyers to think outside of the box and to look for more suppliers, which in the end benefits the business whether they do an auction or not.”

Executives at companies with smaller procurement operations might find a mandate unnecessary. Walker’s Shortbread, for instance, has only five full-time procurement specialists for the entire company, and they all work in the same office, so Bressers was able to discuss the strategy with them directly. That approach helped him gain buy-in on digital procurement at a company that had been managing the process with telephone calls and emails for decades.

Similarly, Grupo Herdez has not mandated e-auction consideration or use. The economic crisis caused by the COVID-19 pandemic made cost rationalization a requirement for survival. The procurement team communicated the necessity of using automated negotiations to drive down costs to business unit owners, buyers, and suppliers. Business unit owners and suppliers took the most convincing because the company had used some of the same suppliers for 40 years or more. To get incumbent suppliers to agree to participate in e-auctions, Grupo Herdez’s procurement managers went to the suppliers’ senior leaders to explain the economic need for competition to cut costs. “Even though many of them have more power in the relationship because they are larger than us, they understand and accept our need,” said Felipe Díaz Mojica, manager of strategic supply.

2. Make success visible. While mandating e-auction consideration helps global businesses get started, making early successes visible across the company can generate excitement among business unit heads and buyers — especially when leaders credit the buyers for their role. Google made success visible in staff newsletters and offered employees incentives based on the number of events they conducted through automated negotiations.

In the early stages of Maersk’s automation journey, the CPO broadcast live negotiations on big screens and celebrated the business unit heads and buyers who led the e-auctions. Since every e-auction was generating double-digit savings, the successes broke through stakeholder complacency. “The ‘push’ strategies for automated negotiations soon evolved into demand ‘pulls,’ ” said Nikolaj Jessen-Klixbüll, Maersk’s director of procurement.

At Walmart, business unit heads from one country were particularly skeptical about the value of automated negotiations, so procurement leaders invited them to watch a live auction on a big screen in an auditorium. DeWitt recalled that the nonbelievers initially sat in the back with their arms crossed.

“Nobody looked happy,” he said. “Then the auction started, and prices started to drop. It was wildly competitive, and you could see the mood in the room change. People started to smile. By the end, they were literally giving high fives to each other and to us. After that, they became our best champions.”

Walmart presented monthly awards recognizing the buyers who were using automated negotiations for new spending categories, for large-volume events, or in new geographies. One purpose of the awards was to signal to the entire company that while software enables automated negotiations, it’s the buyers who run them.

At Walker’s Shortbread, business unit heads needed to see how suppliers would submit bids before they sanctioned the new procurement model. “Business owners were nervous,” said Bressers. “We are a 125-year-old company where deals were done with handshakes and a purchase order.” He won them over by demonstrating an e-auction in a sandbox environment before conducting one live. He then invited key business unit heads and the procurement team to the first couple of live auctions, which were displayed on a large screen. After observing the bidding process, business leaders recognized that the process was fair and were very pleased with the lower prices.

These early successes happened only because the companies planned automation events carefully, including vetting the suppliers.

3. Prequalify suppliers. Procurement teams should recruit and preapprove suppliers before automated negotiation events. This practice ensures that only capable suppliers can be awarded the business. Procurement teams may also need to collect initial proposals to increase the pool of qualified suppliers.

Maersk’s buyers work with business unit heads to identify their needs. The requirements are converted into supplier scores that are used to prequalify suppliers against minimum requirements and rank them in terms of their comparative position before negotiations start. A supplier with a lower carbon footprint, for example, would be favored over an equivalent supplier with a higher carbon footprint.1

“For this to be a success, business owners specify their prerequisites,” said Jessen-Klixbüll. “They know we’re not going to invite any suppliers to participate if the business doesn’t trust that the supplier can deliver the service.”

Before an e-auction, Maersk uses automated dynamic requests for quotes (RFQs) if there are limited suppliers in the market or when there are large differences between suppliers’ prices. The dynamic RFQ process aims to reduce the pricing gap and qualify more suppliers for e-auctions. Maersk also uses this process to negotiate deals with a single supplier when no other viable suppliers exist in the market.

Business unit heads and buyers agree to a target price based on market assessment, needs, and budgets. During the event, Maersk’s software displays a blank line-item price sheet without revealing the company’s target prices. After a supplier submits its proposed price, the dynamic RFQ system offers automatic feedback on the competitiveness of the supplier’s offer, using a traffic-light metaphor: Green indicates that the bid is competitive, amber indicates that the bid is close to competitive, and red indicates that the bid is not competitive.

Unlike an e-auction with a short time limit, dynamic RFQ events stay open for a few days so that suppliers have time to work with subsuppliers on further discounts and then enter a new, more competitive bid.

Walmart uses a scorecard to assess business unit heads’ weighted requirements for quality, service, security, sustainability, costs, and other criteria. Suppliers are prequalified and assigned an initial ranking based on their scorecard. The scorecard is embedded in the interactive bidding software, so suppliers can see where they rank. If business unit heads heavily weigh costs, a supplier will climb in the ranking by bidding a lower price. If nonprice factors are heavily weighted, lowering the price will not improve the supplier’s ranking by much.

“It requires prework to get the business and buyer stakeholders to develop the scorecards,” said Bayan A. Hariri Sr., director of procurement transformation and center of excellence (COE) at Walmart. “But it makes it so much easier to award the supplier when the event is done.”

Before automated negotiations were adopted, buyers from Walker’s Shortbread contacted incumbent suppliers and one or two other suppliers to determine market prices and then used that information to renegotiate prices with the incumbent. Now, with automated negotiations implemented, buyers first invite suppliers to respond to RFQs to determine the suppliers’ capabilities and get a sense of current market prices. Walker’s Shortbread then uses this information to prequalify suppliers for e-auctions. Incumbents now compete for the business. The number of qualified suppliers has doubled for some procurement categories, increasing competition.

4. Treat nonincumbent suppliers fairly. The procurement team must communicate the value, process, and award criteria to suppliers before an automated negotiation begins. “It is important to communicate to suppliers that, with an e-auction, suppliers get much better and more real-time visibility into their position in the tender,” said Lily Han, manager of global procurement at Google. “They also get very direct control of their competitive position; it is much more in their hands.” At the same time, suppliers need to be assured that the other suppliers will not know who is competing in the event, said Grupo Herdez’s Díaz Mojica.

As most procurement professionals will attest, business unit heads and buyers prefer incumbent suppliers because change creates more work and potential operational risks. Companies should adhere to a strict policy that the supplier that wins the negotiation should be awarded the business. There should be no negotiations after the event; incumbent suppliers should not be able to overturn the results of automated negotiations with offers of big discounts afterward. Maersk, Walmart, and Walker’s Shortbread adhere to this golden rule. Walker’s Shortbread selects the winner based on a weighted average of technical and cost criteria.

To increase fairness and avoid misunderstandings about process and purpose, Walmart also provides every supplier with personalized training before they participate in automated negotiations. Buyers explain the auction design and award criteria and ensure that suppliers understand how to use the technology.

Supplier feedback on the training has been positive, but a better indicator of supplier value is repeat participation, according to DeWitt: “Suppliers come back again and again.”

5. Unleash the power of AI to improve deals with tail-end suppliers. Normally, procurement organizations negotiate only with their major suppliers, which typically represent 20% of a company’s suppliers but 80% of its procurement budget. Buyers generally offer tail-end suppliers cookie-cutter deals that are nonnegotiable. Recently, however, companies like Walmart, Maersk, and others have found ways to improve deals with tail-end suppliers using AI-powered chatbots.

Like e-auction technology, an AI chatbot can run 2,000 negotiations simultaneously, 24-7, while allowing suppliers time for bid preparation if needed. “The ability to take on a massive amount of negotiations simultaneously and to be able to scale that across a number of scenarios is of incredible value,” said Jessen-Klixbüll.

Scaling the chatbots has increased productivity for both Maersk and Walmart because the software learns from every negotiation, reducing the setup time for new procurement categories.

When using AI-powered chatbots, business unit heads and buyers start by identifying the suppliers to approach and defining acceptable trade-offs that will become part of the programming. For example, business unit heads might prefer a price discount in exchange for paying the supplier earlier. Or they may favor offering suppliers a 60-day written termination notice rather than a termination-for-convenience clause, or want to offer the supplier opportunities for growth by increasing their product mix and sales volumes.

Unlike the many AI tools that produce probabilistic outcomes, AI-driven automated procurement tools produce deterministic outcomes, thus eliminating the possibility of surprise results. Once the tools are deployed, the buyer steps out of the process and the chatbot presents alternatives to a human representing the supplier.

Maersk began using an AI-powered chatbot predominantly for inland transportation, where volume and traffic are too limited to justify a full-blown auction. Maersk pre-awards a supplier for a specific region, and when the supplier is needed, the AI chatbot leads the negotiation.

Walmart first used its AI chatbot for contract renegotiations with tail-end suppliers in one country and has since expanded to midtier suppliers and multiple countries. Its average savings range from 7% to 10%. In return, suppliers have gained better termination conditions, early payments, and/or growth opportunities.

Most tail-end suppliers welcomed the opportunity to actively negotiate with Walmart for the first time. In follow-up surveys, 67% of suppliers said that they found the system easy to use and 83% liked the ability to counteroffer.2

Smaller companies also can gain benefits from AI chatbots. Genuine Cable Group (GCG), a U.S. company with 1,200 employees, is currently training its chatbot on different scenarios, with plans to launch it in the fourth quarter of 2023. GCG has tens of thousands of suppliers, with some deals as small as $10,000 in spending per year. The chatbot will allow GCG to engage with more suppliers than it had been able to in the past, according to CEO Steve Maucieri. The project is low risk because the software provider offers a gain-sharing model in which its fees are paid from the savings generated. Maucieri also anticipates a future in which his many customers will use AI-powered chatbots to negotiate deals with the company.

6. Create a formal support structure. Formal support structures, such as COEs, can help to scale automated negotiations across geographies, business units, and spending categories.

Maersk came to realize that if it wanted to embed mature procurement processes across the globe, it needed to have procurement teams located closer to its businesses. It created a global COE with regional support representatives. Teams in Panama City, Panama; Charlotte, N.C.; Cape Town, South Africa; Rotterdam, The Netherlands; Dubai, United Arab Emirates; and Shanghai support Latin America, North America, Africa, Europe, the Middle East, and Asia, respectively.

The COE representatives don’t take negotiations away from buyers. Instead, they provide tool expertise and support buyers’ efforts to engage business stakeholders, consider negotiation types, and design automated negotiations using templates. The COE also focuses on supplier experience so that the automated negotiations ease suppliers’ burdens too.

“We don’t want to make the negotiation too complex, difficult to use, or bureaucratic, because buyers and suppliers will eventually walk away,” said Jessen-Klixbüll.

Walmart also has a COE with a dedicated team of super users who support buyers and suppliers. Walmart’s procurement leadership views the maturation of the company’s procurement strategy and capability as one of the biggest benefits of automating negotiations. The COE continually updates its templates to guide buyers to the optimal sourcing approach. “We always position automated negotiations as a strategy that enhances the negotiation as part of the sourcing process, and not as a replacement of the sourcing process itself,” DeWitt said.

For both Maersk and Walmart, buyer and supplier training is ongoing, given that new employees and suppliers are constantly onboarding and automation options and negotiation types are evolving.

Smaller companies can engage the services of an outsourcing provider to create formal structures. Walker’s Shortbread, for example, hired an e-auction software provider to manage the infrastructure and e-auctions.

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Ultimately, automating negotiations is not about the technologies; it’s about enabling buyers to be more efficient and effective by focusing on procurement strategy. Suppliers benefit by replacing high-pressure person-to-person negotiations with clearly defined automated negotiation events, and sales cycles no longer languish. Business unit heads benefit from measurable savings and from expanded pools of qualified suppliers. To capture these benefits, executives should focus less on technology and more on effective procurement strategy, deployment, and change management. The good news is that the practices we’ve described are highly transferable across companies and industries and have the potential to benefit many.