Managing supplier relationships strategically is more crucial than ever to maintain supply chain flow and keep store shelves stocked. But when a company like Walmart or another Fortune 500 firm finds itself with tens of thousands of suppliers, fostering those relationships and keeping vendor contracts up-to-date is next to impossible through manual work alone.
That's especially true for the so-called "long-tail" suppliers, the majority of a vendor base with contractual agreements that remain too small to warrant the resources required to renegotiate arrangements on products, pricing and payments.
As a result, organizations are missing out on widespread optimization stuck within the collective inefficiencies of individual, smaller contracts.
"My message to the CEOs of Fortune 500 companies is that you have almost $500 million worth of unclaimed value in these long-tail supplier agreements," said Pactum CEO Martin Rand in a recent PYMNTS interview.
Automation in supplier negotiations is key to managing the volume of contracts for such a large, global organization, but it's equally important to maintain a human quality in discussions to preserve the buyer-supplier relationship – and to find value for small suppliers, too.
Neglecting the Long Tail
When the vast majority of such a high volume of suppliers falls into the category of unmanaged tail spend, large corporate buyers will find themselves with unoptimized supply chains that are very likely costing them money.
According to Rand, about 80 percent of vendors for Fortune 500 companies are considered these types of long-tail suppliers. Organizations will establish a contract with these partners when they first come into the fold of their supply chains, and then neglect to revisit those agreements in the future. While it's costly to manually renegotiate thousands of individual agreements, Rand noted, it's similarly expensive to manage them one by one.
He offered the example of copper prices to demonstrate the significant impact of inefficient, outdated vendor contracts. "We look at today's economy in flux. Let's look at commodity prices, like copper," he said. "The price is now 20 percent cheaper than it used to be two months ago. Twenty percent is a big deal. If these input prices change so drastically, and if supply chains are now disrupted, then changes have to be made."
While the largest conglomerates may be able to absorb the costs of failing to address these changes, nobody likes wasted spend. What's more, said Rand, it's just as important for corporates' small suppliers to renegotiate contracts as it is for the buyer.
Balancing the Leverage
Buyer-supplier negotiations are often approached with the corporate buyer coming into the conversation from a position of power, particularly when some of the largest organizations in the world are negotiating with a small vendor.
But it's critical in contract renegotiations for both sides to benefit. This is the "Pareto-optimal" principle of equilibrium that enables one side to gain without forcing the other side to lose, Rand explained.
"That means the agreement is efficient," he said. "However, when humans negotiate deals, or when a deal is struck one time and then never updated later because it's too expensive, those contracts are not Pareto-optimal. Generally, people have a hard time reaching this state."
This can be applied to negotiating the price of goods, payment terms, warehousing, transportation and even data exchange. The latter is a particularly intriguing opportunity to ensure that both buyer and supplier benefit from renegotiations, with larger corporate buyers holding highly valuable data on products to which buyers rarely have access.
"Buyers could share this data and it could be used in product development for a small company to be more efficient and make more money," Rand noted.
Automating the Conversation
The art of negotiation has, for centuries, involved face-to-face conversations, and the introduction of automated technology like artificial intelligence (AI) and chatbots into this dynamic may raise some eyebrows.
According to Rand, Pactum's technology continually learns from past experiences to offer the most effective negotiating strategy without compromising the pursuit of Pareto-optimal agreements. He cited internal research to reflect users' satisfaction with that chatbot, with customers describing the tool as "polite" and a better listener than a human.
"Sometimes big enterprises approach the negotiation from a position of strength," he said. "But the bot can spend time with the small vendor and weigh out all of the possible benefits it can bring."
Automation technology brings further efficiencies through not only automating the contract negotiation process, but also by integrating with ERP systems to actually apply and enforce those new agreements. If supplier payment terms have been lowered from 90 to 45 days, for example, that information is sent to an ERP to automatically begin paying invoices within 45 days.
Major conglomerates are leaving money on the table by failing to address their long-tail vendors and legacy agreements. But in today's market, capturing wasted spend isn't the only priority for businesses large and small. It's also critical to promote stronger business partnerships to ensure that everyone within the supply chain can optimize operations and remain financially healthy.
"This is not really a time to leave inefficiency in contracts," said Rand. "It is especially important now to make sure that both sides take the maximum value out of each contract."