Long tail – Great Savings: the 5 untapped benefits of addressing tail spend
The overlooked silent majority
Tail spend comprises 80-90% of all purchased items—primarily low-volume and often one-off or infrequent orders that go out to a wide range of suppliers.
Despite the vast number of items included in tail spend, it accounts for just the bottom 10-20% of a company’s total spend.
The conventional wisdom is that a procurement function should focus its time and attention on the top 20% of suppliers. This often leaves the ‘tail’ – typically smaller ‘indirect spend’ suppliers – as a problem that never gets addressed.
The five benefits:
Our experience is that there are five significant benefits available by addressing the tail.
Our experience with clients demonstrates that savings of between 10% and 15% can be realised through a structured, thorough and robust Tail Spend Management project.
This is driven by redirecting spend to preferred suppliers who provide better terms, putting in place optimum suppliers for the remaining spend and using distributors and group procurement frameworks.
As an example, an organisation with £150m of spend, will have a tail of £30m-£40m. That could be £3m-£4m of savings that could be realised.
TWO: Aggregation to leverage buying power
Intelligent use of distributors and group procurement frameworks, such as ProSource, enable the aggregation of spend, leveraging the buying power of larger entities for spend categories where you have smaller volumes or little negotiating power.
Our ProSource frameworks deliver over 20% savings by harnessing the volume of many.
THREE: Supplier Reduction
Significant supplier reduction is achievable. Redirecting spend into preferred suppliers not only drives improved pricing (and improved terms based on growth) with those suppliers, it also reduces the overall supplier base.
There is an internal cost to managing every supplier. From system set-up to the management of data, suppler qualification requirements, insurance checking to contract management.
In the US, the cost of producing a 1099 form alone has been estimated at $600 alone whilst in Europe consider the time and effort recently put into GDPR compliance.
In our experience up to 30% of tail suppliers can be either redirected to preferred suppliers or consolidated into selected, sourced and optimised suppliers.
FOUR: Consolidation and the value of growth
Consolidation of spend from the tail into preferred suppliers not only delivers savings on each transaction but drives spend growth with those suppliers.
This drives improved relationships, improved service levels and enables buyers to leverage the value of growth to improve terms on the top 80% of spend
FIVE: Purchase-to-Pay optimisation
Finally, a Tail Spend Management project allows for purchase-to-pay processes to be reset – putting in place the optimum processes and directing future spend through the right channel.
This may be through the use of systemised catalogues, P2P front ends for requisitioners, consolidated invoicing, purchase cards or new approaches such as Amazon Business. Resetting the P2P channels and ensuring end-users have the best mechanisms for easy ordering ensures benefits are sustainable.
With the cost of processing an invoice estimated at over 70 pounds/80 dollars an invoice, significant processing efficiencies can be realised on the back of a Tail Spend Management project.
Of course, easier said than done.
Most organisations do not have the capacity to redirect resources to a Tail Spend Management project.
However, using an external expert team from Procura provides a solution to augment an existing function, providing the additional analytics, expert approach and horsepower to reset the tail.
Points to consider:
- Previously untapped benefits in terms of savings, efficiencies and end-user experience are now achievable from the long tail – the 80% of suppliers/20% of spend that never gets addressed.
- It isn’t just savings – there are significant benefits in terms of supplier reduction, supply base consolidation and purchase-to-pay optimization.
- Focus your team on the top 80% spend/20% suppliers – consider a Tail Spend Management project using an external expert such as Procura to address and reset the tail.