The ‘Tail Spend’ challenge: Whats the issue?
The Pareto Rule
Tail spend is traditionally defined by the Pareto Rule: the top 80% of spend comes through the top 20% of suppliers.
The conventional wisdom is that a procurement function should focus it’s time and attention on the top 20% of suppliers. This often leaves the ‘tail’ – typically smaller ‘indirect spend’ suppliers – as a problem.
Defining the issue is key
The challenges that arise when examining ‘tail spend’ vary and defining the precise issue is a key starting point.
Is it one of transactional processing - where maintaining a database containing many suppliers and dealing with invoices from lots of different organisations can be cumbersome?
Is it a supplier management challenge? For example, a problem with a small supplier can cause the same issue as one generated by a large supplier. While easier to prevent and then deal with problems in a consolidated way through Supplier Relationship Management organisations only have capacity for this level of interaction with a few suppliers. Do less suppliers cause less problems?
Or is it cost? Cost pressure applies across all suppliers. Dealing with it and countering with procurement cost reduction is most effectively achieved through the least suppliers with the largest spend. It’s an asymmetrical battle.
4 strategies for addressing tail spend challenges
Strategy 1: Consolidation
Redirect spend away from tail suppliers and consolidate into your preferred suppliers. This will increase spend with your preferred suppliers (allowing you a positive negotiation on their overall spend) and ideally reducing the cost of the redirected spend.
Strategy 2: Prime vendor/distributor
Use one supplier as a prime (or tier one) vendor to sweep up requirements for smaller suppliers. This can be for processing (contract, order, payment) but also for physical supply as a distributor. The lever is to identify a prime vendor/distributor who has more buying power than you in order to leverage improved pricing.
Innovation in this area is key. For example, accessing group buying frameworks is an increasingly effective way of leveraging larger volumes for lower prices.
Strategy 3: Purchase-to-pay optimisation
Ensure the appropriate P2P process is in place for tail spend requirements. For example; low value, recurring spend can be catalogued for ‘self-serve’ orders and paid through a consolidated invoice. Or, ad-hoc, low value transactions can be paid by a Purchasing Card to avoid supplier-set-up and invoice processing – ideal for journals, subscriptions and on-line training materials for example. The three strategies above should be used in combination according to the issue.
Strategy 4: Co-source with a partner
Focus your own resources on the Top 80% and use a partner to address the tail. Address tail spend in this manner – either by supplier or by tail category – working through a process of consolidation, rationalisation, cost reduction and P2P optimization can be hugely effective. Procura call this ‘co-sourcing’ and often a programme can be delivered on a success-based fee structure allowing organisations to address the tail without investment.
Finally, when addressing tail spend, the project should be framed and key metrics identified. The key metrics include the number of suppliers, spend in scope, number of transactions and cost savings. Bear in mind, even after you have finished, the tail is a mathematical construct and is always there!.
Points to consider
- Define the issue and then focus on the solution
- There are three key strategies – use in combination
- Frame and target the project – identify key metrics and implement – there will always be a tail!
- Utilise a partner to address the tail and direct your resources to the Top 20