Over the last twenty years, procurement organizations have focused on maximizing cost savings through the supplier base. For the most part they have been successful thanks to better tools and processes that drive improvements in efficiency. Now, procurement leaders are looking to find new ways to squeeze more savings from their operations. So where should they be looking next? I believe there is an incredible amount of hidden savings to be found in unaddressed spend. In fact, a study by the Everest Group in 2014 found the savings potential in the long tail spend of organizations could be between 15 to 17%. The following offers guidance on how to effectively manage long tail spend to capitalize on the savings it can deliver.
What is the long tail?
The long tail spend is often described as all spend that is not strategically managed or under management. This means any spend without a corresponding contract frame agreement or work order negotiated by procurement. In organizations that have invested significant effort into strategic category management, the spend under management tends to be around 80% of all expenditures, leaving the long tail spend at 20%.
We find that the remaining 20% that is long tail spend tends to come from roughly 80% of the suppliers. Often this will be fragmented: ad hoc purchases at multiple suppliers, low-value transactions at one-time vendors, non purchase order spend, off contract spend and so on. When all the long tail spend is added together it becomes your biggest overall supplier. This biggest supplier costs you a lot of effort that may not be clearly visible within the organization. Typically the more suppliers you have, the more work and effort is required from within your organization. It can make an enormous difference if you need to maintain 2,500 or 25,000 suppliers.
The benefits of long tail spend management.
By better managing long tail spend, you will significantly reduce the number of transactions and the related costs of operational purchasing within procurement and in other departments such as finance. It will also enable you to minimize the number of internal resources working with tail spend suppliers to further reduce procurement costs. These savings can be significant considering that the administrative cost of each spent Euro can be as high as 35%.
Improving the visibility of these low-value spend suppliers will better enable you to identify opportunities for sourcing savings and supplier consolidation. Also by raising spend under management and managing the long tail spend you will increase contract compliance for further savings. Notably, suppliers are also more generous with increased discounts when they are the only providers for a specific category and some kind of volume of purchases is guaranteed.
Beyond cost savings, handling long tail spend helps to eliminate non compliant suppliers and consolidate larger suppliers which leads to reduced business risk and a reduced risk of fraud across the supply chain. This also increases the chance of your organization being compliant to external legislation such as Sarbanes Oxley (SOX).
The reason why organizations struggle with the long tail
One of the main reasons that purchasing departments struggle with long tail spend management is the poor data visibility caused by factors such as complex supply chains, different IT systems and data sources, and fragmented and disconnected business processes such as sourcing, contract management, and procurement. Also the sheer number of suppliers, items, transactions, and high number of business stakeholders can simply overwhelm some organizations. There are often not enough available resources with the right skills to analyze the problem and set a corrective action plan. Unfortunately, neither strategic category managers nor operational procurement agents have the knowledge or skills to handle the long tail.
In addition, organizations that don’t have clear set policies or well defined processes are more likely to lack effective control. This results in a high percentage of non-compliant purchases often with low value transactions and small volume suppliers.
Finally, there is often a lack of adequate tool support to help the organization analyze and manage the long tail in an efficient manner. A pure manual approach to tail spend management quickly becomes cumbersome and error-prone without the right tool support.
Overcoming these obstacles isn´t an easy task, but the benefits of doing so are estimated by different sources to be between 15-20% through reduced procurement cost, increased efficiency, supplier consolidation, additional sourcing savings, and decreased business risk.
How to tackle long tail spend management.
Coming from somebody who has implemented software tools for the last 20 years, this might sound strange, but there is no one software tool in the world that can manage long tail spend for you. You need to combine manual effort with the right tool.
Most organizations start looking to manage tail spend purely by finding the right tool and equipment without taking the effort to first analyze and consolidate their tail end. A tool on its own is not enough.
The smarter approach to the long tail
Before focusing on the tool, organizations should first analyze their numbers with a proper spend and supplier assessment. This kind of spend analysis exercise will help you understand your current state and will serve as a foundation for a business case for the next step.
The next step is top management and stakeholder alignment. To be successful with a long tail spend management initiative, you will need to get the backing of your C-suite like the CPO and CFO through a solid business case and clear explanation of savings potential.
Bringing in the support of top management will also help with the third step, which is to set-up clear policies and processes to drive the long tail management initiative. This includes compliance policies, preferred vendor lists, no purchase order–no pay policies and the like. You should also introduce processes such as automated procurement with catalog suppliers as well as spot buy and free text orders channeled through a tactical and operational procurement team.
The next step involves having a dedicated team to take care of your long tail spend suppliers. Spot buying and operational free text orders at preferred suppliers will run more efficiently with a dedicated group managing the process. It is also possible to outsource this work to an external team.
Finally, selecting and implementing the right tool is key to a complete transformation of your long tail spend management. Generally, the most important tools include spend analytics tool and an easy-to-use eProcurement system with a good search engine featuring rich content, efficient buying channels and support for spot buy and tactical eSourcing.
It is important to realize that there is no one quick solution to managing long tail spend. If there are no clear policies or processes to guide your organization on what to do and who needs to do it, you will not achieve your goal of having an optimized tail spend. By combining the right tool with the right approach and analysis to manage your long tail, you will stand to benefit from an additional level of savings in unaddressed spend.