“From trivial many to the useful many”
Many procurement organizations rely heavily on the 80/20-rule saying that 20% of their suppliers account for 80 % of the spend and they put their effort accordingly. Hence these organizations do not focus on the bottom 80% of the supplier base, namely the “trivial many”. Likewise, traditional categorization theories focus on strategic suppliers with the highest spend range. However, it is as important to focus on the entire supplier base – not just your key suppliers – in order to gain an efficient supplier categorization. This means that organizations can gain advantages by not just focusing on the vital few, but also on the useful many with the argument that the largest savings may derive from the smallest purchases, namely the Tail Spend.
Many advantages derive from managing Tail Spend
Procurement organizations in general will benefit from managing the entire supplier base including the smallest, ad-hoc purchases in the tail. Managing the tail will enable a more strategic sourcing process and help organizations to become streamlined and cost efficient as it will generate advantages such as increased control, reduced spend and reduced time and total cost of procurement. Consider the following benefits:
- Additional backing units for smaller purchases such as a task force and a Spot Buy Desk will support the procurement function and thus increase control over the supplier base.
- Cash savings can be obtained through better competition processes for smaller purchases and by a higher use of frame agreements (where prices can be negotiated systematically).
- Increased use of automated processes such as e-catalogues will reduce administrative working hours and cycle times and thus contribute in minimizing the total cost of procurement.
- Consolidating smaller suppliers an immediate drop of procurement costs and spend as well as increased control will be obtained.
A three step approach to manage your Tail Spend
One way to manage Tail Spend and gain increased control, reduced spend, and reduced total cost of procurement is to carry out the following three steps:
Step 1 – get to know your supplier base! Analyze your supplier base and its characteristics, dig into division of spend and number of suppliers, average spend per supplier and what purchases that are done from the suppliers. The knowledge is crucial for the following steps. Integral to knowing your supply base is knowing your internal customer base and why they are using these suppliers. Connect these two areas of knowledge.
Step 2 – take immediate (short term) actions for the supplier base. This is done by dividing the suppliers into four segments, call them Top Suppliers, 1st Middle Tail, 2nd Middle Tail and End of Tail, in order to take path to sustainable actions for consistent control. The immediate actions are for example to make sure that the top 20% of the suppliers stand for 80% of spend. This can be done by consolidating the subsequent suppliers into these segments, firstly by giving the suppliers “Top Supplier characteristics” e.g. frame agreements and closer relationships. Also, get rid of redundant purchases and suppliers and make larger purchases per supplier – the end of the Middle Tail and End of Tail should be consolidated and reduced.
Step 3 – Maintain the outcome of short term actions. Implement different tools and processes for the various segments in order to get the ultimate long-term control over the supplier base. From left to right, from Top Suppliers to the End of Tail, actions to consider are to increase level of frame agreements and standardization of requirements, make use of automation such as e-catalogues and a Spot Buy Desk, and don’t forget the yearly phase out of suppliers!
The tools and immediate actions for diverse supplier bases and organizations are of course different, but the concept is the same; don’t forget your smaller purchases and your smallest suppliers and focus on getting control over your Tail Spend!