4C’s Robin Agarwal examines the benefits organisations can uncover by taking a closer look at tail spend
Many have discussed Indirect spend tail management and the benefits that it can deliver to companies. However, having worked in Direct materials and services procurement with numerous businesses, we have first-hand experience that Direct tail spend is frequently mismanaged as well.
The reason? Procurement teams typically invest heavily in more visible and high spend areas. This means the final 20 per cent of spend, commonly known as the “tail spend”, remains largely untapped. Depending on the organisation, tail spend is often made up of a complex web of small volumes of materials, sourced via multiple suppliers. These characteristics, coupled with competing priorities, mean buyers often fail to devise a tailored strategy for managing this spend. This results in a gradual accumulation of cost inefficiencies and supply chain risk.
In addition, Direct tail spend is notoriously difficult to keep track of as it expands alongside business growth, without being meticulously analysed. This is further compounded when rationalisation initiatives abide by the 80/20 rule and further ignore tail spend.
Due to nature of Direct spend, it also carries more risk when compared to Indirect tail spend. Spend categories which may be providing distinct competitive advantages to the company, or could expose the brand to significant risk, are also often part of tail spend. For example, 4C analysed the tail spend of a global food manufacturing firm and found number of business critical raw materials in the tail spend. Similarly, we have found that businesses when buying raw materials in small quantities, even from far east countries which have higher risk of slave labour, do so without full supply chain visibility due to smaller spend. This would expose the business to an ethical risk, compounded by the lack of adequate supply chain visibility which is prevalent in tail spend.
An issue worth investigating
When it comes to managing the tail, many businesses assume the cost and resources needed to review the tail spend are not worth the investment. Typically, it is thought that as the spend is small, savings will be quite small as well to spend time. However, on a recent food manufacturing client, where we have delivered Directs tail management programme, has seen savings of up to 50% in several spend areas and with an overall ROI of more than 5:1.
We have found that many businesses, which do decide to go after the tail spend, simply implement e-sourcing or blanket negotiations with suppliers. While these techniques can result in quick wins, they ultimately fail to take advantage of all potential opportunities as there is relatively little volume to leverage.
In addition, asking suppliers for reductions often backfires when the latter look to increase prices at the first opportunity – often leaning on the fact they previously reduced prices when requested. Running price negotiations without credible alternatives, often the case in the tail spend, can also lead to supply risk issues as it can be quite difficult to make supplier changes on short notice.
Putting the tail first
When it comes to the tail spend, it takes a well-considered, holistic approach, which recognises tail as a priority, to deliver sustainable results. However, these programmes are not easy to implement. In much the same way as many procurement teams have historically shunned tail spend, other functions within the business often fail to perceive the added value of such initiatives. These programmes inevitably require executive level buy-in and leadership to be successful.
Key steps for tail management programme:
- Identify objectives and resources: At the start of the process, the objective needs to be clearly defined and the business needs to commit resources. It is important to have a dedicated team for the tail, as if it is treated as add-on work for an existing team, day to day activities will always take priority. Though these initiatives are procurement driven, they will also need appropriate resource from other functions.
- Identify the tail: Instead of just looking at tail suppliers it is important to define the tail at sub-category level to enable proper rationalisation. There are number of ways to do it, but the definition of the tail must be flexible enough to meet defined goals across various spend categories. One way is to consider how often you meet suppliers in each spend category. Often the most neglected spend areas are good place to start. Or, take a more analytical approach and rank each sub-category based on spend vs number of unique materials.
- Identify value levers: To enable sustainable savings with minimum maintenance, focus on value levers that can take out inefficiencies built in supply chain over the years. Some of the key value levers we have seen delivering significant value in the tail, include specification or supplier rationalisation, global sourcing vs local sourcing, MOQ optimisation, specification reviews, competitive tenders or negotiation using market indices.
- Develop an implementation roadmap and execute it: Quantify the savings potential and risk per value levers via market engagement and log them on the savings risk register. This can then be reviewed with a cross functional team to identify costs, timescales and prioritise projects.
- Execute projects and communicate: At every stage of the programme, and even more so when engaging cross functional teams, it is important to maintain good communication with the executive team, highlighting positives as well as escalating challenges that can be addressed on time. As it is tail spend, it is easy to lose track of projects if issues are not managed quickly and efficiently.
A fruitful process
Correctly implemented tail management initiatives deliver not only significant savings, but also benefits to the wider business. Rationalising supply chains at this level helps differentiate between transactional spend and critical spend, resulting in renewed focus and clarity.
It also reduces duplication and complexity by cutting down the number of materials and suppliers involved. Relationships with suppliers in critical and transactional spend areas improve, allowing for more solid and transparent partnerships and longer term value. As a result, procurement, QA and supply chain teams can better manage the supply chain and redeploy resource elsewhere.
Once a solid system is in place and maintenance becomes the only requirement, procurement and wider business will be freed up to focus on other priorities. Headline catching projects, such as supply chain sustainability and risk management are often seen as big areas to focus for procurement leaders. And that’s fine, but don’t forget about tail spend – it’s an untapped well of opportunity.