On average, tail spend account for just 5% of company purchases, yet they make up 70% of hidden costs. This imbalance, resulting from many different factors, is often linked to an excessively broad supplier portfolio, which inconspicuously but inevitably inflates administrative costs.
A supplier base spread out across the company
Over the years, the growing needs and requirements of companies and their internal stakeholders have led to supplier databases expanding exponentially. As a result, tail spend now account for an average of 75% of company suppliers.
Depending on the type and size of the organisation, this percentage can amount to hundreds or even thousands of suppliers, often used exclusively for local purchases or a few annual transactions. Furthermore, this figure does not include unscheduled purchases made from unlisted suppliers.
Underestimated management costs
Purchasing from so many different suppliers incurs significant administrative costs, mostly in the following two areas:
- Supplier management costs
Listing a supplier and keeping them in the database is estimated to cost an average of €1000 per supplier per year, depending on the sector.
- Transaction costs
More suppliers mean more transactions. Consequently, companies find themselves processing an increased number of purchase orders and invoices, with the cost of each transaction ranging from €95 for a normal order to €19 for a digital order.
Streamlining the supplier base is therefore essential, as these seemingly trivial hidden costs add up to a considerable amount of money in relation to the number of suppliers and transactions involved.
Reducing the number of suppliers and the resulting administrative costs in order to achieve economies of scale is a well-established strategy among procurement departments. However, in addition to simply saving money, reducing the number of suppliers allows companies to optimise spending, improve team productivity and strengthen strategic partnerships, among other things.