What are the 6 cost reduction techniques for long tail spend?

Cost reduction indirect procurement
Updated on July 5th, 2022
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On average, long tail spend represents 5% of the overall expenses of large companies. This percentage increases to 60% for orders and 75% for suppliers[1]. These figures highlight the need to optimise long tail spend as well as head and mid-tail purchases. So what are the levers for reducing the costs of long tail spend? Manutan offers an effective strategy that targets 6 savings levers: suppliers, product range, transactions, users, contracts and quality.

What are the levers for reducing the cost of long tail spend?

In other words, what are the levers for bringing down costs? To find out, it is highly recommended to conduct an in-depth analysis of the procurement department, the way it is organised as well as the resources it uses: technical solutions, software and tools (ERP[2]/P2P[3], etc.). This should also take into account the needs and constraints of the field. On the basis of this analysis, it is possible to define a savings strategy for long tail spend, focused on the following areas:

  • Reduction of the supplier portfolio;
  • An appropriate product range in line with the identified needs;
  • Digitalisation of transactions;
  • Product access cost reduction;
  • Roll-out of a new contract;
  • Eradication of poor quality.

The aim is not to initiate projects involving all of these levers at the same time, but to design the strategy to be implemented. To do this, it is essential to define acquisition cost reduction targets and to determine indicators for monitoring progress. Here is a real-life example to illustrate the implementation of this approach and to answer the question “How can you reduce the cost of long tail spend?”.

Lever no. 1: Rationalising the supplier portfolio

To reduce the costs of long tail spend associated with the management of each supplier, but more importantly, to reduce the number of orders and the associated costs, it is essential to reduce the number of partners. Replacing several small distributors with a single distributor offering a wide range of products makes it possible to reduce the number of contacts for the same procurement volume while increasing the number of lines per order.

The key indicator is the total number of active suppliers. The secondary indicators are:

  • The number of orders per site;
  • The average purchase value;
  • The change in the number of lines per payment.

Lever no. 2: Defining the most appropriate range of products and services for long tail spend

This stage involves identifying the products and services to be made available to users. The aim of this long tail spend strategy is offering the right range at the right price. This includes:

  • Choosing a broad range or, conversely, a list of defined products and services;
  • Selecting product categories and brands: premium, mid-range, entry-level or private label.

The key performance indicator is the take-up rate of recommended products or services. The aim here is to observe the change in the share of services or goods (material or immaterial) in this range.

Lever no. 3: Making transactions paperless

Digitalisation also significantly reduces the transaction costs of long tail spend (searches, orders and invoices). Indeed, the costs of a standard transaction for long tail spend amount to an average of €95 (£80), whereas for a fully digitalised transaction, the figure can be less than €30 (£25) through e-procurement, for example[4].

Ideally, the assessment of transaction costs for long tail spend is defined with the customer and then validated by their management control. If it is not possible, many studies have been conducted on the subject and can be used to make an estimate.

During this stage of the project, the key performance indicator is the digital order rate (order rate from an e-procurement solution, EDI order rate[5] and invoice digitalisation rate) in order to assess the savings actually made.

Lever no. 4: Adapting to users

The fourth lever for reducing the costs of long tail spend is to reduce the time and effort required for users to actually access the products they have ordered. This frees up their time to focus on higher value-added tasks. This means improving delivery solutions or making products available close to where they are consumed, such as through vending machines.

These delivery processes also reduce storage, transport and reception costs. Moreover, the use of dispensing machines reduces consumption by about 30%[6]!

These benefits are measured in terms of cost reduction associated with the provision of products (in FTE[7]). For example, improving the process of receiving deliveries or travelling to pick up products has an impact on expenditure.

Lever no. 5: Rolling out the contract

It is important that all users are informed about this new contract for long tail spend. The roll-out plan consists primarily of:

  • A plan to visit the most important sites;
  • A campaign of calls to users;
  • A broader information operation (e-mails, leaflets presenting the range and associated services).

The roll-out of the long tail spend contract is monitored through the take-up rate and the achievement of the turnover potential defined for each site.

Lever no. 6: Eradicating poor quality

The costs of long tail spend can also be related to small everyday irritations. For example, a delivery address error in a customer account can lead to a multitude of complaints and product returns if not quickly corrected! To avoid customer dissatisfaction, these risks must be dealt with.

By identifying all the sources of poor quality (damaged or missing products, wrong delivery address or contact person, etc.), it is possible to deal with them effectively and thus improve the level of service. For this lever, the key performance indicators are the service rate and the complaint rate.

Of course, each of these steps is monitored over time to ensure that cost reduction targets for long tail spend are met or, if not, that corrective actions can be implemented. A specific reporting system has been set up to analyse the results of each lever with a follow-up schedule between Manutan and its customer. This can take the form of a monthly telephone review meeting between the Manutan project manager and their contact person, as well as quarterly business reviews with the company’s sales and procurement managers.

[1] Source: Manutan Group

[2] Enterprise Resource Planning, a business management system

[3] Procure-to-Pay, a company’s procurement process

[4] Source: Manutan Group

[5] Electronic data interchange

[6] Source: Manutan Group

[7] Full Time Equivalent; i.e., hourly cost

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