Long tail spend optimisation is a little-known issue in companies. Usually, procurement departments manage their head and mid-tail purchases in a structured way, but it is not always the case for long tail spend, which are perceived as non-strategic. However, this type of purchasing accounts for up to 70% of hidden costs in procurement departments. Fortunately, there is a method for optimising the management of long tail spend based on data analysis, a Lean Procurement approach and an agile framework.
According to Pareto’s Law, also known as the 20-80 Law, long tail spend represents 5% of a business’ total expenditure but accounts for 50% of the total number of purchasing categories.
If the Kraljic matrix is applied and combined with the financial risk – which remains relatively low for this category of purchases – with the overall level of risk, long tail spend can then be classified into two sub-categories: simple purchases (which present a low risk) and/or critical purchases (which carry a significant risk).
Two major issues therefore emerge in relation to long tail spend, to which an appropriate strategy should be applied:
- Firstly, it is about understanding the total cost of ownership (TCO) of these purchases. Indeed, up to 70% of hidden costs are incurred in managing long tail spend. These costs are related to an excessive number of supply partners, out-of-process purchases, defective processes, error and return management, etc.
- At the same time, procurement departments need to pay close attention to security, especially when it comes to critical purchases. To this end, they must work with suppliers that can guarantee the quality and origin of products, compliance with standards and regulations, etc.
The Manutan Group has developed a method to support its key clients in long tail spend optimisation. Designed by buyers for other buyers, Savin’side® is based on data analysis, a Lean Procurement approach and an agile methodological framework.
This strategy aims at getting a better handle on the total costs of ownership, and thus improve the management of this type of purchasing, through six optimisation levers.
Because long tail spend accounts for up to 75% of a business’ suppliers, they generate significant administrative costs. These comprise supplier management costs (estimated at an average of €1,000/supplier/year) and transactional costs. This is why it is worth reducing the size of your supplier portfolio by replacing certain suppliers (representing low annual expenditure or covering a local area, for example) with a single distributor that offers a wide range of products.
Internal customers are rarely guided in their long tail spend choices. This usually results in the purchase of high-end products, i.e., high-quality, high-priced products from well-known brands. However, this is not always appropriate when it comes to simple purchases, and it gives rise to direct costs. The solution is therefore to optimise the selection of products by ensuring that they meet the functional needs of internal customers, so as to avoid this phenomenon of “excessive quality”.
When you consider that long tail spend accounts for 60% of the order volume, it seems imperative to optimise the transactional process. To achieve this, procurement departments can start by making the Procure-to-Pay process paperless, from product selection to invoicing. As well as improving efficiency within the company, this strategy generates financial savings and environmental benefits.
A plethora of suppliers and orders results in a large number of deliveries, requiring the mobilisation of various company employees (security, inflows, warehousemen, etc.) without any real added value. To boost everyone’s productivity, procurement departments can improve processes for delivering and making products available to users through various services: personalised or timed deliveries, industrial vending machines, etc.
When procurement policies are not properly adhered to in a company, it leads to direct financial loss and the proliferation of rogue spend. Procurement departments must ensure that the benefits negotiated in the contract with a supply partner are fully utilised across the company’s sites and raise awareness among internal customers if necessary (information, site visits, marketing campaigns, etc.).
Poor quality is scattered throughout the company, making procurement management harder. This is why it is crucial to solve the root causes of identified shortcomings in order to improve the service rate.
While operational efficiency and cost reduction are among the priorities of procurement departments, long tail spend optimisation represents a formidable lever for action. Such a strategy echoes Lean Procurement: continuously tracking down “waste” to create value.
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