Unlike head and mid-tail spend, management of long tail spend is less structured. This can be seen in the early stages of the procurement life cycle, right from identifying internal customer needs. Long tail spend is not always part of a specific process or detailed specifications. However, formally specifying your expectations is an essential step towards optimising product selection and making direct savings which should be an important part of your procurement budgeting.
Knowing your real needs for better procurement
Employees rarely have the support available in companies to help them with their long tail spend, such as specifications, for example. Because of this, they choose their products freely, like they would for their personal purchases, influenced by their consumer habits, what they feel like, their personal beliefs, etc.
In most cases, this means internal customers buy high-end products, i.e., high-quality products from a brand with a certain reputation, at a high price. When it comes to long tail spend, companies go for top-of-the-range products in over a third of cases. Depending on what the product is used for, this may be justified to get a warranty or to guarantee the lifespan of a product and service, for example. However, the other levels in the range (entry-level, mid-range and private label), which are more economical and/or offer better value for money, are sometimes a more fitting choice.
Finally, this propensity to buy high-end products is part of a phenomenon that is almost as invisible as it is costly, a phenomenon called over-quality. If you want to get rid of this bad habit, you have to analyse and formally specify what internal customers really want. This means you can fit the range level to the functional need, without any cognitive bias, and choose a product of the right quality at the right market price.
Analysis of the different range levels
There are generally three main range levels: entry-level, mid-range and high-end. Each is positioned according to its own characteristics in terms of price and quality:
- High-end: high-quality, high-priced products, often with many features.
- Mid-range: products that are good value for money and sell on average for 10% less than high-end items.
- Entry-level: products that meet basic primary needs, selling on average for 20% less than high-end items.
Alongside these three different range levels, there are also private label products. These can be considered as real alternatives to the high-end brands because they are often products of equivalent quality but whose sales price is on average 15% lower. These price advantages are achieved through the major reduction in marketing costs compared to other brands.
These price differences, combined with the large volume of transactions represented by long tail spend, underline the importance of optimising which products you select so you can achieve substantial savings for your business.
Optimise your product selection by using partnerships
A very effective strategy with a swift return on investment already exists to counter this phenomenon of over-quality and reduce the costs generated by this widespread problem. This consists of optimising the selection and consumption of products by purchasing through a third party. Because procurement departments often have neither the time nor the resources to initiate this approach themselves, they often choose to outsource this service to a partner supplier.
Backed by their product expertise and extremely broad offer in terms of long tail spend, this partner supplier can then:
- Recommend a list of products that fit the real needs of employees based on what they will be used for.
- Implement the necessary action plans to help employees choose wisely using tools that are both informative and educational, such as marketing campaigns (email campaigns), automatic suggestions of alternative products at a lower cost (down-selling), etc.
- Send information about actual and potential savings to raise awareness and emphasise the profitability of this approach to the various people involved.
The strategy of pairing leadership from the procurement department with the expertise of the partner supplier enables internal customers to select products better, fosters sensible consumption and, thus, reduces expenses. Especially since these savings show up directly in the company's income statement meaning the budget gained can be reallocated to structuring development projects.
Last but not least, this approach paves the way for the overall optimisation of long tail spend. Such a strategy, based on reducing waste in an approach specific to the Lean philosophy, can be rolled out for all costs throughout the production life cycle by using the TCO approach. After having rationalised their supplier portfolio and optimised their product selection, companies would also find it very beneficial to accelerate their conversion to paperless transactions or to improve their roll-out of framework agreements with their suppliers.
- Download our white paper ‘Optimise your product selection and consumption’
 Manutan Group, internal data