After structuring the management of their head and mid-tail spend, many organisations wish to bring their long tail spend under control. Indeed, this procurement category accounts for the majority of hidden costs and therefore represents a significant source of savings for buyers. This case study focuses on a large company in the agri-food industry which was guided in optimising its long tail spend. By activating three key procurement levers simultaneously, the company achieved €67,8121 in cost savings.
Savin’side®: A proven methodology
The Manutan Group has developed a methodology to guide large companies in optimising their long tail spend. Focused on cost reduction, this approach is based on analysing consumption data, procurement processes and the company’s line of business.
As part of this audit, six strategic procurement value levers for optimising procurement are reviewed:
· Supplier rationalisation;
· Optimisation of product consumption;
· Digitalisation of transactions;
· Optimisation of logistics;
· Deployment of framework agreements;
· Quality management.
Once this is mapping done, we can define and deploy a tailored, collaborative action plan with the company’s lead buyer. When activated correctly, these key levers are tools that enable organisations to reduce costs, gain efficiency and contribute to their CSR (Corporate Social Responsibility) strategy.
The case of a large agri-food company
We supported this company based on one year’s consumption data. Thanks to our Savin’side® methodology, we identified three main procurement optimisation levers to activate.
Procurement optimisation lever no. 1: Supplier rationalisation
First, we began by analysing the type of long tail spend products consumed according to the company’s procurement classification system, in this case the UNSPSC. By cross-referencing this information with other data relating to suppliers (such as turnover, order recurrence, etc.), a precise mapping of the supplier portfolio was created.
We identified 10 long tail spend categories that the company under-consumed or did not consume at all compared to other players in the same market. This means it was sourcing other suppliers to meet its needs in these categories while we had the necessary range of goods and services.
Following this initial analysis of the product categories, the company identified suppliers that were non-strategic according to its procurement strategy, and therefore substitutable across the 10 targeted spending categories. In total, this involves 16 suppliers that we were able to substitute. Since the supplier management cost for each one is estimated at €1,0002 per year per supplier, the company achieved €16,0003 in savings as early as the first year.
Procurement optimisation lever no. 2: Optimisation of product consumption
We then analysed the long tail spend product ranges consumed by the company. We carefully studied the product characteristics to offer the company possible lower cost substitutes from
other ranges. It validated a final offer and integrated it to the previous offer which was already on its e-procurement solution (Punch-Out).
The company thus reduced its consumption of premium (-6 points), mid-range (-3 points) and entry level (-1 point) products in favour of Manutan’s own brand (+10 points). Because it offers excellent value for money, the company reduced its direct costs by €33,5244 in the first year.
Procurement optimisation lever no. 3: Optimisation of logistics
Lastly, we examined the values of the orders placed by the company. We divided the orders into value brackets:
· Less than €1005
· Between €1005 and €4006
· Between €4006 and €1,0002
· Over €1,0002
Over the past 12 months, it appears that 34% of orders placed were worth less than €1005.
(Inset) The company estimated its ordering costs at €257/order (via EDI) and its receiving costs at €118/order.
In total, it achieved €12,7009 in savings on ordering costs and €5,58810 on receiving costs in one year.
By activating the right procurement optimisation levers, the company achieved €67,8121 in savings during the first year. Today, the company closely monitors the key performance indicators it has implemented with its supplier to ensure this approach continues to pay off, within the framework of its procurement strategy.