Indirect purchases: Distributors or marketplaces?

choice to manage indirect purchases
March 7th, 2019
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Indirect purchases (or tail spend) are products or services bought to ensure that a company runs smoothly, but that are one-off and non-strategic purchases. This procurement category therefore necessitates specific criteria and requires buyers to consider in advance which channel they should focus on: distributors or marketplaces?

Five criteria for tail spend

Due to the fact that they represent a significant proportion of a company's indirect costs and are scattered across its departments, tail spend products must meet certain criteria:

  • Size and quality of the product range

The range of products must be both extensive and specialised if it is to meet a company's every need in terms of non-strategic purchases; it must include even the most trivial of products that are purchased just once a year!

The quality of the products is also essential to ensure they are unique (no duplicates) and to guarantee their origin and manufacturing conditions.

As users don't buy these products regularly, product information must include a clear summary (conditions of use, technical characteristics etc.) and the requisite documentation (assembly instructions, standards, warranties etc.). All of this information must be presented in a consistent format so that products can be easily compared, enabling buyers to make the right choice. It is important to remember that nearly half of B2B buyers say that the lack of high-quality product content was one of their biggest challenges when buying online.*

  • Technical support

In order to reduce risk, users must have access to technical support (e.g. telephone advisors) that can advise them or, when required, put them in contact with suppliers.

  • Price

Although this procurement category represents on average only 5% of the overall volume of a company's purchases, it is essential for the distributor or marketplace to offer products at market prices, thus enabling procurement departments to focus on other expenditure factors (total purchase price, logistics, quality etc.).

  • Geographical coverage

Lastly, the supplier or marketplace must provide a uniform product range and procurement experience across all of the countries in which the company is located. Currently, large companies are aiming to streamline their procurement processes and in doing so implement, where possible, solutions, services and offers that are available to all their sites.

Are marketplaces suitable for tail spend?

Naturally, the marketplace model makes good business sense, otherwise it wouldn't exist! The key benefits of marketplaces are their extremely broad range of products and their competitive prices. However, taking a closer look at this model reveals certain limitations in terms of the above-mentioned criteria:

  • Lack of consistency

As marketplaces compile a large number of suppliers and their role consists of creating links between these suppliers and companies looking to purchase, the result is great inconsistency in terms of:

  • Product ranges: Suppliers offer a broad range of products, but many of them may be the same! The overall range is not set up in a consistent format and there are often duplicates.
  • Product content: Product content varies from one supplier to another and related documents are not always available. This complicates the processes for both choosing and comparing these products on the platform.
  • Technical support: Whether the purchasing company needs advice or documents, or wishes to return something or make a complaint, every supplier has its own service and processes. 
  • Decentralised management

Buying from these diverse suppliers entails as diverse a range of administration tasks! The result is a multitude of invoices, deliveries, credit notes, returns etc. that have significant administration costs.

It is also difficult to establish contracts, negotiate overall discounts or guarantee a uniform price across the same products within marketplaces.

  • Unknown product origin

Lastly, the origin of the products is not always guaranteed when purchased via marketplaces. This leads to a number of risks (counterfeiting, CSR** etc.). It is important to remember that buyers are responsible for the manufacturing conditions of the products they buy.

In contrast to marketplaces, not only can distributors guarantee the origin of the products they distribute but above all they are also responsible for them.

Lastly, by considering the criteria for indirect purchases in terms of the limitations of marketplaces, it is clear that in many ways, marketplaces do not meet the necessary requirements. Distributors, who control and are responsible for the entire chain of operations, appear to be more suitable. The benefits they offer include control over these purchases, services adapted to the B2B environment and a better user experience. They also reduce all hidden costs (TCO), which are particularly high for this procurement category.



**Corporate social responsibility