Roadmap to Lower TAIL Spend
By Aidan Magner, Jun 22 2015 05:04PM
Recent studies completed by Simple Supply Solutions have shown that a mere handful of suppliers account for in excess of 80% of total spend for a company. In a multinational technology company less than 20 suppliers (from a total of 600) accounted for more than 75% of total spend. Within one specific subgroup of that (sorting by commodity) 2 suppliers from 45 accounted for 92% of spend.
This situation is not unique to multinational technology companies, the size and scale of the spend may be unique, but the trend is the same.
If you sort your annual spend by supplier the classic 80/20- Pareto Analysis curve becomes apparent. There is a clear and significant delineation between the VITAL few and the remainder (the long and lingering TAIL)
What this says is that if your resources manage these vital FEW suppliers, you will have significant impact on the bottom line of the business. There are REAL and tangible benefits to the business through actively partnering with these few suppliers.
The remainder are low volume and low cost suppliers. These we call the TAIL spend.
Does your organisation release a purchase order for all spend? Good governance would indicate that this might be a good idea. However what is the cost or administering the procure to pay cycle?
In many cases the cost of administering the P2P cycle exceeds the value of the PO in the tail spend analysis
At Simple Supply Solutions, we believe that your resources are best placed doing what you do best - managing those suppliers that really influence your bottom line. Your resources should be focussing on building a structured partnership with your strategic suppliers, building a structured program of cost reductions, building a stable platform for regular KPI reviews, building the relationship.
Instead what we see is that the supply chain team are overburdened in administering the latest purchase order for stationary, chasing delivery of shipping tape, expediting that label printer for the shelving in the warehouse. MEANWHILE there are 4 missed telephone calls... The principal sub-contractor has called twice to say that they will need an extra 4 days on their shipping window because their line has gone down, the main casting supplier has left a message that the cost of aluminium has risen by 10% and this needs to be reflected on all open orders and finally the shipping company has called to say that due to a white out in Chicago, all shipments are delayed by 24 hours.
A partnership with Simple Supply Solutions allows you critically and strategically manage that tail spend. We will critically assess that tail spend, clean out all dormant and inactive suppliers, consolidate down the number of suppliers, leverage cost reductions through increased volumes, apply lean principles to significantly reduce the cost of administering and effect a structured program of review and performance appraisal of tail spend suppliers.
By resolving this burdensome side of the procurement tasks, the team can now focus on the VITAL few and have real and lasting benefits on your bottom line