The tail spend conundrum has become topical for many organizations grappling with the challenge of limiting uncontrolled spend and the addition of endless numbers of new suppliers.
The limiting factor as always is resource allocation. Typically, one would assume that procurement concentrates activity and effort on the key suppliers that contribute most to cost while paying cursory attention to those suppliers where cost impact is limited. A recent survey conducted by Spend Matters in the USA found just the opposite. Their findings indicate that “… the biggest problem based on economic value is that on average, procurement professionals spend the majority of their time on the 80%-90% of the suppliers that represent less than 5%-10% of spend and business value”. One wonders then, why the tail is such a problem if upwards of 90% of the supply base is covered?
In the South African context, some light is shed when the structure of a typical finance team is considered. Accounts Payable (AP) functions are responsible for the majority of Purchase Order (PO) generation and consequently the operational aspect of Procurement is generally well entrenched and mature in many businesses. As a result, supplier onboarding and processing of payments is reasonably efficient and a necessary part of business as usual.
What then is the problem if 90% of suppliers are covered and AP functions are efficient? The answer lies in creating a strategic procurement capacity, where procurement professionals have the ability to match business needs with the optimal set of suppliers, having negotiated the best combination of price, quality and turnaround times. This is not always achievable in the AP space where the procurement personnel are typically responding to everyday business needs rather than optimizing the supply base.
The solution is to ensure that procurement professionals are able to devote sufficient time to those supply factors with high cost impact while still having the ability to “touch” all other spend in a manner that allows the full supplier spectrum to be optimized. Easier said than done right?
Actually no. Significant improvements in the number of suppliers covered by procurement personnel can be achieved through the application of strict methodologies aimed at specific areas of the supply base. In particular, tail spend can be systematically reviewed and consolidated to ensure that the time and resources required to manage these suppliers reduces and that the business becomes habituated to utilizing purchasing policies and pre-approved suppliers.
Clients who have implemented strategic procurement methodologies through Adept Advisory have achieved significant cost reductions across the full supply spectrum resulting in immediate margin gains and importantly more control over the number and complexity of suppliers from the top to the tail. Add technology to this mix and gaps in 3 rd party supplier information, contract compliance and B-BBEE status can easily be identified and remediated.
For more information on how we can assist you to optimize your procurement environment please contact Adept Advisory (Pty) Ltd.