As market share gains become harder to realize and competition drives prices down, companies are looking to cost reduction initiatives as the easiest path to increased profits. As a result, procurement professionals are feeling the pressure from the corner office to find additional savings within the supply chain.
But the low-hanging fruit is gone.
Contracts with large suppliers have been negotiated (leaving no points unshaved), offshore suppliers have beens sourced and volume discounts with major vendors are already in place.
The future lies in the tail.
Progressive companies are now looking at their low volume, infrequent and ad hoc spending to find new efficiencies. Unfortunately, there’s a reason why low value spend has gone unchecked all this time. How can a purchasing organization possibly stay efficient while managing low volume and low dollar spending? Let’s look at the reality of the situation in most large organizations:
- Procurement resources are already stretched: Procurement hasn’t escaped corporate austerity measures across the globe. The theory seems to be: as overall headcount is reduced, there will be less people wanting to buy things and so we can survive with less procurement professionals. Unfortunately, that theory doesn’t play out in reality and instead leaves procurement departments understaffed and over-stretched. The survivors have no choice but to live by the Pareto principle and focus on the 20% of suppliers that generate 80% of the sales.
- Communications remains difficult in large organizations: In an era where huge advances in communication technology are commonplace, one would think that procurement departments would find it easier to stay in touch within large or geographically dispersed organizations. Sure, online tools and email have eliminated much of the papework traditionally associated with procurement, however the sheer mass of electronic communications can be overwhelming across all departments. Non-compliance is not just about Maverick spending, but can just as often be the result of missed policy communications, delayed response times for purchasing inquiries or simply forgetting proper procedures. These issues become exacerbated as geographic distance increases or as new departments are added within the organization.
- Internal inertia is a tail spend management killer: Implementing a new policy in a large organization is difficult – introducing new policies to reign in spending or improve compliance can be nearly impossible. Without tools that make compliance easy and effortless, there will always be those looking to work outside the lines. These aren’t necessarily problem employees, in fact some can be extremely successful catalysts who aren’t willing to let (what they perceive as) bureaucracy slow them down. To overcome inertia long tail management initiatives must reduce bottlenecks rather than being seen as new “red tape”
- C Level Support: Of course, all of these obstacles can be overcome with focus and the right strategy. In most organizations this normally requires support from C-Level executives. Should be easy, right? Evidence suggests that the commercial benefit of an effective tail spend management program can be as high as 3% – 5% of the total cost of purchases in an organization. That can amount to a lot of savings and be the difference between a good quarter and a bad one. The problem is that managing tail spend sounds like hard work when compared to shaving a percentage point off a major suppliers rates. That may be true but finding savings within large vendor contracts isn’t always possible due to timing, market forces or because the value has already been negotiated. The challenge to procurement professionals then becomes: “how do we make tail spend management appealing to the corner office?”
Technology may be the answer to our tail spend dilemma. In theory, if a company can implement a distributed and intuitive technology that makes it easy for users to comply with corporate purchasing standards (three quotes, preferred vendor selection, procurement oversight, etc) much of the internal inertia can be overcome. If the easiest and fastest way to make a purchase is the company preferred method, then there is no reason not to comply.
Further, if that technology can be integrated into existing eProcurement systems and be easily curated by the procurement team, purchasing organizations can remain efficient, nimble and low cost.
But the real opportunity may come from the resulting data. Once compliance is increased and systems are integrated, the procurement team will have improved line-of-sight on all purchasing activities in the organization and, no doubt, will be able to identify new and exciting opportunities to consolidate spend, lock-in pricing with preferred vendors and standardize approved products & services. The data also have the added benefit of providing the business case support needed to engage and excite the senior executives.