Just about every person in the business community is familiar with the Pareto Rule, also known as the 80/20 rule, i.e. that approximately 80% of a business’s sales and profits will come from approximately 20% of sales or customers.
When it comes to purchasing and procurement, a type of inverse 80/20 rule is often applied, i.e. that the bottom 20% of procurement spend by value (tail spend) will be supplied by up to 80% of suppliers.
Growing awareness of this tendency coupled with ongoing pressure to cut costs and increase efficiency has led to a situation in which many procurement professionals are now being pushed to manage tail spend better.
In the previous two articles in this series, we looked at how a commitment to better manage tail spend can lead to significant cost savings, and how to identify if your organization has a tail spend problem and segment the affected transactions or suppliers.
MANAGING THE “LONG TAIL”: How Focusing on Tail Spend Management Can Directly Impact a Firm’s Bottom Line, by David C. Wyld (published by The Reverse Auction Research Center), discusses the relationship between the 80/20 (Pareto) rule and tail spend, as well as the so-called “long tail” – specifically, how these two principles apply to an organization’s ability to effectively manage tail spend.
This white paper explains how the long tail concept was first proposed in 2004 in an article by Wired magazine editor Chris Anderson. Essentially, the long tail concept refers to increasing segmentation, targeting and specialization in the modern economy.
Wyld makes the point that, for many businesses, a lot of their profit comes from relatively small sales. Likewise, sizeable savings in procurement can be achieved by more intense control of smaller purchases, as part of an ongoing project to comprehensively manage tail spend in the business.
Do you agree with this viewpoint? Can principles that work well in a sales model be applied to procurement as well?
If you are looking for a simple, no-fuss way to better manage tail spend in your organization, the PocketBuyer™ app from Simfoni is the ideal starting point.