Consolidate and Prosper: Managing Long Tail Spend in the Supply Chain

Woman using tablet to analyze supply chain spend

While everyone loves the convenience of a one-stop shop, procurement practices just don’t work that way. No matter how carefully managed and intensely focused a purchasing team may be, most supply chains still struggle with a long tail spend. But that spend — which may make up only 20% of an overall procurement strategy — is packed with potential for savings.

What Is Long Tail Spending?

Long tail spending is based on the Pareto principle, or the 80/20 rule. The principle is fairly simple. It states that for many events, roughly 80% of the given effects result from 20% of the causes.

When applied more directly to supply chain spending, this theory states that 80% of a company’s vendors account for just 20% of the spend. That 20% can be defined as the long tail, or tail spend.

Let’s be blunt: Long tail spend often escapes management oversight. These purchases tend to fall beyond corporate strategy, contract framework agreements, and negotiated work orders. Ad hoc buying, low-value transactions, one-time vendors, off-contract agreements, and other fragmented purchases all come together to make up this elusive tail.

And what’s more, when lumped together in a single sum, the long tail spend can often become the dominant overall supplier.

What Are the Best Ways to Tackle Long Tail Spending?

The many independent transactions contributing to long tail spend require a great deal of time and resources to properly assess — much more than the managed portions of a company’s procurement strategy. But by focusing on smart tail spend management, these rogue suppliers can be consolidated for serious savings.

Supply chain managers can easily end up buying too many items from too many suppliers, which leads to costs without value. Tackle this by consolidating unnecessary steps in your supply chain, following these simple tips:

  • Take stock of and consolidate the supply base. Apply your company’s compliance principles to all parties involved, and review your relationships carefully. Are you maintaining strategic, healthy partnerships, or are some suppliers failing to meet your needs?
  • Carefully review and run price comparisons from different vendors. A strong strategy often involves a mix of multiple category partners, consolidated for maximum benefits and impact.
  • Skip distribution and make every effort to purchase directly from suppliers. This simplifies processes and streamlines all aspects of the supply chain, from logistics to finance.
  • Track lead times and supplier performance on a regular basis. Transparency and efficiency are critical to the system’s operations at every step.
  • Identify the bottlenecks related to particular parts or materials in order to isolate and eliminate delays. If a single component causes trouble, it can be replaced with a better solution.

Does Supplier Consolidation Really Save Money?

Simply skimming your list of suppliers doesn’t save money, of course. Supplier consolidation requires strategic evaluation. Perhaps these tips won’t help your company eliminate excess spending, but they will require a new level of negotiation, analysis, and organization. By turning a critical eye to costs, managers can often bring about:

Reduced Headcount
Fewer suppliers mean consolidated transactions, making for reduced personnel costs. All of the extra accounting, receiving, and procurement hours spent managing rogue accounts vanish.

Lower Prices

Everyone loves a good discount, and a consolidated spend gives your company more power to leverage for lower prices.

Less Time Billing

Every unique supplier requires careful handling: Billing, filing, and forms stack up year after year. If your suppliers have been consolidated for overall savings and ease of operations, the reduced amount of paperwork will serve as a nice perk.

 

Image credit: Panumas Yanuthai/Shutterstock.com

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