Common challenges in tail spend management
We often see that the limited resources in procurement departments are chiefly devoted to large vendors with characteristics of long term ‘strategic’ sourcing and buying of major assemblies, modules, components and services. In most cases these accumulate to 80% of the purchase spend, but only count for 20% of the supply base.
Many procurement managers experience that the last 80% of the supply base – the tail spend – is complex and challenging to manage. Tail supply often represents thousands of items across dozens of categories bought from hundreds of different suppliers, and the requirements are often sporadic or unpredictable. Demand for tail parts originate in many manufacturing sites and departments from R&D, manufacturing/assembly, to service with their own demand pattern characteristics and different specifications for items that are near identical. The sheer size of the supply base, the large administrative burden, and the lack of data make it hard to manage tail spend. The lack of visibility, and active or forward looking management often result in stock shortages or outages in tail supply.
The challenging combination of tail complexity and resources shortages often deprioritizes tail spend optimizations, resulting in unneeded production disruptions and missed saving opportunities at a significant part of the supply base. This is unfortunate considering the number of value-adding opportunities in this spend category. A study of The Hackett Group (2016) even suggests that effective tail spend management results in cost savings of 7.1% percent.
From complex to integrated tail supply
For an optimal supply base you want to guarantee the availability of tail parts when and where they are needed, at the lowest possible combination of paid price and process cost. In this view, tail supply is aligned with organizational goals and objectives and therefore requires a holistic approach. Tail supply must be integrated into the broader supply chain strategy to optimize processes, maximize efficiencies, reduce costs, and enhance overall supply chain performance.
In practice, the transformation to integrated tail supply results in optimizations in sourcing and procurement including inventory control, logistics and related business processes. These efforts are reflected in:
- Integrated demand planning across the enterprise
- Simple, robust policies and processes
- Clean, accurate and up-to-date product master data
- A consolidated supplier base
- Standardized item specifications
- Automized processes
The efforts listed above requires organizations to break through complexity and enable improvements that go beyond the procurement department. In fact, the shift towards integrated tail supply requires a holistic view that enables synergies between sites, departments, suppliers, and other stakeholders. This makes it even harder for procurement departments to seize opportunities in tail supply.
One approach that’s gaining traction as the ‘ideal solution’ is to partner up and outsource to a supply chain expert in integrated tail supply that optimizes and manages your tail spend.
Added value partnering with an integrated approach
Supply chain experts specialized in integrated tail supply not only execute tail procurement, they work as a business partner who constantly identify opportunities to generate savings in the Total Cost of Ownership. Think about the optimization of goods flows towards production (like kanban) and service (kitting), but also harmonizing processes by working with EDI, 1 point of contact for queries, proactive open order management, and active inventory management.
For procurement professionals it is important to see this partner as more than just a glorified supplier for tail parts. In fact, they are a strategic ally that operates independent, brand-neutral, and has deep product category and industry expertise. This partner takes care of your tail supply on multiple levels – working side by side with all the relevant users and specifiers in the client companies to define and refine requirements. At the same time, the partner work closely with the supply base, encouraging and promoting the best suppliers, and if necessary dropping the weaker performers. Proposing and implementing simple but powerful procedures and technologies that make the whole requisition to payment cycle as transparent and efficient as possible, for buyer and supplier.
By partnering with a supply chain expert for tail spend like MAG45, the integrated approach will result in controlled pricing, active risk management and lower costs. Tail supply procurement then moves from being a cost center to a source of added value, while procurement departments are freed up in time and can give even more attention to large, long term ‘strategic’ sourcing and buying of major inputs.
Contact us to learn more about how integrated supply can uplift your tail procurement.
