For many companies, getting a handle on tail spend – the 20 percent or so of the procurement budget spread among 80 percent of a firm’s vendors – has long been regarded as too daunting a task with too little reward. After all, tail spend is unsexy, usually consisting of routine, commoditized consumables, inputs, and other maintenance, repair and operations supplies. Improving tail spend requires management resources that many firms are not willing to spare.
But today, tail spend management is getting a second look from many manufacturing companies who have extracted every bit of value from their direct supply chain. The 7 to 10 percent savings effective tail spend management can deliver is too rich an environment to ignore.
Optimal management of the spending tail can both cut costs and make operations run more smoothly.
Lower Total Spend
This is the greatest benefit and the easiest to measure. Reducing MRO supply chain costs through tail spend management involves at least three important components:
- Bringing more spend under active management – By subjecting more purchases to the rigors of an established procurement process, they become visible. Management can then analyze processes, solicit proposals, discover opportunities for volume discounts and look for additional ways to trim expenditures. Start with the largest “unmanaged” suppliers and purchase categories, then work at consolidating suppliers. This creates opportunities for placing more SKUs under the purview of already-contracted partners, lowering prices.
- Controlling off-contract and spot purchases – Because infrequent purchases typically consist of small order quantities, it is inefficient to account for them in a supplier contract. However, a spot buy department should negotiate non-contract discounts. If the firm’s buying power with a supplier allows, it may be able to secure a percentage discount on all items not covered by the contract. Purchases of specialty items not actively sourced can be negotiated through a spot buy desk to eliminate the tendency of plants and regional offices to shop exclusively local. The desk can solicit bids, negotiate prices and arrange for expedited delivery.
- Automating and illuminating routine, low-value buys – Even the most active spend management cannot oversee every purchase. The most routine, repeat transactions should still adhere to best practices to ensure the lowest prices and consistent quality specifications. Like many tail spend management tasks, the automation process may be more easily achieved by partnering with a third-party expert who can set up, monitor and adapt procurement protocols for these items. The vendor also can develop processes for electronically sharing delivering purchase orders, confirmations, shipping details, invoices and other documents. This can reduce both the number of transactions and the administrative and labor costs per transaction.
Improved Productivity and Efficiency
While bringing a greater percentage of spend under active management may appear to place additional time constraints on supply chain managers, properly segregating tail spend items and categories allows for more efficient allocation of management resources. Here’s how:
- Line item consolidation – Tail spend management begins with standardizing part identifications, eliminating obsolete SKUs and other data-cleansing activities that streamlines procurement, monitoring and any drains on management time.
- Supplier rationalization – Fewer contracts take less time to administer. Larger contracts garner greater buying power. And greater buying power allows manufacturers to dictate better terms of not only pricing, but also availability, inventory management services and other transferrable perks.
- Automated procure-to-pay procedures – By eliminating the risk of data entry errors while providing purchase and usage insights, digital transaction processing allows management to devote less time to correcting mistakes and more time developing strategic advantage and discovering other value-adding duties.
SDI has the experience and technology to help manufacturing companies bring tail spend under control. Our transaction processing, process visibility and spend analysis services help companies successfully bring more spend within proactive management control and consolidated MRO. For more information on SDI’s tail spend management ideas and MRO-as-a-service offerings, contact our experts today.