It makes sense that most manufacturing companies actively manage their direct supply and large capital expenses. It is a fairly simple task because most of an organization’s spend will be concentrated among relatively few vendors. In fact, the indirect supply chain has been shown to adhere to the Pareto Principal, which states that a company will spend 80 percent of its budget with 20 percent of its vendors. With most of their eggs in only a few baskets, enterprises understandably watch those baskets like hawks. They aggressively negotiate favorable prices and delivery schedules, solicit multiple RFPs, and enter long-term contracts take other precautions to keep costs as low as possible.
But maintenance, repair and operating supplies (MRO) are all lumped into the tail end of the indirect supply. And with MRO it’s not dozens of suppliers, it’s thousands. How do organizations account for the 80 percent of their suppliers from whom they buy off-contract, often outside normal procurement processes?
For many firms, the unfortunate answer is, “they don’t.”
Reining in tail spend (named for the long, flat end of the total spend/number of suppliers chart) can give sourcing and procurement organizations strategic business value by exposing the true cost of excessive inventory, expedited shipping fees, and materials shortages.
Symptoms and Causes
Tail spend, also referred to as “rogue” or “maverick” spend because it often takes place outside a business’s procurement channels, often grows incrementally and unnoticed until it becomes large enough to attract executives and auditors’ attention. By that time, the tail may be wagging the dog, growing to millions of dollars per year. Companies should look for clues that their tail spend is becoming unwieldy so they can take steps to bring it under control:
• Diverging, often conflicting, priorities between company divisions
• Loss of transparency and declining service levels
• Growing number of one-off, emergency, spot, and low-cost buys
• Increase in the number of suppliers and SKUs
The logistical, personnel, and profitability challenges the COVID-19 pandemic presented accelerated the trend of companies’ taking harder looks at their MRO tail spend. Companies that once found MRO tail spend too difficult a nut to crack now are rethinking supply chain operations as they seek ways to become sleeker, nimbler, and more efficient.
SDI Tail Spend Solutions
Manufacturing companies, facilities managers, and private equity investors increasingly engage SDI to monitor and optimize these expenditures. They rely on SDI to extract value from streamlined processes while maintaining supply chain continuity and mitigating risk. We have found a nearly 2-to-1 relationship between profitability and MRO tail spend savings. That is, for every dollar saved through MRO tail spend management, companies see a $2 increase in their bottom lines.
With a half-century of experience in tail spend management and comprehensive MRO supply chain solutions, SDI has developed a suite of services and applications to put organizations back on the right track. We start with a holistic analysis of our clients’ procurement and tail spend management procedures. This includes a detailed report of every spend category, supplier, and SKU to determine the compliance rate and service level.
• Tactical buying desks – Centralized assessment teams that evaluate incoming purchase requests and determine the best method for fulfilling them based on their value, complexity, and criticality.
• eProcurement – Contract management and automation through vendor catalog purchases that facilitate inventory control, ordering, and payments.
• Source-to-Pay Solutions – SDI offers customized and off-the-shelf MRO managed services that allow clients to focus internal resources on core activities. We can handle purchasing, logistics, and workflow for a true end-to-end solution.
These tools ensure adherence to clients’ procurement and purchasing rules by placing more purchases on long-term and short-term contracts, locally sourcing more products to reduce freight charges and delivery lags, identifying redundant sources to guard against logistical bottlenecks, seeking diversity among vendors, managing supplier relationships, and making electronic transactions more reliable and routine.
SDI in Action
A client recently came to SDI seeking greater control over, better visibility into, and higher services levels from its MRO tail spend.
Our team organized the client’s spend per vendor and separated capital expenditures from operational and ongoing service requirements. We were able to trim 23 percent from the client’s MRO tail spend by implementing a series of improvements:
• Standardized methods for supplier contact, ordering, payment, and reconciliation
• Consistent, centralized control of supplier contracts and RFPs
• Control and Compliance validation measures for accounts payable processes
SDI services can help you get a handle on tail spend before it sends your organization into a tailspin. Our decades of experience coupled with the most advanced MRO management software will bring more of your fragmented spend under active management. To see which of our tail spend management services offer the best fit for your company, contact our experts for a demonstration of our MRO-as-a-service platform.