What is Tail Management?
Tail management is a concept based on the Pareto principle – Often referred to as the 80/20 rule. The Pareto principle states that, for many events, approximately 80% of the effects come from 20% of the causes. This rule can be applied to many business practices such as:
- 80% of your profits come from 20% of your customers
- 80% of your sales come from 20% of your products
It also has a specific and demonstrable effect on many business supply chains where by:
- 80% of your suppliers will account for 20% percent of your spend
This 20% of spend is known as ‘tail spend’ or ‘long tail’. Tail management is the art of managing your tail spend supply chain to optimise procurement and supply chains.
Tail management is the art of managing your tail spend supply chain to optimise procurement and supply chains.
Why is Tail Management important to you?
In every organisation, procurement has limited resources and must set priorities. When it comes to optimising the supply chain it often makes sense to focus on the areas where the largest impact can be felt, namely the largest spend categories and the top contracted suppliers.
This leaves a ‘tail spend’ which typically accounts for 20% of spend and yet accounts for 80% of all suppliers. This can represent the majority of transactions a large business can make, which can cover a huge range of product and service categories and often indirect (GNFR) purchases too.
Due to time and people constraints many companies have failed to address this ‘non critical’ tail spend, assuming incorrectly that the investment in time and resources needed to review the tail spend would not justify the end savings. This is a misconception.
Optimising the tail spend supply chain can deliver significant cost savings and deliver the following benefits:
- Take the cost out of your procurement process
- Deliver up to 80% vendor reduction
- Leverage spend
- Increase purchasing control
- Increase visibility of expenditure
- Improve efficiency through one order, one invoice and one delivery
- Reduce risk / increased compliance
- Outsource for reduced headcount and administration
- Improve CSR performance through managed deliveries
How do you apply best practice to your tail spend supply chain?
If you are interested in optimising the long tail of your supplier base to achieve cost and process benefits across your business, there are 4 key areas which can be addressed:
1. Supplier Base Optimisation & Consolidation
The principal method of change is to apply the principles of compliance and consolidation to your company’s tail spend. This should begin with a full review of all suppliers to gain a proper understanding of the existing supply chain. Tail suppliers (particularly non compliant suppliers) should be removed and the spend transferred to selected preferred suppliers that are fully compliant.
A strategic view towards sourcing through multiple category partners is recommended with consolidation being the key aim for maximising beneficial impact. Consolidation can drastically reduce supplier numbers (up to 80% according to the Pareto efficiency) across this small portion of spend to achieve immediate cost and process benefits across your business.
2. Process & Technology
Supplier consolidation and reduction makes it easier for processes to be aligned and streamlined across all aspects of the business, from supply chain to finance. Compliance and demand management can be improved across the supply chain by addressing issues in the supply chain and P2P process, including ensuring early intervention for invalid requests in the requisitioning process and early visibility of new demands. This will help to prevent new vendors being created outside of existing contracts and allow preferred suppliers to manage demand more effectively.
Synchronisation of IT systems and software alongside reduced supplier numbers will provide greater visibility of stock inventory across the supply chain. The logistics process is simplified and this can often result in lead time reductions, reduced inventory need and deliver additional green supply chain benefits.
Once compliancy is applied to the tail spend of the supply chain, sub optimal payment terms can be removed. Consolidation across the supplier base can generate transparency and accounting efficiency due to reduced invoice numbers and clearer visibility of spend.
Outsourcing allows the whole tail spend and tail supply chain management to be sub contracted to a single (or lower number of) supplier(s), making it very easy to impose compliance, increase visibility of spend, increase control and leverage economies of scale across multiple product categories.
Small suppliers can be sub-contracted to the primary suppliers ensuring any valuable non compliant suppliers are still contained and effectively managed within the supply chain. The logistics of the tail supply chain can be self contained and managed by the outsource partner(s).
If you are interested in finding out more on Tail Management, you can read a selection of papers at www.tailmanagement.co.uk.