Having followed this discussion for some days, let’s share some insights. Tail spend. Maverick spend. And then some headache.
EBG have yet to meet with an organisation that has taken control over their tail end spend. We have heard about the 80/20 rule for so long we have stopped asking questions about the rest of the 80% sending the 20%.
On a visit to Norway this spring, trying to understand if EBG should go through with a dedicated blog and networking conference, one thing became very clear. The legislation set up this summer states that all maverick purchases should be finished off with an electronic standard invoice. No matter what the cost of the purchase nor the type of supplier. And, as so often, that type purchases are made by an organization that simply what the daily work so function. That fact, together with growing masses of suppliers and the knowledge that in order to have complete control as stated by external audits, there need to be more control over what is being purchased, by whom, and at what total cost.
In this discussion a simple question is being asked: Tail End Spend: How does your organization manage this spend?
Pin pointing one answer from Wouter:
“Nice to see so many points of view and alive discussion! Some remarks from my side as I like the topic and based my experience. Most projects come across as a basket of headache at first and when you pay attention to it grows into a beautiful baby 🙂
Start with simple 80/20 and focus what to include (routine products) and exclude (bottlenecks like spare parts). However be critical on what to exclude as you need leverage, so some segments which had been piggy backing already might be included as well as some services or leverage items. I agree with Dan that most is unmanaged spend, but you might want to include some managed spend in the scope to support the sourcing strategy.
Scoping Strategies: there is a certain order as to set the right scope;
– Reducing & Standardization: many parts in the tail are ‘pink elephants’
– (undue) piggy backing: you might want to undue piggy backing as to create more leverage, as well as piggy backing to take out certain segments,
– Leverage: this will generate relatively most benefit, if you exceed a certain threshold level
– Outsourcing/ external integration: the threshold is even higher and benefits might be as well.
looking at the channel not sure if Dan is right that most is ‘outside of a system’. I believe that organizations tend to believe ‘one (process) fits all’ and most don’t set up something specific to the tail like a P-card. So in reality ‘setting up a vendor’ just for the tail occurs far too often. Further I do believe, especially for the tail, there is a lot of value to create when focusing on the retrospective (referring to when the documenting of the specification and the control is being done) channels, as you can have a flat and efficient process:.
– Prospective: e-catalogue, punch out, free text
– Retrospective; p-cards, blanket order
– Service suppliers: SSC, integrator, special software, etc
The one thing which shouldn’t be your objective when optimizing your tail is focusing on purchase price reduction. Think in value creation. Do include all TCO components and question yourself what would you like to pay for additionally? To name a few; PO/Invoice reduction, Supplier consolidation, Consignment, Stock mgt, transparent reporting, controlled distribution, distribution closer to end user, (over)consumption reduction, part optimization and standardization, part quality improvement, reducing maverick spend, rebates, etc
Think out of the Box;
I once made with Pareto the tail within the tail and offered a price increase, yes increase, of 5% if they would take over our source (distributor). Therefore they would get a handling fee on top of the margin of their competitor (if they would source tier2/manufacturer). However, they would need to realize some/many of the optimizations above (which are by far of more value). Another example was an industrial environment were a supplier installed a 8mtr high vertical lift module on the factory floor with ERP connection and a capacity of 10.000 items, fully automated, controlled part distribution per employee including fully theft proof, individual demand reporting, etc. They installed it for free if they could replenish it…. sometimes it is as simple as that!”