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Technology leads to tail-spend savings

APICS CEO

Friday June 15, 2018


Technology continues to offer new benefits to supply chain professionals. Digital solutions can help collect and organize sales and operations planning data; facilitate collaboration with supply chain partners; and monitor machines, robots and devices in factories, among other uses. Now, a recent report by McKinsey & Company details how digital solutions can help procurement specialists achieve some often-overlooked savings for tail spend.

Tail spend, also known as C-material spend, represents the collection of low-volume, one-off or infrequent orders a company makes. Typically tail-spend orders compose 80-90 percent of all items purchased. However, because they only make up 10-20 percent of a company’s total spending, purchasing managers often instead focus on savings opportunities for the remaining 80-90 percent of their procurement costs.

Nevertheless, article authors Riccardo Drentin, Mauro Erriquez, Carsten Nee and Marco Ziegler argue that companies are overlooking significant savings — as much as 15 percent — when they choose not to optimize tail spend. To put that in perspective, this means that a company that has a total direct spend of $3 billion dollars, 20 percent or $600 million of which is tail spend, could save as much as $90 million. That’s no small order.

The authors surveyed the technology market and typical tail-spend tasks to uncover how digital platforms can help procurement specialists better manage this cost. They determined that technology can help purchasing managers with the following tasks:  

  • Preparing product data: Because most companies don’t manage their tail spend closely, their product data often is scattered throughout their organizations in non-standardized formats. The authors found that, on average, companies have only 20-40 percent of the needed data readily available. To help organize data, companies can use text-mining tools and parsing algorithms to extract the data from local databases, enterprise resources planning systems, purchase orders and other documents. In addition, using heuristic rules to automatically convert units — for example from liters to kilograms — can boost data quality by as much as 50 percent. Lastly, augmenting the human expertise of data scientists with analytical models can help humans fill in gaps and improve data quality by another 10-30 percent.
  • Issuing requests for information (RFIs): Procurement specialists can use web-based platforms to send electronic RFIs to suppliers around the world. The results provide locations where supply is in abundance, which can help identify vendors with competitive prices and narrow down the list of contenders for the request for quotation (RFQ) process based on specific parameters.
  • Issuing RFQs: The same web-based platforms help purchasing managers quickly create customized bid sheets for each supplier. Data analytics tools enable multiple bidding rounds that encourage suppliers to keep their prices competitive. The tools can quickly notify the customer about which companies won the bidding rounds and help identify the best suppliers based on qualitative and quantitative criteria, including cost savings.
  • Managing qualification requirements: Once a supplier is selected after the bidding process, a web-based platform can automatically prompt the supplier to complete any qualification documentation to ensure that safety and regulatory standards are met.

According to McKinsey, companies that switched to web-based platforms to optimize processes achieved 5-10 percent tail-spend savings. In addition, these processes became easier for both buyers and suppliers, and product data quality noticeably improved.

By utilizing digital platforms to help them be more proactive about tail spend, purchasing managers can unlock new sources of value for their companies.

More value trends to watch

Purchasing has always been part of the value stream, but technology can make tail-spend management a part of a company’s value chain. The APICS Dictionary defines value chain as, “The functions within a company that add value to the goods or services that the organization sells to customers and for which it receives payment.” By reducing the costs of tail-spend items, purchasing managers increase the value of end-products for their companies. 

But technology is just one of the many factors influencing the role of purchasing managers. By staying on top of new opportunities and challenges in the field, purchasing managers can continue to add value to their companies. APICS 2018 presenter Jeff Purnell, vice president of global supplier management at Cisco, will give attendees an overview of some of the upcoming trends purchasing managers and other supply chain professionals need to know. His presentation, “Top Supply Chain Sourcing Trends in 2018 and Beyond,” also will include insights into how businesses will need to adapt their sourcing strategies in the near future to stay competitive. To register for APICS 2018, Sept. 30-Oct. 2 in Chicago, visit apics.org/conference.