Tackling the "Tail End"

If you were told that you could drive a 5 to 10 percent increase in your company's shareholder value, would you be interested? Of course you would.

For years, leading procurement organizations have implemented rigorous strategic sourcing programs to coordinate purchasing across divisions and regions, renegotiate and reduce pricing, streamline supplier networks, develop new suppliers, and establish a more strategic focus within purchasing organizations. The results have been significant cost savings for the company, which translates into improved shareholder value. And because 80 percent of a company's total materials and services spend is comprised of 20 to 30 percent of the categories purchased, it is common for these programs to target the larger-spend categories. A Fortune 500 company that applies a global strategic sourcing program across 80 percent of its $5 billion corporate spend to achieve a conservative 7 percent savings can realize about $280 million in bottom-line improvements — not a bad message to take to shareholders.

However, once the major categories have been sourced, corporate interest in the strategic sourcing program often wanes, leaving a big piece — the "tail end" — untouched. Since this typically represents about 20 to 30 percent of a company's total purchases, addressing this portion of spend can generate a great opportunity to maximize savings, improve margins and ultimately increase shareholder value. So, what is preventing purchasing organizations from extending their sourcing programs to the "tail end?"

The Barriers and Benefits

Companies are slow to tackle this problem for a number of reasons, ranging from limited resources to the level of sourcing difficulty. The tail end consists of numerous, dispersed purchasing categories, each with relatively low expenditure levels. To maximize initial savings, sourcing programs naturally hit the higher-spend categories first, where there is more leverage with suppliers and relatively high savings can be achieved. In today's resource-constrained environments, assigning the best resources to core spending categories often leaves the procurement organization strapped when it comes to conducting day-to-day purchasing activity. It becomes quite a challenge to identify and allocate additional "special" talent to enable sourcing of the lower-spend categories, which, individually, may not seem worth the effort.

Another barrier is the uncertainty and associated risk of failure. Many of these smaller spend categories are typically not core to the business or may be highly technical with complicated specifications, making it more difficult to carry out the sourcing process. With these characteristics, savings ranges are more questionable, and it is not possible to guarantee success at a 90 percent — or more — level, which means there must be more of an appetite for risk to gain the reward.

What organizations should recognize is that the tail end of spend can provide considerable savings and should not be overlooked. In fact, some dispersed spend categories that have never been through the sourcing process may produce very high savings relative to more recently sourced categories. For example, consider a large merchandise retailer with over $5 billion in total corporate purchases and a $1 million courier services spend. In this case, due to the relative size, courier is not considered a large, "core" category. However, by employing strategic sourcing strategies, the courier category has the potential to deliver an estimated 8 to12 percent in annual savings, or $80,000 to $120,000 for that category alone. If you extrapolate these savings out to the rest of the tail, assuming that the 8 to12 percent represents an average benefit, the retailer with $5 billion in spend and approximately $1 billion (20 percent) in unaddressed spend can realize a savings opportunity of $80 to $120 million.

How to Capture the Opportunity