Rethinking The Oft-Overlooked Tail Spend Dilemma
When it comes to the procurement processes of large enterprises, the 80-20 rule typically applies: 80 percent of spend usually lands at 20 percent of a supplier base. For one-off or infrequent purchases, that means less money is being spent with a wide array of suppliers.
Indeed, large firms tend to run their procurement workflows on legacy processes, even if they are digitized, making spend and vendor optimization a tricky task. Optimizing only a small fraction of purchases is far from top of the priority list for already busy procurement teams. Yet when a large company is spending $10 billion with suppliers, that still means that even a fraction of those purchases are worth potentially billions of dollars.
“We’re talking tens of thousands of transactions and vendors,” Frechette told PYMNTS in a recent interview. “It makes sense why people aren’t addressing it — it’s very complex, but if it’s still billions of dollars of spend, it creates a huge opportunity to optimize.”
Historically, not much has changed in the sourcing and procurement process among the largest companies. While the pen-and-paper processes of decades past have been digitized, that doesn’t necessarily mean they have been optimized or made to be more efficient, noted Frechette.
Making optimization even more difficult is the fact that large firms have implemented complex and often clunky systems that are behemoths and difficult to replace.
Yet the market has seen dramatic changes in 2020, and procurement is no exception.
Frechette said organizations pressing forward in their digitization journeys have recognized the need to not only digitize but automate the procurement function. They’re also taking a closer look at spend management, and how intelligence and analytics might be able to have meaningful impacts on the bottom line. Businesses are placing greater weight on the value of vendor diversity as well, he said.
Another trend is an effort to mitigate risk, though this strategy can often create greater complexity.
“Procurement is being pushed to increase continuity and decrease risk of supply chains,” Frechette noted. “In 2019, you would have one or two suppliers for your direct spend. Now, with supply chain risk across the board, whether domestic or international, you have to have multiple suppliers, have them identified and validated and available, so you don’t bottleneck your own offering to your customers.”
Prioritizing Indirect Spend
Considering these changes, it is perhaps not surprising that the focus has continued to remain on direct spend. Yet when the value of indirect spend is so high, organizations looking to usher in efficiency and cost savings will quickly recognize the opportunity in addressing tail spend pain points.
“These companies are not typically buying 50 monitors, they’re buying 1,000,” said Frechette. “They might be buying 10,000 widgets, or salting and plowing services for huge campuses. These tail spend purchases are still meaningful amounts. They’re six- and seven-figure purchases.”
The challenge, however, is that the majority of this tail spend continues to flow to the same vendors organizations always use. Fairmarkit is hoping to tap into the rest of firms’ supplier pools to open up the marketplace and generate more competitive pricing for buyers.
There is an array of value-added opportunities in addressing tail spend through automation technology, particularly when that tool is able to integrate into existing procurement systems rather than forcing organizations to replace their existing tools altogether. Automating supplier diversity initiatives, or consolidating transactions to bring efficiency to both buyer and vendor, are examples of how optimization strategies can go beyond merely digitizing the procurement process.
In today’s environment, organizations can no longer afford to overlook tail spend, according to Frechette. Luckily, businesses are beginning to rethink their procurement strategies.
“The biggest shift that’s come with COVID is that procurement used to be this forgotten about, bad-reputation, back-office function that no one wanted to work with,” he said. “Now, because of all of the different macro factors, procurement is center stage.”