Managing tail spend has been a major topic of discussion among sourcing professionals for at least the past two decades. In most companies, external spending has a Pareto-like distribution – the largest 20% of suppliers (by dollar volume) typically account for about 80% of the total external spend. Tail spend is generally defined as the 20% (or so) of the total external spend that is attributable to the smallest 80% of suppliers.
Tail spend can involve direct goods and services, but most is associated with indirect spend categories. A 2017 study by Spend Matters highlighted several important characteristics of indirect tail spend. The typical company in this study had about $1 billion in total indirect spend and 9,374 indirect suppliers. Using the 80/20 rule, about $800 million of the indirect spend would be concentrated in 1,875 suppliers, while the remaining $200 million – the tail – would be spread across about 7,500 suppliers.
The Tail Spend Conundrum
Tail spend presents a difficult conundrum for sourcing professionals. When it’s not professionally managed, the result is often overspending and missed opportunities for cost savings. But because tail spend typically encompasses a large volume of relatively low-value purchases, managing the tail consumes a disproportionate amount of time and effort by sourcing personnel. So while bringing tail spend under professional management can produce direct cost savings, it can also lead to higher indirect procurement costs.
Because of this conundrum, companies have used a variety of tools and techniques to manage tail spend. These techniques have included e-procurement applications, public and private e-marketplaces, and commercial purchasing cards. None of these techniques are comprehensive and some industry experts criticize this approach as piecemeal. But in reality, tail spend encompasses such diverse goods, services and types of purchases that it’s not realistic to expect any one tool or technique to work well across the entire tail spend spectrum.
Solving the Print Tail Spend Problem
Printed materials and many types of creative and marketing services are major components of tail spend at many companies. Most large and mid-size enterprises buy printed materials and creative/marketing services hundreds – if not thousands – of times every year. Purchases are typically made from numerous suppliers by several organizational units and business functions spread across the entire enterprise. Many of these purchases are relatively small (in terms of dollar amounts), and most involve custom products or services that are true one-off purchases.
As a result, purchases of printed materials and creative/marketing services can be challenging for procurement leaders to manage efficiently. Fortunately, print e-sourcing technology solutions can enable companies to take control of this particular part of their tail spend. Enterprise-class print e-sourcing solutions
are purpose built to support the procurement of virtually all kinds of printed materials, as well as a wide range of creative and marketing services.
A capable print e-sourcing solution will deliver several financial and operational benefits, but in our work with dozens of clients, we’ve identified three financial benefits that sourcing leaders routinely say are particularly valuable.
Direct Cost Savings – The use of a print e-sourcing solution will reduce the direct costs of printed materials and creative/marketing services by 14% to 22% in most companies. Print e-sourcing solutions drive direct cost savings primarily by making it easy for companies to use competitive bidding on a widespread basis. Competitive bidding is particularly valuable when purchasing printed materials because excess capacity in the printing industry motivates suppliers to offer attractive pricing when competition exists. When companies initially implement a print e-sourcing solution and expand their use of competitive bidding, the direct cost savings can be considerably higher than 14% to 22%. In our work with clients, we often see pro forma cost savings of 30% to 50% based on an analysis of previous purchases that were made without competitive bidding.
Indirect Cost Savings
– As noted earlier, one of the key challenges in managing tail spend is dealing with a large volume of small purchases without significantly increasing indirect procurement costs
. A print e-sourcing solution reduces indirect costs by streamlining the work activities and processes required to manage and execute purchases of printed materials and creative/marketing services. In effect, a print e-sourcing solution increases the number of purchases that a buyer can effectively manage. Evidence indicates that a buyer using a print e-sourcing solution can manage up to six times more purchases than a buyer using manual methods.
Improved Spend Visibility – Because printed materials and creative/marketing services are often purchased by numerous departments and business functions, many companies don’t have accurate or comprehensive information about how much they are actually spending on such products and services. Poor spend visibility is an important issue because it often contributes to overspending. A print e-sourcing solution centralizes the data regarding spending on printed materials and creative/marketing services, and provides company leaders complete visibility regarding the amount and nature of that spending.
Tail spend will always be part of the sourcing landscape. To improve the management of tail spend, sourcing professionals will need to use a variety of techniques and technology tools. Print e-sourcing solutions provide an effective way to reduce the costs of printed materials and creative/marketing services, and can enable companies to tame this unruly component of their tail spend.