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Unlocking the value of tail spend: how to boost benefits and efficiency through advanced tail sourcing.

Non-strategic tail spend presents a challenge for most procurement organizations. The term is often defined as the 80 percent of suppliers that represent just 20 percent of an organization's spend. The desire to balance resources with level of spend becomes a difficult task for conventional sourcing approaches, as complexity often outweighs expected benefits. Additionally, organizations often find themselves in single-sourced situations with little competition for materials, resulting in a steep climb up the cost curve and increased supply risk. As organizations grow and their offerings diversify, so does the challenge.

For prepared organizations, this challenge can be turned into a significant opportunity. In our experience, organizations with the right approach can achieve 10 percent to 15 percent savings across broad portfolios. By applying an advanced methodology, these companies have reached those targets while doubling the productivity of staff.

An Advanced Tail Sourcing framework helps unlock the value trapped in non-strategic tail spend by focusing on the two activities listed below.

1. Align internal capabilities, processes, and technology to manage tail spend.

2. Increase the attractiveness of the tail spend to generate market competition.

Advanced Tail Sourcing Process

A fundamental mistake made by most organizations is to manage non-strategic tail spend in the same manner as strategic category spend. Typically, companies sprinkle tail spend throughout the procurement organization, giving each sourcing manager a small portion of spend with limited alignment to their categories. This results in sourcing managers ignoring the tail and only returning to it to address supply disruptions or cash in savings after a long period of price appreciation. This is ineffective and inefficient.

Organizations successful at managing tail spend segment the tail spend away from their strategic sourcing managers and align dedicated resources with the right incentives, capabilities, and tools to attack the tail. Contrary to traditional practice, our experience shows that tail spend is best managed by dedicated, process-driven specialists with strong analytical skills rather than by market experts. Their focus is to expose spend to the market frequently and source it efficiently. Given a robust process, firms can staff teams with more junior resources while maintaining a high level of effectiveness. Processes guide the staff through sourcing events while taking advantage of their core analytic skills to draw the proper conclusions.

Enabling the effective execution of these processes are technology and tools that automate the sourcing process, including e-sourcing tools and database management tools. E-sourcing tools are essential to efficiently take spend to market and engage suppliers, while database tools provide the capability to quickly prepare RFPs for market in a repeatable way.

A leading company in the chemical industry piloted the Advanced Tail Sourcing approach by empowering a team of dedicated specialists with supporting tools. The team included a dedicated group of analysts to take tail spend to market and a coordinator to manage the interface with the rest of the organization. These changes, along with cutting edge technology, enabled the team to double the amount of tail spend taken to market per resource, freeing up time for the rest of the organization.

Making Tail Spend Attractive to the Market

In addition to developing the appropriate internal capabilities, it is important for organizations to increase the attractiveness, awareness, and transparency of the tail spend to the market. Similar to how tail spend is viewed in many organizations, suppliers may have limited awareness of the spend or they may view it as unattractive.

Creating targeted market baskets around supplier capabilities helps improve the attractiveness of the tail spend. Successful organizations develop robust supplier databases, mapped to their tail spend, to help generate targeted market baskets. This complex but fleeting activity is best accomplished with the support of key distributors and industry experts.

Working closely with a core set of suppliers helps create awareness in the market of the tail spend. Suppliers should be selected based on how their capabilities align with the market baskets the organization has created. For direct spend, this could be key national and regional distributors in the industry. The team of tail specialists should build relationships across multiple core suppliers to help drive competition.

Finally, conducting frequent and efficient market interactions is critical to create transparency in the pricing of the tail spend. This is particularly important for tail spend that is freely negotiated or tied to spot markets, which has the potential to experience price creep over time.

A.T. Kearney recently helped clients enjoy a significant boost in market engagement employing these approaches. These clients worked closely with their core suppliers to match materials to capabilities and define attractive market baskets. They supplemented core supplier insights with market research to develop a robust supplier database for the tail. In the end, companies saw a significant increase in market participation, including identifying alternative suppliers for roughly 80 percent of their previously single-sourced spend.

Key Considerations

From A.T. Kearney's experience in implementing the Advanced Tail Sourcing framework, there are three key considerations that organizations must keep in the forefront of their planning. These considerations can prove challenging in practice but are critical to success in implementation.

* Skills: Identifying or developing the talent with the desired analytical skill set.

* Scoping: Identifying the type of spend best suited for managing as tail spend.

* Change management: Garnering internal support for necessary changes and enacting changes with limited interruption.

Skills. One of the most significant considerations for implementing the Advanced Tail Sourcing methodology is skills development and talent acquisition. The skill set required for a tail sourcing specialist is very different than that required for a traditional market-oriented sourcing specialist. The specialist is a challenging role to fill internally, as this person will be more junior with less sourcing experience but will require advanced analytical skills. Organizations seeking fast implementation should consider hiring from outside.

Scoping. The Advanced Tail Sourcing framework is designed for spend that can be frequently sourced with limited market knowledge. Spend with these qualities typically meets the following criteria: 1) Small and non-critical spend that does not present a significant supply risk to the business; 2) has more than one potential supplier in the market; 3) and does not require complex supply agreements or is managed through spot purchases. Spend that does not meet these criteria should be managed through traditional sourcing approaches.

Change Management. Organizations adopting the Advanced Tail Sourcing methodology must be prepared to proactively manage the change effort. Implementation involves transferring responsibilities and instilling new processes within the organization. Successful organizations align performance incentives with the changes being implemented and include key decision makers within the organization as part of the implementation team. By aligning incentives and garnering the support of the leaders within the organization, the approach can be adopted while avoiding potential pain points.

Regardless of the category, non-strategic tail spend is an area of large benefit potential for organizations with the expertise and techniques to source it efficiently. In our experience, companies can realize benefits of 10 percent to 15 percent across a broad range of tail spend with 50 percent fewer resources when they adopt these best practices.

Hendrik Disteldorf is principal with A.T. Kearney. He is based in New York and can be reached at hendrik.disteldorf@atkearney.com. Tobias Fehre is a principal with A.T. Kearney. He is based in Frankfurt Germany and can be reached at tobias.fehre@atkearney.com. Guttorm Aase and Mike Piccarreta are consultants with A.T. Kearney. For more information, visit www.atkearney.com.
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Title Annotation:The OPERaTIONS ADvANTAGE
Author:Disteldorf, Hendrik; Fehre, Tobias; Aase, Guttorm; Piccarreta, Mike
Publication:Supply Chain Management Review
Date:Mar 1, 2014
Words:1239
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