By Sarah Scudder, President and Chief Revenue Officer, Real Sourcing Network
Tail spend presents a classic Catch-22 for sourcing and supply chain professionals: bringing tail spend under professional management can produce direct cost savings, but it can also lead to higher indirect procurement costs…
Managing tail spend has been an important topic for sourcing and supply chain professionals for the past several years. In most companies, external spending has a Pareto-like distribution – the most significant 20% of suppliers (by dollar volume) account for about 80% of the total external expenditure. Tail spend is generally defined as the 20% (or so) of the total external spend attributable to the smallest 80% of suppliers.
Tail spend is primarily associated with indirect spend categories. In a 2017 study by Spend Matters, the typical company had about $1 billion in total indirect spending 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 spread across nearly 7,500 suppliers.
The tail spend Catch-22
Tail spend presents a classic Catch-22 for sourcing and supply chain professionals. When it’s not professionally managed, the result is often overspending and missed opportunities for cost savings. But because tail spending typically encompasses a large volume of relatively low-value purchases, managing the tail can consume a disproportionate amount of time and effort. 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 problem, companies have used various tools and techniques to manage tail spend. Tools and techniques including e-procurement applications, public and private e-marketplaces, and commercial purchasing cards. None of these techniques is comprehensive, and some industry experts have criticized 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 specific tool or technique to work well across the entire tail spend spectrum.
Solving the print tail spend problem
Printed materials and marketing services are significant components of tail spend at many companies. Most large and mid-size enterprises buy printing and marketing services hundreds – if not thousands – of times every year. The supply chain for printing and marketing services is usually fragmented, and purchases are typically made 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 actual one-off purchases.
As a result, purchasing printing and marketing services can be challenging for procurement leaders to manage efficiently. Fortunately, print e-sourcing technology solutions can enable companies to control this 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. Still, in our work with dozens of clients, we’ve identified three financial benefits that sourcing and supply chain leaders routinely say are particularly valuable.
Direct cost savings – The use of a print e-sourcing solution will reduce the direct costs of printing and marketing services by 14% to 22% in most companies. Print e-sourcing solutions drive immediate cost savings primarily by making it easy for companies to use competitive bidding on a widespread basis. 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 made without competitive bidding.
Indirect cost savings – As noted earlier, one of the critical 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 printing and marketing services purchases. In effect, a print e-sourcing solution increases the number of assets 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 numerous departments and business functions often purchase printing and marketing services, many companies don’t have accurate or comprehensive information about how much they are spending on such products and services. Poor spend visibility is an essential issue because it often contributes to overspending. A print e-sourcing solution centralizes the data regarding spending on printing and 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 and supply chain professionals will need to use various techniques and technology tools. Print e-sourcing solutions provide an effective way to reduce the costs of printing and marketing services. It can enable companies to tame this unruly component of their tail spend.
There may be several possible reasons for the different trajectories of advertising and marketing spending. For one thing, the absence of live sporting events has taken a significant bite out of advertising spending, especially spending by large national brands. In addition, many companies have recognized the importance of maintaining engagement with existing customers, which may account for some of the increase in marketing spending.