Vendor Consolidation & Tail Spend Management
Tail Spend Management is the process of managing the long tail of a supply chain, namely the procurement of indirect goods, small value orders and ad-hoc purchases. According to the Pareto rule, the ‘long tail’ represents approximately 80% of a company’s suppliers yet only accounts for 20% of its spend. Paradoxically, the time and resources needed to manage the 20% spend will often far exceed that of the 80% given the highly transactional nature of tail management. Download our Tail Spend Management Whitepaper.
As a result of globalisation, the ‘long tail’ has grown significantly for many manufacturing organisations as they bring on board new and specialised materials suppliers in their efforts to satisfy the varying and increasing demands of their end customers.
In an attempt to efficiently “manage the tail” and achieve economies of scale, supply chain and procurement managers will invariably end up buying too many items from too many different suppliers, which leaves them sitting on inventory levels that significantly exceed customer demand.
This excess inventory adds no value, and in incurs cost. It represents cash that could otherwise be invested in business growth and value-added activities.
While managing the tail effectively and efficiently is a challenging prospect for most organisations, there are a number of techniques available to supply chain and procurement professionals, which include:
- Consolidating the company supply base
- Reviewing and comparing prices from different vendors
- Bypassing distributors and buying direct from suppliers
- Monitoring supplier performance and lead time issues
- Identifying materials or parts that are a regular cause of work order delays
These solutions can be difficult to implement, due to the specialist systems required, and the time and resources it takes to put the necessary systems and processes in place. As a result, more companies are beginning to outsource ‘tail management’ in its entirety to specialist supply chain companies, who are experienced and equipped to generate cost and efficiency improvements on behalf of their client companies.
Today’s customers are demanding – this applies to both external consumers and internal stakeholders within an organisation. Customers demand more speed in the supply chain, visibility into operations, more product choice, customised orders, and omnichannel flexibility. Such demands require more variety of materials from a wider base of suppliers, each of whom needs to be trustworthy and reliable.
This requirement forces supply chain and procurement professionals to bring on board more vendors, manage more individual transactions, quality assure the materials supplied and make sure stock is delivered to the right destinations at the right times.
Needless to say, these tasks present serious supply chain challenges which can be very difficult to overcome:
- Purchased Costs: As the number of suppliers to an organisation increases, it’s buying power decreases. The annual savings and economies of scale associated with purchasing in bulk (unit prices, shipping rates, handling fees, taxes, duties etc.) decreases with the number of suppliers, particularly when dealing with low-value orders.
- Supplier Interaction Costs: With more suppliers, the number of separate transactions increases along with the amount of time required to manage those suppliers. According to a 2012 procurement report by the Hackett group, it costs an organisation between $700 and $1,400 to source a supplier, set it up on internal systems and transact with that supplier. In addition, the cost of processing a single purchase order can range from $50 to $250.
- Inventory Carrying Cost: In order to achieve volume discounts, materials need to be bought in bulk. Buying in bulk from many different suppliers means carrying lots of stock, which needs to be stored, secured and managed. This costs money.
- Increased Non-Compliance: Suppliers to a business must have the right processes and systems. The more suppliers a business has, the more challenging it becomes to monitor against ever-increasing internal compliance and supplier regulatory requirements.
- Working Capital*: Not only does it cost money to store and manage inventory, the inventory itself represents valuable cash that could otherwise be invested for business growth.
Vendor Consolidation is a procurement practice that involves lowering the number of vendors (suppliers) that a company buys from. Instead of spreading out spend across a large number of suppliers, a company will focus spend on a limited number of select vendors. This is a fundamental first step in optimising tail management and brings with it a number of key benefits:
- Complexity Reduction: Having a smaller number of suppliers means fewer relationships to manage and it also makes it easier for supply chain managers to automate interactions between This, in turn, frees up their time to focus on value-add activities and strategic vendor management.
- Cost Management: Fewer vendors means less money spent on individual supplier freight charges as well as the internal process costs required to manage large volumes of supplier transactions.
- Continuity of Supply: Reducing the number of suppliers, particularly those that supply low-value materials and are dealt with less frequently, reduces the likelihood that orders will be delayed or not delivered. Maintaining a smaller base of trusted suppliers that understand the business requirements significantly reduces quality and lead time issues, providing certainty of supply and peace of mind.
As supplies become more commoditised, there are fewer price differences to be found amongst vendors. Price matching tools enable the detailed comparison and review of prices, particularly where multiple vendors are available for the same SKU (stock keeping unit) or line item. Where all things are equal, a manufacturer should always purchase a specified item from the supplier that offers the best value. Price matching delivers the following specific benefits:
- Lower Prices: Open-book pricing allows manufacturers to ensure that competitive prices are obtained for materials By consolidating spend amongst the most cost competitive suppliers, manufacturers can benefit from significant economies of scale.
- Cost Transparency: Materials that are priced on an ‘open book basis’ provide buyers with full transparency of costs at each stage of the supply chain, and this also eliminates multi-vendor margins.
Progressive manufacturers have begun migrating from distribution to fulfilment supply models, bypassing inbound distributors and buying directly from their materials suppliers. By transitioning to this model, manufacturers can benefit from:
- Lower Prices: Distributors, on average, mark-up materials by 25-30% before selling these on to manufacturers. Buying directly from the supplier removes an additional layer of cost and allows companies to benefit from significantly lower material cost prices.
- Internal Cost Reduction: Accurate demand forecasting and planning facilitates just-in-time delivery, removing the necessity for internal logistics while reducing excess labor, distribution, and overhead costs.
- Supply Chain Control: Eliminating reliance on distributors gives supply chain managers more control, reducing the risk of poor lead-time performance or delivery failure. In addition, more favourable T&Cs and supply chain control can be established for the manufacturer through the development of direct supplier relationships. If done correctly, removing distributors and creating a transactional based supply chain can increase inventory visibility.
Lead Time Maintenance
By investing in advanced materials resource planning (MRP) systems or engaging with a partner with the right analytical tools, it is possible for manufacturers to identify lead time issues early, measure vendor performance & maintain accurate lead times. Specifically, companies adopting this technique benefit from:
- Shorter Lead Times: By achieving Just-In-Time (JIT) or On-Demand Fulfilment, companies can reduce their costs, prevent order delays and improve customer/ stakeholder satisfaction.
- Reduced Lead Time Variability: Lead time maintenance can reduce or eliminate the variability of lead times, enabling supply chain and procurement managers to optimise their planning & demand management processes.
- Inventory Accuracy: Certainty of lead time improves supply chain decision making, facilitates better purchasing and ensures that manufacturers consistently have an accurate mix and quantity of SKUs delivered to the right locations.
- Preserved Cash-flow: Manufacturers can place minimum order quantities (MOQs) on materials and do not have to rely on buffer stocks in the event of late or non-delivery. Importantly, this means less capital tied up in stock and more free-cash for investment.
Culprit SKU management requires the analysis of work orders in order to identify and eliminate “first culprit” chronic SKUs that are the cause of work order delays. The ability to identify culprits and take remedial action delivers the following benefits:
- Quality Assurance: Identifying and replacing culprit parts (and the vendors that supply these) can dramatically improve the quality of supply.
- Reduced Work Order Delays: Having stock on time reduces or eliminates delays in work orders which avoids stakeholder dissatisfaction and the costs associated with The incremental value of an on-time work order can be valued in the region of $500.
- Better Buying Decisions: When consistent lead times are maintained, supply chain and procurement managers can make better decisions with regard to the level and mix of stock orders.
One option for companies looking to optimise supply chain cost, capital and complexity are to outsource the management of their non-core vendors.
An ‘alpha supplier’, such as Exertis Supply Chain Services (SCS), can assume full responsibility for the procurement, management, and supply of inventory from non-core vendors directly to a manufacturer on-demand. Since taking over tail spend management for a global med-tech firm, Exertis SCS has delivered procurement cost savings in excess of 20% for that client.
The following case study summarises the benefits that Exertis SCS is delivering for a global industrial manufacturer after taking over the management of its non-core Approved Vendor List (AVL).