Head vs. Tails: The Shifting Focus to the Trivial Many
How many times have we used the 80/20 rule in our lives?
Ever since Joseph Juran, often known as "Father of Quality" interpreted the principle and coined the term, Paretos's principle or the wider known 80/20 rule, this has been one of the most applied and important principles guiding our focus on the Vital few.
Management experts across the world have adapted the rule across multifarious business areas, in building team focus, management of key stakeholders, clients and customers, in testing and sampling and decision making.
Procurement professionals have so far seemed to have taken the above as given. With the pressures of meeting the already existing challenges in managing critical vendors, shortage of resources and the not so motivating savings prospects from the smaller spend areas, the tail spend (the term used to represent the balance 20% spend apportioned across a mammoth vendor base) is often left alone to get longer and unmanageable. This often becomes the breeding ground for many procurement maladies like non compliances, inappropriate vendors, maverick spend and higher spend fragmentation.
While Pareto ratio does present a promising proposition in-terms of segmenting spend, however are we correctly utilizing it? In most cases we take it a rational basis for us Procurement wizards to choose to ignore a key portion of the supply chain.
Do you know that T. rex's long tail was its key to speed and hunting prowess? An animal whose long tail only served to counterbalance the up-front weight of its freakishly big head. Please excuse my poor analogy (which springs out of my obsession with this extinct species that walked the earth), but this latter portion of the spend does presents an important consolidation opportunity waiting to be tapped.
While the importance of managing the critical spend cannot be undermined, the long tail of balance 80% vendors contributing to approximately 20% of spend presents an innate unexplored potential waiting to be tapped. Our understanding that tail-spend accounts for large number of trivial spend transactions seems myopic as tail spend transactions typically span across a wider range of categories predominantly indirect and a few direct as well. (Note: The tails spend also need not necessarily be low value spend alone, it can also have several other characteristics)
So just when you thought you have expended all your saving options, Tail spend presents an important opportunity to directly impact the bottom line and bring in fresher opportunities. The flanking benefits include getting spend under active management, reduction of off contract spend and mitigation of supplier risk and risks associated with non- compliance. By managing your Tail Spend, as high as 20% plus savings could be easily obtained in the first year itself and @ 5% to 8% thereafter. Now put $ computations against these percentages against your spend and you see the opportunity size.
We live in times where every penny counts and therefore its time procurement stood up and took notice of this area which represents the useful (and not trivial) many. Think again!