Unraveling the Supplier Tail: Navigating Challenges and Opportunities in Supplier Management

In today's interconnected global business landscape, effective supplier management is pivotal for success. One often overlooked area is the management of the "supplier tail", also known as the B and C categories within the ABC classification. The supplier tail refers to the extensive list of suppliers that account for a relatively small portion of a company's total purchases but demand significant resources to manage.

The share of a company’s total cost that is procurement spend varies across industries with a typical average among service companies of around 30% and around 50% among manufacturing companies.

In Sweden alone the procurement tail spend is estimated to USD 80 Bn spread out across ~ 1 million suppliers. The global magnitude of the problem is 100 x that.

Delving into the Overlooked Purchasing Areas

The supplier tail describes the vast number of suppliers responsible for a minor share of a company's total purchases. These suppliers can range from small local businesses to large international corporations, supplying anything from office supplies to specialized machine parts. While each supplier in the tail might only contribute a small fraction to the company's total purchases, managing them can be time-consuming and expensive. Strategies like digital solutions, supplier consolidations, and approved vendor lists (AVL) can be employed for effective management.

Lost Negotiation Opportunities and Their Impact

While the supplier tail constitutes a significant portion of the total supplier base, it often represents a relatively small part of a company's total purchases. This is because major purchases are usually made from a few key suppliers. As a result, negotiations with suppliers in the tail are often overlooked, leading to missed opportunities for better terms and prices, and consequently, increased costs.

Benchmarking, a method of measuring company performance by comparing specific aspects of its products or services against best practices, can provide insights into areas of potential improvement. McKinsey & Company suggests that most companies can achieve 5-10% savings by addressing the supplier tail.

Embracing ESG Across the Supply Chain: The Strategic Importance of Including the Supplier Tail

Companies today are recognizing the imperative to integrate Environmental, Social, and Governance (ESG) criteria across all aspects of their operations, including their entire supplier base. This comprehensive approach extends to the supplier tail, the long list of suppliers that may account for a smaller portion of total purchases but still play a significant role in the overall supply chain. Managing ESG compliance and performance within the supplier tail is not merely a matter of ethical responsibility; it's a strategic necessity.

Failure to address ESG factors among these suppliers can lead to reputational risks, regulatory non-compliance, and potential disruptions in the supply chain. Conversely, a proactive approach to ESG in the supplier tail can enhance sustainability, foster innovation, and create value, aligning the entire supply chain with the company's broader sustainability goals and societal expectations.

Harnessing the Potential of the Supplier Tail

Despite the challenges, there's immense potential for companies to take control of their supplier tail and enhance their supplier management. Many companies in Sweden and the Nordics are shifting their focus towards managing their supplier tail, with a growing trend towards technology and automation. Agile principles and active planning play crucial roles in this process, enabling rapid and flexible responses to changes in the supplier landscape.

Globally, there's a vast potential for companies to control their supplier tail, especially in industries with numerous suppliers and intricate supply chains. Category management is another method to manage the supplier tail, grouping similar suppliers and products to streamline the purchasing process.

Conclusion

The supplier tail presents both challenges and opportunities for businesses. By understanding its scope and impact, companies can evaluate its influence on their overall supplier base. Addressing the supplier tail can lead to significant cost savings, stronger supplier relationships, compliance throughout and increased innovation, providing a competitive edge in the global market.

Key Takeaways:

--> The supplier tail represents a large group of suppliers that, while individually contributing a small portion, collectively require significant management resources.

--> Many negotiations are often overlooked, leading to increased costs.

--> Significant opportunities exist to enhance supplier management by addressing the supplier tail, with potential savings of 5-10% (McKinsey&Company).

--> Managing ESG compliance within the supplier tail is a strategic necessity for companies, impacting not only ethical responsibility but also reputational risks, regulatory compliance, and overall supply chain alignment with sustainability goals.

--> A growing focus on managing the supplier tail is evident both in the Nordics and globally.

Tips for Better Control Over the Supplier Tail:

--> Identify Your Supplier Tail: Begin by identifying the suppliers that constitute your supplier tail.

--> Understand the Costs: Recognize the real costs of managing your supplier tail, including direct and indirect expenses.

--> Adopt a proactive approach to ESG: Integrate ESG criteria across all suppliers, enhancing sustainability, fostering innovation, and aligning with broader sustainability goals to mitigate risks and create value.

--> Leverage Technology: Use technology to streamline the management of your supplier tail.

--> Negotiate Smartly: Leverage technology to negotiate all your suppliers.

--> Build Stronger Relationships: Effective management can lead to better service, higher quality, and more innovation.

--> Monitor and Evaluate: Regularly oversee and assess your supplier tail to identify potential issues early and continue improving your supplier management over time.