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.
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.
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.
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.
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.
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.
