Supply chain finance – are you ignoring your greatest source of saving?

Supply chain finance – are you ignoring your greatest source of saving?

Posted by Pete Loughlin in Supply Chain Finance 07 May 2012

Supply chain finance is increasingly seen as a source of significant saving. By using supply chain finance tools and techniques, whether that’s simply managing payment terms better or whether it is by using more sophisticated techniques like dynamic discounting or reverse factoring, significant commercial benefit can be derived. Treasury managers are taking it more seriously but in many cases they are ignoring one of the biggest sources of saving and it’s right under their noses.

Purchasing Insight logoMap your organization’s suppliers by value of spend and it’s easy to see why most of your spend is with a small proportion of suppliers. It’s a typical 80:20 with 80% of spend with 20% of suppliers and classically, it’s within the 20% of the largest suppliers that there is most return to be derived from spend management.

 Supply Chain Finance - Supplier Tail

But take a step back for a moment and compare the “tail”, the 80% of suppliers that represent 20% of spend, with your other suppliers. When you aggregate the tail spend it often proves to be amount to more than your biggest suppliers.

Your supplier tail could be your most important supplier!

So if the tail spend exceeds that of your bigger suppliers, why is it ignored? Of course it’s more complex. Engaging with multiple small suppliers is very different than with a smaller number of large suppliers. But this is 2012 and in the era of “big data” management there are tools and techniques available to support even the most complex supplier landscape.

I recently spoke to Sid Vasili, CEO of Invapay, who specializes in helping businesses managing their tail spend.  “Lots of organizations are adept at extracting value from their core spend.” Sid told me. “Indeed for many, they’ve already squeezed out most of the benefit that’s available. Ignoring tail spend is potentially leaving huge amounts of money on the table.”

There is nothing wrong in focusing attention where it gives the greatest reward but, particularly for mature organizations, when major supplier spend has been optimized the significant benefits available from managing tail spend could be a new and as yet untapped source of savings.

To learn more about managing supplier tail spend more effectively, download the white paper “Supply Chain Finance – extracting value from the supplier tail”

  • Jonathan Bedard May 8, 2012 at 2:08 pm /

    Great paper Pete. The supplier tail is extremely valuable. The challenge for buyers is realizing this value. Electronic invoicing alone is not enough. It must be accompanied by an efficient on-boarding model that provides the right financial incentives for all suppliers to join. Learn more http://goo.gl/PVvEF

  • enrico May 11, 2012 at 4:27 pm /

    I have (1) a problem of understanding and (2) I see a big problem.
    (1) If 20% of the spend is in the supplier tail, how can their aggregated value become greater than that of the top suppliers? Shouldn’t is still remain 20?
    (2) I am convinced of the value of payables financing and working with suppliers to extract liquidity. However corporations- mainly the larger ones that can potentially gain lots of value from the tail of suppliers- are centralizing their procurement functions. Hence, the “control” of the supplier base has shifted from the periphery (i.e., the subsidiaries) back to the HQ. Is it realistic to think that a few buyers sitting at HQ have the time to chase the 80% tail suppliers? No argue that technology can spot out the ones to work with, but I am dubious that the “soft” part of the deal (i.e., negotiating with each tail supplier) will ever happen. And even unlikely that the buyers in the periphery can take this role, since there’s no buyers left in the periphery.

    I am seeing the concept of the tail much more applicable to the receivables side, where indeed clients “belong” to the periphery sales managers and where liquidity can be as well extracted with appropriate collection analysis and policies. Perhaps not using the DSO as the metric, but that’s another story.

    Happy to continue the discussion.

  • Jonathan Bedard May 15, 2012 at 11:58 am /

    All good points and questions Enrico. In terms of the value of the supplier tail, I interpret this as the cumulative value of the tail (20%) can, in aggregate, be as large as a top supplier, but certainly not as valuable as all of the top suppliers. On your second point, you highlight the key challenge of extracting value from the tail, as enterprises do not have the resources to negotiate with each supplier in the tail. The process of on-boarding the supplier tail will have to streamlined and automated as much as possible.

  • T Collins June 1, 2012 at 4:17 pm /

    Dynamic Discounting is rapidly gaining acceptance among AP departments at large corporate organizations because it can save buyers up to 0.5% of their annual spend. Taulia’s Dynamic Discount Optimizer maximizes your AP department’s revenue generating potential by offering your suppliers early payments and dynamic payment terms.

    Visit http://www.taulia.com/en/platform/dynamic-discount-optimizer.html to read more.

  • Vinod June 8, 2013 at 2:22 am /

    Centralization of procurement would also lead to probably reducing the spend on the supplier tail by moving the products or services being procured from them to one of the main suppliers.
    Yes, there may be a question of increasing dependency on a certain supplier but we are in the era of partners rather than supplier-customer relationships.
    Therefore I think proper analysis of the tail suppliers can lead to consolidation of the supplier base

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