Stop Chasing Your Tail: How to Design & Implement a Tail Spend Management Program

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Information about Stop Chasing Your Tail: How to Design & Implement a Tail Spend...
Business & Mgmt

Published on March 6, 2014

Author: Ariba



Sourcing and procurement organizations are under pressure like never before. Not only are they responsible for purchasing at a time of volatile commodity prices and supply market risks but, like other corporate functions, they are expected to do more with less funding for their operations. At the same time, they are being tasked with delivering business value through innovative, agile, and flexible operations.

Amid these pressures, one place where procurement may be leaving money on the table is in the low-value purchases generally known as tail spend. Join Accenture as we help you better understand the unrealized value that exists in the tail, and more importantly, how to manage your tail spend cost effectively and to achieve up to 12% of realized savings, allowing you to remain focused on strategic purchasing. Hear client case studies of how high performing companies manage their tail spend with innovative use of tools and service delivery models.

Learn more about Ariba LIVE at

Getting a Grip on Tail Spend Accenture #AribaLIVE Accenture - Confidential

Today’s Facilitators Accenture Sourcing & Procurement Services Vikrant Viniak Steve Davenport David Morgenstern Accenture - Confidential

Focus Areas • Tail Spend Defined • Challenges & Characteristics • The Opportunity • Case Study1 • Solutions and Tools • Case Study 2 • Q&A 3 © 2014 Ariba – an SAP company. All rights reserved. Accenture - Confidential

Accenture Sourcing & Procurement Services Complementing our clients front, middle and back office procurement fuctions On-Site (Engagment) • 2000+ Sourcing & Procurement consultants – Strategy Setting – Stakeholder Management – Demand Management – Budget Integration • 750+ Category Managers for category aggregation Regional S&P Centers (Enablement) • Sourcing Utility and eAuctions • Contract Management & Enablement • Spot Buys and Tactical Sourcing desk • Compliance analytics and interventions Prague Bratislava Project/ Stakeholder Mgmt 4 Complex Sourcing Execution © 2014 Ariba – an SAP company. All rights reserved. Spend Analytics Req-PO processing MDM and Catalogue Enablement Supplier Helpdesk Application Outsourcing Dalian Delhi Mumbai Bangalore Sao Paulo Johannesburg Sourcing Support 1:N Category Management • • • • • Pittsburgh Philadelphia Buenos Aires Strategy Setting Global Hubs (Efficiency) Auction Execution Contract Enablement Assisted Buy Desk Spend/Supply Mgmt/Analytics User Help Desk Accenture - Confidential Manila Mauritius Brisbane Requisition & PO Processing Vendor Master Data Mgmt Supplier Help Desk Infrastructure & App Outsourcing Invoice & Payment Processing

Business Outcomes That Focus On The Compliance Imperative For All Spend - $155M Of Realized Savings Savings Potential from Category Management Increased Spend Under Management Spend reduction of $150M after sourcing program Higher Frequency of Sourcing Events Increased Saving % per Sourcing Event $150M of sourcing savings often erodes to $75M based on typical 50% compliance rates 5 © 2014 Ariba – an SAP company. All rights reserved. Savings Realized from Procure to Pay Operations Lower cost of running Buying Operations via automation and labor costs Improved Compliance to preferred vendors and contracts via catalogs and assisted buy desks Improve compliance from 50% to 90% Increased Spend Mgmt & Savings of one-off purchases via spot buy capabilities Driving compliance to 90% to capture $60M of leakage, and capture all non-contract and tail spend via spot buy desk to drive 20 M$ incremental spot buy savings Accenture - Confidential

Understanding Tail Spend Challenges and Characteristics • Every year, companies make millions of purchases that are too small to be handled by procurement or too infrequent to • be included in catalog systems. While most companies believe they have most of their purchasing categories under control, they tend to neglect this tail spend - the considerable portion of their total spend made in purchases, for example, of less than 200K USD. Sourcing or some contract takes care of this? We have a catalog or PCard for these? Low Value $2 K or Less $200 K or more What about me?  Often uncontested  Poor stewardship  Lack of real time visibility 6 © 2014 Ariba – an SAP company. All rights reserved. Accenture - Confidential High Value

Automating Buying Channels While automating buying channels is the end goal for all P2P programs, we must acknowledge that: ‘free text and non-contract and non preferred vendor buying will always exist’ Buying Channels Opportunity to influence compliance high low 7 Procurement involvement high medium 5 1 no (automated) 3 2 4 2 1 3 6 4 5 7 Efficiency © 2014 Ariba – an SAP company. All rights reserved. Supplier agreement Price defined Automated -   Self service content enabled -   Assisted buying   - Framework PO -  - Ad-hoc requests  - - -  - - ? - 6 Self enabled sourcing Maverick Buying low Procurement involvement high 7 Valid non-PO Accenture - Confidential

Got a Grip on Tail Spend? Ask yourself these questions: • How do you know when your company has a problem with tail spend? ♦ Number of suppliers > number of employees; ♦ 2/3 or more of suppliers supply only 5 percent of spend; ♦ < 70 percent of reqs negotiated by procurement; ♦ > 10 percent new suppliers added each quarter ♦ < 50 percent of transactions with preferred suppliers; ♦ < 50 percent of purchases automated—e.g., through catalogues. If two or more of the above statements apply to your procurement organization, you need to get a grip on your tail spend! 8 © 2014 Ariba – an SAP company. All rights reserved. Accenture - Confidential

Tail Spend Even when you understand, or suspect, that you have a problem with tail spend, why is it so difficult to come to grips with it? • • • The sheer numbers of suppliers in the tail make it difficult to manage it effectively. Lack of visibility into purchases in the tail can make it difficult to manage it effectively. You may suffer from “tail spend fatigue,” with procurement managers too busy handling small purchases and putting out fires to be able to analyze and address the root causes of tail spend. • • Your procurement professionals may be too expensive to involve in low-value spend. Change means aligning consumption policies and P2P processes and having the IT to support them. Accenture has found that the most powerful method for dealing with a procurement organization’s tail spend challenges is to segment the tail and then address the unique issues posed by each segment. 9 © 2014 Ariba – an SAP company. All rights reserved. Accenture - Confidential

TSM A TSM Program will unlock $12M-$20M annual value in a typical $1B overall spend organization while bringing full visibility to this spend Total spend (by supplier) 3 Non-compliant reqs • 10 2 Recurring reqs that can be aggregated / managed 1 One-off reqs that can be negotiated by spot buy desk 4 Tail of the tail to monitor Managed spend Managed spend Tail spend TSM programs create value from: ♦ 1- Ongoing spot buy of non-recurring requisitions; ♦ 2 - Reducing overall tail spend through pro-active contract creation of recurring requisitions– one off or ongoing initiative; ♦ 3 - Routing of non-compliant requests to compliant contracts; ♦ 4 - Self enable requisitioners, monitor this spend to assess any recurring opportunities © 2014 Ariba – an SAP company. All rights reserved. Accenture - Confidential

Case Study 1: It’s All About Speed Life Sciences - Scope of work/business challenge • Facing significant challenges in their sales pipeline due to patent expirations that would impact over 20 percent of their net revenue • Launched cost management programs designed to address shortterm fiscal challenges and to achieve immediate cost reduction • Used Accenture’s Tail Spend Management approach to accelerate and exceed cost savings targets 11 How Accenture’s solution assisted • Scope: spot buy targeted key spend areas including Non production goods and services requests (RFPs, pre-shopping carts, MRO, capital spend, and shopping carts). • Profile: spend and site thresholds set > $10,000 in USD or currency equivalent. • Process: facilitate spot buy and RFP processes, negotiate with vendors, conduct bid walks (capital), obtain market/competitive quotes, and leverage preferred and diversity suppliers. • Track and measure all activity in spot buy tracking system. • Provide bid analysis summary and award recommendation. • User Satisfaction: Focus on Turn around time . Program Focus Planned Actual TAT (Turn around Time) 8 days or Less 2 days Per Transaction savings Target 10 % 18 % Volumes of Reqs 500 800 Representative Categories Capital Infrastructure Lab Equipment Facilities Reagents MRO Marketing IT Services Chemicals Research and Development Spectrometers Pro. Services Storage High performance and results achieved  Global program status (accepted)  10 Spot Buyers ~ 800 transactions a month  95 percent of spend one time buys—5 percent driven to existing agreements  Savings rate > than SLA targets Accenture - Confidential

Tail Spend Solution • • 2 - Run-state operations to process tail (in-house or 3rd party) – Category Cards – Tools and Technology • 12 1 - Reshape the tail – one-time intervention to shrink tail 3 - Policy changes to challenge behavior and centralize the ‘buy’ © 2014 Ariba – an SAP company. All rights reserved. Accenture - Confidential

Quick Wins and Tail Shrinking Program Duration: 12 – 16 weeks Purpose: • Execute Tail Spend Reduction for Wave 1 categories • Work with suppliers to maximize # of contracted order lines • Prepare technical catalogue enablement and end user communication Deliverables: 1. Proposal of contracts ready for negotiation /implementation (actual negotiation under responsibility of Local Buyer) 2. To-Be Category Buying Channel allocation 3. Item list for upload to eCatalogues New contracts/ Catalogs Copyright © 2013 Accenture All rights reserved. Accenture - Confidential 13

Technology Enablers Supplier Networks are key to efficient Spot Buying Supplier networks Collaborative Planning & Forecasting Supplier Discovery Order Management Sourcing & Tendering Category Management Content Management Transactional processing Logistics & Traceability Contract Management Claims Management Source: "Supplier Portals & Networks Research", Accenture 2013 14 © 2014 Ariba – an SAP company. All rights reserved. Accenture - Confidential Discounts & Supply Chain Finance Invoice & Payment Processing Supplier Qualification & Accreditation Supplier Relationship Management Supplier Performance & Risk Management Supplier Development Supplier Collaboration

Technology Enablers: Ariba Spot Buy Solution Ariba offers integrated and non-integrated solutions to support your Spot Buy desk. Buyers Ariba Sourcing (On-Demand, On-Premise) Ariba Procure-to-Pay/ Procure-to-Order Ariba Discovery (Website) Ariba Discovery Sellers Ariba Discovery (Leads) 15 © 2014 Ariba – an SAP company. All rights reserved. Ariba Sourcing (Proposals) Ariba Contract Mgmt (Contracts) Accenture - Confidential Ariba Network (Orders & Invoices)

Case Study 2: Bringing Spend Under Management Potential benefits from Spot Buy capability amount to $3M, with increased governance, compliance and fraud protection Spot Buy - Quantitative Benefit 8,200 addressable orders annually with value range from $5k to $250k per order • $ 135M in addressable spend, mainly based on noncontracted and one-off purchases • Spot buy capability is expected to deliver potential annual benefits of $3.0 to $ 5.1 M Spot Buy - Key Qualitative Benefits • Increased spend under management through active competitive bidding for comparable product/service • Enhanced governance, compliance & fraud protection, through formalizing procedures for non-standard purchasing activities • Easier identification and reporting of potential noncompliance (eg. order splitting) Master Data Management - Key Benefits • Single standard material and vendor master as ‘single source of truth’ across the organization • Standard processes for creation and maintenance of master data channelled to a single team • Additional support around high number of material and vendor master related queries • Some quantitative benefit driven through utilizing offshore resources for master data related activities Helpdesk - Key Benefits • Accurate reporting on queries identify issues in current processes & aid continuous improvement • Reduction of requisition to payment cycle time leading to faster resolution of purchasing queries • Effective support aiding in smooth implementation of new processes across the business • Some quantitative benefit driven through utilizing current staff for more value added activities • 16 © 2014 Ariba – an SAP company. All rights reserved. Accenture - Confidential

Examples from the Field “Day in the life of” examples of the TSM delivery desk: multiple tactics to address spend Demand generation Team found out about a project to update signage in building • First orders already completed • Partnered with requesters to validate additional opportunity • Realized new projects were imminent • Negotiated with existing supplier and achieved 5% savings Spot buy • • • • 17 Single vendor negotiation BU claimed that current pricing is consistent with previous pricing • Vendor’s original quote does not state OEM part numbers (shows limited information) • Desk asked for the OEM part numbers, performed market research and discovered that the vendor pricing was 22% higher than market price • Negotiated 24% price reduction Proactively discovered a competitive bid was required for a mass annunciation system between two vendors Vendor A offered the most modest price but equipment was off site and required moving costs Vendor B offered a modest price, but had some equipment on site which was also compatible with the existing system Approximately $1 million in savings (10%) © 2014 Ariba – an SAP company. All rights reserved. Spend analysis RFX process Site capital project to build an enclosure around the boiler located outside a building on the site • Identified six general construction firms • Worked with lead engineer to provide information about the four additional firms • Tactical sourcing agent involvement – from RFP generation through contract approval • Negotiated 12% savings Site has significant amount of MRO SKUs • For a specific part, site wanted to know what other sites were utilizing the same make/model • Tactical sourcing agent leveraged spend analytics to see which sites were utilizing parts • Approximately $500,000 in savings (12%) Accenture - Confidential

Summary and Takeaways • • • • • 18 Analysis will create a burning platform – procurement audit and/or savings driven business case Policy support and Change Mngt critical ; on-going site interventions will be needed Right-size choice of tools to ensure high user adoption (web portals vs ERP) Continually monitor for consolidation opportunities – tail can shrink to a minimum size of oneoff occasional buys. Turn off suppliers not used for a year… Investigate Make vs Buy – need low cost footprint to be effective here, along with the right upfront transformation of the buying process and deployment of tools/processes. © 2014 Ariba – an SAP company. All rights reserved. Accenture - Confidential

Getting a Grip on Tail Spend – read more 19 © 2014 Ariba – an SAP company. All rights reserved. Accenture - Confidential

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