Every year, retailers make millions of small and infrequent purchases that are outside of their core spend areas. The final 20% of spend, or the 'long tail', may not represent the majority of a retailer's spend, but it often covers 80% of the suppliers', who often generate most of the supply chain 'noise' and consume significant working capital.
While retailers invest heavily in managing their core spend areas, they tend to neglect this tail spend. The trend is that the tail is getting longer, so neglecting to manage tail spend can potentially lead to mounting waste, every day, across the business. On the other hand, managing it more effectively can deliver significant cost savings and free-up precious time and resources for retailers.
What drives the long tail?
Long tail originally occurred in online retailers such as Amazon, whose environments were less affected by the physical constraints of manufacturing, production, and distribution. Today, most retailers, online and bricks-and-mortar alike, operate in long-tail environments.
A main driver of long tail is customer demand, which is increasingly scattered geographically, is in smaller quantities, and requires more specialised products. Other drivers include product proliferation, shortened product life spans and omnichannel sales. These all contribute to an increase in demand for items that are not particularly predictable nor do they have high volumes, but are still important to the business.
What problems does the tail cause?
Managing the tail is much more challenging than the core spend area. In a single retailer the tail spend may include tens of thousands of items across a daunting range of categories. These items are fragmented and can involve hundreds of different suppliers. Each individual purchase may be of a fairly low value, with the purchasing patterns often erratic and infrequent.
The sheer numbers of suppliers and the lack of visibility into the purchases make it difficult to forecast and manage inventory accurately. As a result, inventory mixes in a long-tail environment become misaligned. Some products are over-stocked, others under-stocked, and both impact the top and bottom lines. The tail consumes significant working capital, without delivering the desired level of results.
How can the tail be managed?
Despite the challenges, it is possible for retailers to make the most of this long-tail environment – and even to succeed if the supply chain, its composition and management are enabled in particular ways. There are three key measures that retailers can take:
1. Consolidate the supplier base
This should begin with a full review of all suppliers to gain a proper understanding of the existing supply chain. Small spend areas or small suppliers should then be aggregated into larger contracts or particular categories so a list of preferred suppliers can be used in the future with confidence.
By reducing the number of suppliers and spend areas, retailers can become more transparent and efficient, reduce invoice numbers and have clearer visibility around spend.
2. Simplify process & technology
Given the infrequent and unpredictable nature of long tail demand, it is crucial to adopt accurate demand and inventory models to support reliable service levels and good inventory management.
Processes that enable clear, end-to-end visibility around spend is also essential. This process should take into account the industry and category right down to the line-item level. This will help procurement teams identify inactive and duplicate supplier accounts and other efficiency opportunities.
3. Outsource to a partner
Another option is to sub-contract the whole tail spend to a single or a smaller number of suppliers. The logistics of the tail supply chain can then be self-contained and managed by the outsource partner.
As retailers look for ways to relieve margin pressures, achieving efficiency and transparency in tail end spend can be easier and require fewer resources than generally believed, with the returns much higher if the right measures are adopted.
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