Demand Management & Tail-end Management:
Optimizing indirect procurement
Indirect Spend Whitepaper 2021: challenges, underrated potentials, and opportunities
Companies are currently being forced to reduce their costs. The pressure to realize savings has intensified, not least as a result of the pandemic. Nevertheless, the optimization of indirect procurement is neglected and underrated as a source for cost reduction. The numerous categories involved are too complex and untransparent. However, there are solutions to effectively and sustainably master the challenge of indirect spend.
Overview of approaches to optimize indirect spend
To address the challenges of indirect spend, procurement needs innovative means and complex approaches that go beyond traditional levers such as increasing competition among suppliers. Only in this way can all opportunities truly be realized and procurement is able to contribute value that can be sustained.
Examples traditional levers
- Bundling demand: Consolidate demand into larger order volumes with the aim of reducing prices
- Increase competition: Stimulate competition by introducing new suppliers, reducing current suppliers, and running tenders
- System suppliers: Bundle demand to one supplier to reduce the margins otherwise paid to multiple suppliers
- Supplier development: Establish new suppliers with high potential; develop cost reduction approaches with incumbent suppliers
Examples complex levers
- Demand management: Reduce existing standards, e.g. through guidelines and eliminating unnecessary demand
- Optimize processes & tail spend: Rationalize processes to reduce inefficiencies; implement e-catalogs
- Target costing: Analyze the cost structure to increase efficiency or reduce costs
- Expand international sourcing: Use global markets to select and expand the supplier base
The comparison of the efficiency of the different levers can be found in the detailed PDF version of the whitepaper.
Demand Management: Objectives & role of procurement
Demand management is about cutting the consumption itself, in contrast to traditional optimization of a defined demand through negotiation, re-specification, or bundling. This is one of the strongest levers in indirect procurement and goes beyond established procurement activities.
The goal is to eliminate unnecessary requirements and reduce established standards to minimize budgets and cut costs. In addition, a value-analytical approach can increase the relationship between output and quality by using monetary resources in a more targeted manner. With demand management, Procurement has an expanded role to play in ensuring that indirect spend is
cost-effective. Instead of focusing purely on cost optimization, Procurement examines the necessity of budgets and associated costs. Only with the help of the demand management lever can category-driven addressability be increased by reducing demand.
Complexity of demand management
How complex the demand management approach is and what potential it can extract depends on various factors. In general, the more heterogeneous the demand structure, the more complex demand management becomes. The heterogeneity can be based, for example, on a decentralized specification of requirements: different locations lay out the required quality or their individual service requirements differently. In these cases, there is a need for harmonization in advance. Once this has been done, it is possible to implement demand management levers.
In our white paper, you can find out how you should proceed in demand management and which factors have a decisive influence on success – among other things, with the help of a harmonisation project example from INVERTO in the stationary non-food retail sector.
Challenges of tail-end management
The tail-end spend comprises the sum of all small purchase volumes across the supplier base. It typically makes up 10-20% of the total procurement spend. Because of its high degree of
fragmentation, tail-end spend brings two challenges with it: on the one hand, high transaction costs in relation to the contribution made by the products or services from individual suppliers; on the other hand, the cost of optimization initiatives is often disproportionate to the success that can be achieved.
Due to the small size and the wide spread of requirements across different users in the company, these purchases are not managed by Procurement. Therefore, in many cases, a high previously unrealized cost reduction potential can be assumed.
Further contents of the whitepaper on tail end management:
- Approaches to long-term optimisation
- An example from practice
Stakeholder management – basis for success
Given that indirect spend categories are often the responsibility of departments, effective stakeholder management is indispensable. Only by involving all parties in the entire optimization process at an early stage can complex levers such as demand management and tail-end management take effect and deliver value. Involving all stakeholders can also create the transparency that Procurement has been lacking in these categories up to now.
In our whitepaper, we introduce you to underestimated and innovative solutions that can help you realise your savings potential in indirect procurement. We also describe the basics that need to be taken into account in order to secure cross-company and cross-departmental support for optimising indirect spend.