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Outsourcing to enhance TCO savings

Forward looking companies are presently seen to actively consider outsourcing of their tail end spend to achieve total cost of ownership savings. Tail end spend normally constitutes those items which contributes to maximum count of purchase orders and leads to interaction with numerous suppliers. Outsourcing these tail end spend frees up the internal procurement resources of the company who then starts to focus more on their high end spend which offers maximum cost savings opportunity. This enhances TCO savings for the company.

Perhaps the most pertinent learning from the pandemic is the need for de-risking and controlling the supply chain which requires huge management bandwidth. The creation of an efficient and consolidated supply chain strategy to address the tail end spend is thus the need of the hour for an organization. This will free management bandwidth, diminish supply risks, provide hard cost savings, reduced inventory and working capital. It is a decision that must, therefore, be properly researched, and must necessarily take into account far more than the unit cost of individual products. From being an option few would consider a decade ago, procurement outsourcing is now an increasing popular course of action for many manufacturers across the industry sectors who are achieving measurable benefits as a result. Tail end spend management is not limited to a particular industry sector or organization. Incidentally, Industry leaders across sectors as diverse as Heavy Manufacturing to Real estate and Automobiles to Food & Beverages has chosen mjunction as their preferred partner for procurement transformation in Tail end spend management.

Finding the tail
If we make a simple spend analysis or make a list of the items an organization procures over a period of time we would be able to identify a long list of certain items which are low in value but significantly high in numbers. We call it the Tail end spend. If we apply here the Pareto’s principle we would be fair to assume 80% of these items by number contributes to only 20% of the total spend, while the balance 20% of the items (by number) contributes to 80% of the total value. While this ratio of 80:20 may not be exactly true in all cases and there may be certain deviations, this principle holds an important key to stratification of the overall spend of an organization and the prioritizations of the various strata for optimal efficiency of the procurement function. Understandably there is an obvious organizational focus on the ‘vital few’ which is the biggest component of the total procurement budget. However an improper approach to the tail end spend can have negative impact to the procurement function which would finally lead to related organization inefficiencies. Due to the low value of the tail it’s often the most ignored part of the procurement spend and hence might be managed badly. More than missing the savings opportunity it may often result in

1. Poor delivery compliance resulting in risk to business operations
2. Increased inventory levels owing to increased cycle time which blocks the working capital
3. Poor contract coverage leading to increased Maverick Spend

This often spoils the great work done by the buying team for the major spend buckets. The tail-end buys are not mission critical yet timely availability must be ensured for smooth business operations. Moreover the humungous list of tail end buys often occupies a significant bandwidth of the procurement team, finance & accounts team and even the management as the number of transactions are significantly higher than in case of major items. Often these items are single time buys and every time a new vendor has to be inducted in the system to get the required product or service further increases the pain of the procurement team as well as finance & accounts team.

Benefits of single supplier for tail-spend
Apart from mitigating the risk of GST input credit there is transfer of an overarching risk of disastrous supply interruptions from the largest portion of supplier base by appointing a single supplier for the tail end buys. Also there is a risk associated with delayed payment to MSME suppliers and financial liability therein. Notably the tail end buys are mostly catered by MSME suppliers who have statutory protection incase payment is deferred by their customers. This liability arises if ordered goods are delivered but Goods/ Material Receipt Note (GRN/ MRN) is delayed beyond stipulated credit period. This is aggravated due to lack of uniform processes across different plant locations. mjunction played an important role in rationalization the processes which helped client organization to manage their tail-spend in a better way.

The pandemic has taught us many lessons in supply chain management and perhaps the most pertinent being the risk to business continuity. With little or no knowledge of the fragmented small time tail end suppliers there is immeasurable risk of defaults. The business share is often insignificant for these individual suppliers too hence it’s prudent to consolidate the tail end supplies and outsource to a single supplier. To sum it up the primary and most important benefit from this kind of engagement is- Unlocked management and transactional bandwidth which could be best used to manage strategic and high value items and enhance Total Cost of Ownership savings for the company.

Authored by

Kaushik Sarkar

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