Webinar :
Cross-border Purchases and VAT: Optimization Strategies
Tuesday June 4, 2024 at 11 am
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Non-strategic purchases (also called Tail Spend purchases or spot purchases) are few in volume, but represent hidden costs important for the business. Thus, 5% of the total volume of business purchases are considered as Tail Spend purchases, that is, generic purchases that are low in value, non-recurring and non-critical. On average, they represent 70% of hidden costs in business. This figure highlights the need to optimize the management of Tail Spend purchases. Improving the purchasing policy, by outsourcing this function among others, is the only way to reduce the hidden costs associated with spot purchases and to ensure the sustainability of a company's activities. In this article, find out how outsourcing procurement can help eliminate hidden costs associated with Tail Spend purchases.
Accounting makes it possible to know and evaluate the various costs of a company in order to implement a good management strategy to improve its performance. However, not all costs are reflected in accounting. There are also what we call hidden costs. It's the Henri Savall's hidden cost theory. The latter is an economist and professor of management sciences at the University of Lyon III. He created the ISEOR, or Institute for Socio-Economy of Businesses and Organizations. The latter develops tools and methods for optimizing costs based on the relationship between hidden costs and business performance.
According to Henri Savall, the hidden costs in business are simply invisible costs that do not appear in the company's accounting. Unlike visible costs, which have a specific name, they are real costs or lost profits that are not listed or misidentified in the accounting system. However, they can hurt business performance. That's why they're also called non-performance costs.
Les hidden costs in the business reflect the existence of organizational anomalies or dysfunctions. Among the origins of hidden costs, we can cite poor quality products, excessive staff turnover, non-compliance with deadlines, absenteeism, etc. Note that the regulatory mechanisms put in place by managers to correct hidden costs themselves cause hidden costs. Indeed, they involve a loss of time for managers, new investments and the establishment of a new organization.
In the accounting system, hidden costs can be merged into the costs of products and services or equated with opportunity costs. Depending on the services or functions concerned, there are several types of hidden costs in business : the hidden human resources costs, the hidden costs of management control, the hidden costs of the purchasing department... hidden costs of Tail Spend purchases are among the latter.
Business purchases can be classified into three categories according to Pareto's law: class a, b, and c purchases. This classification confirms another categorization of purchases: direct purchases and indirect purchases.
- Direct purchases: also called strategic or productive purchases, direct purchases are purchases of products or raw materials that enter directly into the production process. They correspond to Pareto Principle Class A purchases. They represent 80% of the total volume of business purchases. As these are strategic purchases, they are almost systematically optimized by the Purchasing Departments.
- Indirect purchases: as their name suggests, they do not enter directly into the production process. They are also called non-strategic or non-production purchases. They can be classified into two subcategories: Class B purchases and Class C purchases.
The former refer to non-production purchases that are both strategic and recurrent. Computer hardware, vehicle fleet, and travel fall into this category. They represent 15% of company expenses. As they represent a strategic challenge, class B purchases are also rather optimized by Purchasing Departments.
This is not the case with low-value Class C purchases, which are often overlooked by the company, as they are considered to be non-strategic. They represent 5% of the volume of business purchases. Tail Spend purchases are purchases of products or services that are useful for the proper functioning of the business, but that are not strategic. Unlike Class B purchases, they are not recurring. They are therefore punctual and not very predictable. Office supplies, furniture, personal protective equipment, personal protective equipment, hygiene products and small tools are part of this purchasing category.
Despite their small amount (less than €500 per order), Tail Spend purchases account for the majority of indirect costs. They represent 60% of the volume of orders, 75% of the number of suppliers and 85% of the number of items.
Tail Spend purchases thus contain significant hidden costs (70% of hidden costs in business).
These hidden costs of Tail Spend purchases are linked to a large number of suppliers being created, which has the consequence of generating significant administrative costs. Indeed, businesses have diverse purchasing needs during their activity. The problem is that many structures reference new suppliers for each purchasing need.
These 70% generally represent the management of a considerable number of suppliers. The cost of managing a supplier is on average between €1,000 and €3,000 per year. Depending on the size of the company, Purchasing Departments may have to manage thousands of suppliers. Not to mention non-referenced suppliers who may be asked for “wild” purchase requests.
However, most of them only meet a specific need, this is also called spot shopping. This constant increase in the number of suppliers inevitably generates administrative costs with, on the one hand, the costs related to supplier management (referencing, updating in the database) estimated at around €1000 per supplier. And on the other hand, transaction costs (product research, ordering process and invoicing), which are estimated between €19 and €95 depending on the level of digitalization implemented by the company
If we multiply these hidden costs, which seem low at first glance, due to the number of suppliers, we then obtain significant costs that it is essential to control in order to increase the company's purchasing performance.
Based on this observation, it is undeniable that the pooling of suppliers for Tail Spend purchases is an important economic lever. Whether to reduce administrative costs or to achieve economies of scale. Beyond the financial side, it also makes it possible to improve the productivity of teams by freeing up their time.
According to a Sherpa HEC study, only 8% of companies believe that they have an optimized management policy for their Tail Spend purchases. However, better control of these spot purchases is the most effective way for a company to reduce its costs and stand out from its competitors. The question that arises is how to regain control of spot purchases?
To process and control Tail Spend purchases, businesses have three solutions to choose from:
This solution is preferred when the number of suppliers for indirect purchases multiplies. Purchases are therefore punctual. We are then in a situation of supply, and no longer a purchase. Purchasing departments can handle procurement and contract management. There will be a reduction in hidden costs indirect costs. However, this solution has a major drawback. It is not the most optimal way to ensure the effectiveness of the Purchasing Department in its main missions.
This solution should be considered in a digital context where online purchases are gaining considerable momentum. It consists in decentralizing purchases. Each service will take care of its own Tail Spend purchases. It will have adapted payment methods available. While this method can reduce to a lesser extent the hidden costs of Tail Spend purchases, its disadvantage is that it does not allow for a precise distribution of expenses. It is also difficult to implement in large groups.
This solution is the most optimal. It consists in entrusting the management of spot purchases to an external service provider. Outsourcing is a popular solution. More and more businesses are using this solution to optimize their expenses and their time. Indeed, when a Purchasing Department becomes more mature, it focuses exclusively on strategic purchases. She optimizes her time to focus on so-called critical purchases.
Entrusting non-strategic purchases to an external competent company does not only allow it to gain efficiency and to devote itself to its core business. It also helps to reduce hidden costs associated with Tail Spend purchases.
Choosing to outsource spot purchasing has many advantages for businesses:
The purchasing department or the purchasing department is the branch that is responsible for obtaining the various products or services necessary for the operation of the company and distributing them to the various departments that need them. For each product to be ordered, there may be several competing suppliers. This makes the purchasing process relatively complex and time consuming. By opting for the outsourcing of your Tail Spend purchases, you allow your internal teams to focus on their core business.
While they are not strategic, the Tail Spend purchases can take up a lot of time for purchasing managers due to the large number of suppliers to contact. Purchasing outsourcing spots frees up time for purchasing departments. They will then be able to focus on purchases with higher added value and focus on their core business.
However, the biggest advantage of outsourcing Tail Spend purchases is the reduction of hidden business costs. These expenses can seriously affect business results if they are not optimized. Outsourcing Tail Spend procurement makes it possible to reduce the hidden costs of this type of purchase by rationalizing suppliers and optimizing prices by pooling.
This solution does not not only decreases the administrative costs associated with spot purchases. It also reduces total costs or TCO related to procurement, i.e. the direct and indirect costs of a product throughout its life cycle. Who says lower costs, says increased business performance.
By entrusting the management of your non-strategic purchases to a specialist, you are guaranteed to obtain a better result in terms of quality, cost and time, better known under the name of the QCD triangle. Thanks to better knowledge of the market, he will be able to identify the best suppliers for each type of product to buy. This allows you to achieve lower procurement costs and better efficiency.
A specialist in the outsourcing and digitization of corporate purchases, BME Consulting supports you in your outsourcing project of Tail Spend purchases in order to reduce your hidden costs. Thanks to our network of buyers and suppliers spread over 5 countries, we ensure optimal control of your sourcing. Our solutions allow you to save time and money by reducing your hidden costs and to gain in competitiveness. Indeed, you will entrust the management of your non-strategic purchases to the hands of experts. For your part, you can focus on your core business.
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