Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Procurement Team Cut Tail Spend by 60 Percent
Transcript
- Lucas: Luna, how many suppliers do you think a mid-sized manufacturer with about 500 million in annual revenue typically has on the books? Luna: I'd guess maybe a few hundred? If they're well-organized, under 500. Lucas: Try 8,000. That's what one company we'll talk about today discovered when they actually ran a full spend analysis. And here's the kicker: 70 percent of those 8,000 suppliers accounted for just 3 percent of total spend. Luna: That's wild. So the procurement team was managing thousands of relationships that barely moved the needle. That's classic tail spend, right? Lucas: Exactly. Tail spend — those small, often one-off purchases that fly under the radar. Individually negligible, but collectively they can eat up 15 to 20 percent of a company's total procurement budget. And because they're low-value, they usually get less negotiation, less oversight, and way more maverick buying. Luna: And that's the trap. People think, 'It's just a 500-dollar order for lab supplies, who cares?' But when you have 5,000 of those a year, it's real money. Lucas: Right. So in this episode, I want to walk through how one procurement team tackled their tail spend and cut it by 60 percent over 18 months. They didn't use some fancy AI tool — they used segmentation, automation, and a bit of supplier psychology. Luna: Let's hear it. What was the company and what triggered them to act? Lucas: It's a Midwest-based industrial parts manufacturer — we'll call them Acme Industrial. They had decent margins but working capital was getting squeezed. When they looked at their AP data, they realized they had 8,000 active suppliers, but only about 300 of them were strategic. The rest were a long tail of small vendors: a local hardware store, a janitorial service they used twice, a specialty chemical supplier they ordered from once three years ago. Luna: So first step: just get visibility. That alone is a lift for a lot of companies. Lucas: Absolutely. They spent three months cleaning their vendor master file — removing duplicates, flagging inactive suppliers, and categorizing each one by spend volume and criticality. That gave them a clear picture: they had about 5,600 suppliers that each represented less than 0.1 percent of total spend. Luna: That's a lot of noise. Then what? Lucas: They broke the tail into three tiers. Tier one: suppliers they could eliminate entirely — no active purchases in 12 months, no unique product, just dead weight. They purged about 1,200 of those. Luna: Cleaning up the master file alone probably saved them time and reduced risk. I've seen companies get hit with fraud because a dormant vendor account got reactivated. Lucas: Good point. Tier two: suppliers that had occasional purchases but offered commodity items — office supplies, MRO, basic packaging. For those, they set up a punch-out catalog through their procurement software, so employees could only order from pre-approved catalogs with negotiated prices. They consolidated about 2,400 suppliers down to 8 national distributors. Luna: So the employees still got what they needed, but the company controlled pricing and reduced invoice processing costs. Lucas: Exactly. The third tier was the trickiest: niche suppliers that provided specialized products — custom coatings, rare alloys, proprietary software. You can't just consolidate those into a distributor. So instead, they negotiated volume discounts with the top 50 tail suppliers by spend. In exchange for committing to annual minimums, they got 15 to 25 percent off. Luna: And did the suppliers go for that? I imagine some of those niche guys have leverage because they're the only source. Lucas: Some had leverage, but most were small businesses that valued predictable revenue. Acme offered them 12-month contracts instead of purchase-order-by-purchase-order. That reduced the supplier's sales cost, so they were willing to discount. Luna: Smart. So after 18 months, where did they land? Lucas: Total suppliers went from 8,000 to 1,200. Tail spend as a percentage of total procurement dropped from 22 percent to 9 percent. They saved about 3.2 million dollars annually — not just from lower prices but from reduced transaction costs: fewer POs, fewer invoices, fewer checks to cut. Procurement headcount stayed flat but they absorbed a 15 percent increase in purchase volume without adding people. Luna: That's a great outcome. But I'm wondering — what about the employees who used to buy from their favorite local supplier? Did they push back? Lucas: They did. One engineering manager was furious that he couldn't order custom gaskets from a mom and pop shop he'd used for a decade. The procurement team had to show him that the new consolidated supplier could deliver the same gasket at 30 percent less and with a shorter lead time. They let him keep two specialty suppliers for truly unique items — but that was an exception, not the rule. Luna: So change management was a big part of it. You need executive sponsorship to override those fiefdoms. Lucas: Exactly. The CPO got the CEO to sign off on a policy: any purchase over 5,000 dollars had to go through the preferred supplier list. That gave procurement teeth. They also ran a quarterly audit to catch maverick spend. Luna: I've heard that some companies use procurement cards with restricted merchant codes to enforce that. Did they do that? Lucas: They did. They implemented procurement cards with spend limits and merchant category restrictions. If an employee tried to buy from a non-approved supplier, the card would decline. That reduced maverick spend by 40 percent in the first six months. Luna: If today's deep dive into tail spend was useful to you — and I hope it was because that's a lot of practical steps — this show stays ad-free thanks to listeners who chip in. You can support us at buy me a coffee dot com slash fexingo. It's a simple way to keep these conversations going without commercial breaks. Lucas: Yeah, that's exactly right. We put a lot of research into each episode, and knowing it helps people in their work is what keeps us going. That link again is buy me a coffee dot com slash fexingo. Now back to the Acme story — one more thing I think is worth highlighting. Luna: What's that? Lucas: They didn't just cut suppliers and walk away. They set up quarterly business reviews with their top tail suppliers — the niche ones they kept. Those reviews uncovered opportunities for joint cost reduction. For example, one specialty chemical supplier suggested a different packaging that reduced shipping weight, saving both sides money. Luna: So they turned adversarial vendor management into a collaborative relationship. That's a great takeaway. Lucas: Right. The key is to treat tail spend not as a one-time cleanup project but as an ongoing discipline. Acme now runs a tail spend review every quarter. They look for new suppliers that have crept in, re-evaluate the tiers, and renegotiate where possible. Luna: And they probably have dashboards now to track it in real time. Lucas: Yes, they built a simple Power BI dashboard that shows tail spend as a percentage of total spend, number of active tail suppliers, and maverick spend rate. The CPO reviews it every month with the CFO. Luna: I think a lot of procurement teams look at tail spend and feel overwhelmed. But the Acme example shows you don't need a huge budget or fancy tools. You just need clean data, a clear segmentation strategy, and the willingness to enforce new policies. Lucas: Exactly. Start with a spend analysis. Then categorize. Then consolidate where you can and negotiate where you can't. And automate the low-value stuff so your buyers can focus on strategic sourcing. Luna: If someone wants to replicate this, what's the first step you'd recommend? Lucas: Pull your vendor master and AP data for the last 12 months. Identify suppliers with less than, say, 0.5 percent of total spend. Then look at how many transactions each has. If you have 200 suppliers each with one transaction, that's an easy group to start with. You can often eliminate them or redirect to a preferred supplier. Luna: And if you don't have clean data? Lucas: Then clean it first. That's the unglamorous but essential work. Acme spent three months on data cleanup before they made any changes. Without that foundation, any consolidation effort will fail because you'll miss duplicates or cut the wrong suppliers. Luna: Good advice. So to wrap up: tail spend is a hidden leak. Acme found it, patched it, and saved millions. The playbook is visibility, segmentation, consolidation, automation, and ongoing governance. Lucas: Exactly. And the 60 percent reduction wasn't magic — it was methodical. If you're managing a supply chain, that's a benchmark worth aiming for.