A Spend Curve for an Enterprise
In today's fast-changing and unpredictable environment, managing long-tail procurement is more challenging than ever. The traditional way of onboarding new suppliers to your ERP system to pay them by invoice takes longer than necessary.
Consider the steps involved in onboarding a long-tail supplier. Businesses must conduct due diligence and know their customer (KYC) checks, collect and record invoicing information, and process payments via bank transfer or even legacy cheques.
While digitalisation plays a major role in modern businesses, many enterprises still rely on outdated supplier onboarding and invoicing processes. This reliance hampers scalability and adaptability to ongoing change. Lack of agility compromises business resilience, especially when global supply chains are fragile, as we've seen recently.
These challenges are particularly pronounced in the B2B world. In contrast, B2C customers are accustomed to making online payments with debit and credit cards. B2B purchases are typically handled through bank transfers.
Understanding the Long-Tail
The term "long-tail" refers to a specific spending pattern in business. It is derived from the spend curve, which shows that there is a group of suppliers responsible for a significant portion of the business spend, known as direct spend. This accounts for about 80% of the total spend across different industries - it can be even higher in manufacturing and, of course, much lower in consulting, software, etc.
Moving along the curve from left to right, the spend per supplier decreases. However, there are many suppliers with low spend, resulting in the continuation of the graph - this creates the long-tail on the spend curve. The long-tail spend, also known as indirect spend, typically represents only 20% of the business's total spend.
Direct spend makes up 80% of the spend, while the long-tail accounts for the remaining 20%. Therefore, procurement prioritises direct spend, also called "strategic spend." However, despite representing only 20% of the spend, the long-tail encompasses 80% of all transactions and suppliers.
Purchases within the long-tail are primarily characterised by low volume and involve many suppliers. Dealing with one-time suppliers or infrequent purchases poses challenges for procurement and finance in managing administrative tasks such as creating purchase orders, handling approvals, onboarding suppliers, processing invoices, and making payments for the long-tail.
Direct Spend
Direct spend refers to expenses directly associated with an enterprise's production, including the acquisition of raw materials and services for the enterprise's own production. Enterprises invest in finding the right suppliers and are willing to pay more for high-quality products. Strategic sourcing requires continuous monitoring to ensure compliance, minimise risk, and ensure that suppliers adhere to quality guidelines. Direct procurement is centralised within the organisation, focusing on managing sustainable supply chains and supplier relations.
Indirect Spend
Indirect spend, or long-tail spend, encompasses expenses unrelated to production. This includes everything from facility management to software to office furniture to marketing. Long-tail spend is essential for the daily operations of the enterprise. It involves a broader range of employees making purchases on behalf of the business rather than centralised procurement. Managing the often numerous long-tail suppliers and invoices requires significant administration. Tail spending creates pressure for procurement professionals and accounts payable teams, especially when managing maverick spend (maverick spend typically refers to situations where employees make purchases outside of established procurement processes or without proper approval) from employees. That's why automation is crucial for supply chain management, making it administratively easier for employees, procurement teams, and finance.
The Importance of the Long-Tail
Unfortunately, businesses often overlook the significance of long-tail spend and do not give it the same strategic attention as direct spend. The complexity surrounding the long-tail often leads to a lack of effort in optimising this spend, as it is perceived as not worth the investment.
However, there are substantial savings potential within the long-tail. By effectively managing the long-tail, businesses can achieve notable cost reductions in their overall tail spend. The actual savings depend on the maturity level of the business, with less mature businesses having greater potential for savings. These savings primarily arise from reduced costs of handling invoices and managing suppliers.
Additionally, there are numerous intangible benefits, such as process optimisation, improved compliance, enhanced supplier relations, increased employee efficiency, and minimised payment risk. However, realising these benefits requires businesses to abandon the mentality that it is not worth the effort and instead recognise the significant financial and operational value in simplifying long-tail spend.
Rethinking Long-Tail Spend Management
Reevaluating how long-tail spend is managed opens up opportunities for automation, agility, and streamlined processes. As no strategic attention is given, some businesses apply the same procedures with the same level of complexity to the long-tail as they do for direct spend. This includes laborious onboarding procedures, costly purchase orders, and manual handling of thousands of long-tail invoices and suppliers. Traditional procurement solutions are not optimal for managing long-tail suppliers effectively.
Simplifying Long-Tail Procurement for Businesses
B2B enterprises must catch up with B2C commerce by adopting credit card payments for complete traceability and compliance checks. To future-proof procurement, businesses should consider using virtual cards and online purchases instead of relying on invoices and bank transfers.
Virtual cards and automated compliance checks are crucial for the future of procurement. The COVID-19 pandemic highlighted the urgent need for B2B enterprises to modernise their processes and remain resilient.
Virtual cards offer scalability, adaptability, and control over procurement and payment processes. By implementing a unified system for automating virtual payment cards, businesses can streamline long-tail spend and reduce risk through better control, traceability and improved supplier compliance.
With Mazepay's long-tail spend management platform based on virtual cards, employees can make compliant purchases anytime, anywhere, with a complete audit trail. Contact us today to learn more.