Consolidation and the Long Tail

A typical spend reduction initiative starts by convincing your C-Level executives to mandate the consolidation of spend throughout your company. Through such consolidation, you ensure your suppliers can reduce their margins yet still make enough to service the payments on their salespeople’s Beemers.

If you cannot consolidate your spend, you must find other ways to convince suppliers to lower their prices and/or increase their services without reducing their margins to an unsustainable, sub-Beemer, level. One way of doing this is to reduce your supplier’s cost of sales. Doing this, along with reducing your cost of managing your vendors, allows you to punch far above your weight with your suppliers.

Let’s consider two companies, Big Company and Small Company, buying a non-customised widget. If the widget salesperson is willing to set their margin for Big Company so that a sale results in $1 million gross profit, they should, theoretically, be willing to reduce their margin to the same level for a sale to Small Company that nets them $100,000 in gross profit provided that sale takes 1/10 the sales effort to close and execute.

So what does this have to do with the long tail concept? Well, if there is such a thing as the long tail in procurement, the long tail calculation must include both sales cost as well as transaction costs.