ABC analysis of purchases: how to find the suppliers nobody has ever negotiated with

11 November 2026, 08:11

The Otto group, which sells at a distance and online in Germany, has an artificial intelligence program negotiating terms with more than 200 small suppliers: their prices used to be accepted as they were, because the time spent on a negotiation cost more than it would have saved. The question this raises applies to an SME too: how much of what it buys goes through suppliers with whom nobody has ever discussed a price, and how can they be found?

ABC analysis ranks suppliers by how much is spent with each

ABC analysis ranks the items in a set, in this case suppliers, by a value, here a year's spending, from highest to lowest, and splits them into three classes. It rests on an observation that holds in almost every company: a few items make up most of the total. Usually class A gathers the suppliers that together account for about 80 per cent of spending, class B those that bring the total to around 95, and class C all the rest: thresholds in common use, not set by any rule.

Class C purchases make up what is known as tail spend. It is made up of many suppliers with small amounts, which added together are worth a few percentage points of purchases, and it is the part that gets looked at least. Whoever does the buying spends their time on class A suppliers, where one point of discount is worth thousands of euros, while many tail purchases arise from an urgency and are ordered from whoever answers first.

The data for the classification is already in the accounts

From the management software the accounts department extracts, for each supplier, the total invoiced over the last twelve months net of VAT, which the company recovers and which is therefore not a cost: almost every accounting program has a report of purchases by supplier, and the result is moved into a spreadsheet. The list is sorted from the highest spending to the lowest, and next to each line the cumulative percentage of the total is written: class A ends where the column passes 80, class B where it reaches 95.

Before calculating the percentages, rents and leasing instalments fixed for several years are taken out, since in the short term there is nothing to negotiate on them: what remains is raw materials, components, consumables, services and transport.

In tail spend the cost is not just the price

The typical mistake is to judge class C by its weight in the total and conclude that it is not worth bothering with. The judgement changes once the cost of keeping it is counted too. Every additional supplier brings a master record to update, orders to issue, deliveries to check, invoices to record and pay: it is work for whoever buys and whoever keeps the books, and it does not depend on the amount, because an invoice for €300 takes the same time as one for €30,000.

This is why in the tail the largest saving often comes from reducing the number of suppliers rather than from the discount. Purchases of the same kind, today split among many suppliers, are concentrated on one or two, with an annual agreement that sets the price list, minimum quantities and payment terms. The spending gathered in this way becomes large enough to deserve the negotiation that nobody would have conducted had it been split among six suppliers.

Three checks to make with the list in hand

The first falls to whoever handles purchasing, or to the owner in companies without a purchasing office: within class C, they group the suppliers by type of purchase, for example tools, packaging, stationery, maintenance, small transport jobs, and count how many there are for each type. Where they find five or six for the same thing, they ask two or three of them for an offer covering the whole year's requirement.

The second concerns prices: for the tail suppliers that remain, whoever handles purchasing compares the prices of the most frequently bought items with those of a year earlier. In the tail a price-list increase easily goes unnoticed, because usually nobody has the job of noticing it.

The third is an internal rule: it is decided who may add a new supplier to the software's master records and for what amounts. Without this rule the tail, once reduced, grows long again within a few months.

The ranking by spending is also the starting point of any cost analysis concerning purchases, because it shows where money is concentrated and where it is dispersed. With the class C list in view, the useful question is how many of those suppliers came in through an urgent order and have not had their prices compared with anyone else's since.

This article was prompted by a news item published in Handelsblatt on 11 November 2026.