Companies are increasingly complex organizations that involve numerous functions and moving parts...
Optimize Tail Spend Management to Unlock Hidden Item and Process Savings
Tail spend accounts for roughly 20% of an organization’s budget. Find out how to save time and money with effective tail spend management.
From rising inflation and supply chain disruptions to a looming global recession, today's procurement professionals are facing mounting pressure to cut costs and curb their unmanaged spend. While tail-end expenses are an all-too-familiar concept, it's often overlooked in cost reduction. At the same time, it can account for around 20% of an organization's total expenses.
So how can you unlock significant savings by managing tail spend? Let’s take a closer look at what it actually is, why it matters and how you can develop a successful strategy with the right tail spend management solution.
What is Tail Spend?
Tail spend, refers to all of the ad hoc, uncategorized and unmanaged purchases that an organization makes — often without consulting its strategic sourcing or procurement team. Generally, this type of spending includes the low-value, low-frequency, low-volume purchases that fall outside contracts with a strategic supplier network. As a result, tail spend can involve millions of dollars spread across a vast supplier base.
How does it all break down?
Let’s use the famous economic principle, the Pareto Curve, or the 80/20 rule. When we apply this principle to procurement, it states that roughly 80% of your total spend is with around 20% of your suppliers. Inversely, tail spend makes up 20% of your total spend while using 80% of your suppliers. When laid out clearly in these ratios, it’s easy to see how tail spending can start to add up.
The Different Types of Tail Spend
Before you dive into your spend analytics to find cost-saving opportunities, it’s important to understand what tail spend actually looks like in your procurement process. Organizations classify tail spending in a number of different ways depending on their unique definitions, procurement practices and business objectives, but it often falls into several categories, including:
- Out-of-contract spend.
- Low-value transactions.
- One-time purchases.
- Unclassified expenses.
- Fragmented buying.
What’s interesting to note is that tail spend can be part of both direct and indirect spend.
Direct spend refers to those costs associated with the goods and services related to production or your end product or service. It can include anything from components to manufacturing services and raw materials. Although there is the potential for tail spend in direct goods and services, the amount spent in this category generally leads to organizations managing it more strategically.
Indirect spend refers to all the expenses and overhead costs that are required for your business to operate but aren’t directly tied into the total cost of your products or services. This includes a litany of important spend categories, such as:
- Capital Equipment
- Office supplies.
- Professional services.
- Transportation and logistics.
- Travel arrangements.
- Facility expenses.
While indirect spend might account for a smaller portion of your overall business expenses, McKinsey estimates it’s growing at an alarming 7% per year. Since these costs make up the majority of your tail spend, they hold the greatest opportunity for cost savings.
Why Managing Tail Spend Matters
As organizations and procurement professionals face increasing pressure to reduce costs, they’re starting to pay closer attention to their tail spend. Why is this? Some of your biggest savings can come from effectively managing all of those smaller purchases.
With the right tail spend management solution, organizations can gain numerous benefits, including:
- Increased visibility and savings: Tail spend management provides visibility across your low-value and fragmented purchases. That way, you can identify opportunities to reduce costs through spend volume leverage and standardization of product. A report from Ardent Partners estimated that the average enterprise sees a benefit of 6-12% for every dollar placed under management.
- Consolidation of Supply Base Supplier consolidation allows you to reduce the amount of time spent on the administrative tasks associated with setting up and managing a supplier. According to a Hackett Group study, it costs roughly $700-$1,400 in internal costs to source each supplier, set it up, transact with it and an manage the relationship on an ongoing basis. Consolidating your supply base also allows for the possibility of boosting contract coverage to prioritize strategic sourcing from key vendors in order to drive further savings.
- Minimize business risks: Monitoring your purchases can help you prevent rogue or maverick spending and stick to a list of reliable suppliers and a standard process. Not only can this save money, but it also reduces the risk of non-compliance or fraud.
- Optimize the procurement process: E-catalogs and other automated self-service channels allow you to manage previously invisible transactions, redirect spot buying and provide a clear spend threshold and standard process for internal customers.
Strategic spend management provides a competitive advantage for any organization, enabling you to save both time and money on the thousands of purchases that go under the radar. According to a recent CPO Survey by Deloitte, driving operational efficiency has now replaced reducing costs for the first time in 10 years.
The Challenges of Tackling Tail Spend Management
Because of its low-profile, tail-end spend is complicated to manage effectively. In addition to the time and effort required to track this data, many procurement professionals are reluctant to deal with tail spend because they view it as strategically less important than bigger purchases.
Perhaps the most common and significant challenge for businesses in managing tail spend is the historically poor data visibility. This is due to a variety of reasons, such as:
High-Volume, Poor-Quality Supplier Data
Tail spend is generally defined by the vast number of categories and fragmented supply base it spans, These factors generate huge amounts of disparate data that can complicate spend analytics. Organizing and managing all of this information can be incredibly tedious and time-consuming for your procurement team.
Decentralized Purchasing Activities
Without a common tail spend strategy, it can quickly become difficult to track and monitor purchasing activities for one-off or fragmented purchases. It is not uncommon, for instance, for two sites to be buying the same materials from the same vendor without the other’s knowledge. This inevitably leads to one site paying more for the same materials resulting in overall higher costs for the organization.
Using Multiple Incompatible Systems
Organizations using disparate systems for procurement and inventory management functions can result in difficulties finding the right supplier data. This results in inefficiencies that harm employee productivity, slow down your operations and run the risk of the wrong products being ordered.
Siloed Data and Departments
When departments within an organization are working in silos without a unified procurement process, it can create significant barriers for people to access the information they need. Consolidating this information without a management platform and cohesive strategy often requires a lot of time and effort that could be better spent on more productive tasks.
How to Develop a Successful Supply Chain Strategy
So, how do you develop a successful supply chain strategy to manage these expenses? Here are five steps you can take to turn your tail spend into strategic spend:
- Collaborate with strategic partners: Identify your most valuable supply chain partners and develop a strategic supplier list. Be sure to consolidate as much as possible while still leaving room for diversity and competitive pricing.
- Integrate automation infrastructure: Leverage procure-to-pay management software to monitor and analyze spend information with comprehensive tracking and performance reporting. A recent study by the Hackett Group reported that procurement organizations could execute work with 25% fewer full-time staff and at a 17% lower cost than today by implementing technologies such as smart data capture and advanced analytics.
- Increase visibility and compliance: Prioritize increasing the amount of managed spend under contract to drive savings and avoid business risks. Further sustain those results by implementing digital analytics tools to ensure adherence to contracts.
- Centralize the procurement process: Unified purchasing can help you save money by leveraging your full spend across a consolidated supply base. It can also increase transparency and support standard processes.
- Partner with an outside provider: Based on a recent survey performed by Deloitte, “outsourcing remains an essential tool for client organizations to support their strategic goals”. Source-to-pay providers, like DSSI, can help you reduce costs more quickly and effectively by introducing their own automation tools and processes.
Manage Tail Spend Effectively with DSSI’s Disciplined Source-to-Pay Process
DSSI’s Source-to-Pay solution delivers a comprehensive and professional purchasing solution that includes capabilities to help you manage your tail spend effectively including industry-leading technology, proven processes and experienced purchasing teams. To learn how your organization can benefit from our solution, contact us today.