Category Management: Treating Tail Spend as a Category
By Anthony Clervi | October 6, 2020
Using a “set-it-and-forget-it” approach to tail spend saves time, but it can also mean your organization misses out on a great deal of potential value from 80% of its supplier relationships. The alternative is to actively manage the spend tail by applying the methods of best-practice category management.
The "set-it-and-forget-it" approach
Busy procurement teams can’t manage everything, which is why spend thresholds exist. A medium-sized business, for example, may have a spend threshold of $100,000. Any purchases over this amount are managed centrally by the procurement team. Anything under the threshold can be purchased by anybody in the business with a company credit card.
Even still, there has to be some level of control. Procurement can establish purchasing policies, processes, and guidelines for decentralized buyers to (hopefully) follow.
These might include:
- Setting up an online catalog for categories such as office stationery.
- Requiring an approved purchase order (PO) before any purchase is made.
- Using procurement software to make purchases instead of invisible channels such as email.
- Rules around how to communicate with suppliers.
- Requirements such as sourcing three quotes before making a purchase.
- Social procurement and sustainable procurement guidelines.
- Providing training for anyone in the business with purchasing authority.
This approach comes with the following risks:
- Maverick spend: Decentralized buyers ignoring procurement rules can lead to spiraling costs and higher risk in the spend tail.
- Risk: 80% of suppliers in the spend tail do not undergo the risk management and audit processes that are in place for the top 20% managed by the procurement team.
- Poor visibility: Unless the entirety of tail spend is captured within procurement software, the procurement team will lack visibility. As a result, they will not be able to find opportunities for value through spend analysis.
- Poor value: Without a procurement professional giving their attention to the spend tail, there is little chance of uncovering cost reduction and other value.
Managing tail spend like a category
Tail spend is a mishmash of hard-to-classify purchases. It also includes invisible purchases and items purchased on a one-off basis, along with purchases made with small suppliers and start-ups. These purchases never hit procurement’s radar, however, because they are well below the spend threshold.
Getting this complicated category under control sounds like a daunting task, but doing so will ultimately unlock new sources of value for the organization. It’s therefore worth considering assigning a member of your procurement team to manage tail spend, just as they would with a typical spend category.
This will enable procurement to apply category management methodology to the spend tail, which may include:
- Tail spend assessment.
- Quality control.
- Finding and implementing an optimal technology platform to capture spend data.
- Reducing maverick spend.
- Developing strategy and tactics.
- Performance tracking and measurement.
- Setting savings targets.
- Uncovering other sources of value such as supplier-led innovation.
- Increasing visibility and conducting spend analysis.
- Volume consolidation (bulk purchasing).
- Finding process efficiencies.
Keep in mind that none of the above will be possible without the visibility enabled by an effective procurement technology platform.
Is spend tail management worth the cost and effort? It depends on the size of your organization. In a large organization with a spend tail worth hundreds of millions of dollars, for example, shaving even 1% off the spend tail can make a significant impact on the bottom line. In a smaller organization, determine whether or not the potential savings will cover the salary of the person assigned as category manager.
Outsourcing tail spend to a GPO
There is a third way to effectively manage tail spend as its own category.
Many Chief Procurement Officers engage Group Purchasing Organizations (GPOs) as an extension of their procurement teams, outsourcing categories such as travel, office supplies, and logistics. The same strategy can be used in terms of outsourcing tail spend – as a category – to a GPO.
At Una, our focus is offering turn-key procurement solutions that accelerate your sourcing program. We do this by analyzing your current spend and identifying which categories to target first. The same process can be applied to tail spend, as well.
After running a cost analysis, we’ll be able to tell which categories within your tail spend will benefit from the immediate savings generated by our pre-negotiated supplier contracts. But it’s not just about saving money – outsourcing your tail spend to a GPO will also save time and effort, freeing up the procurement team to focus on other strategic projects.
Una’s one-on-one advisory approach means we’ll define what success looks like together and take the time to understand your goals. Schedule a consultation with one of our expert Sourcing Advisors to learn how to unlock cost savings and other benefits through tail spend category management.
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