Understanding Tail Spend: Four Myths About Tail Spend Management
By Anthony Clervi | October 27, 2020
In many cases, organizations have resigned themselves to the inevitability of tail spend. It’s expensive and inefficient but perceived as ultimately uncontrollable.
But, procurement professionals can take control of their organization’s tail spend. They must be prepared, however, to delve into the how and why of tail spend before developing strategies to control costs and risk.
Let’s talk about some of the myths surrounding tail spend to help get a better understanding of what it really encompasses, along with tips to form a plan to get it under control.
The myth: it’s impossible to achieve complete visibility of an organization’s tail spend
Tail spend typically represents 80% of an organization’s supply base and 20% of its overall spend.
With so many tail-end suppliers to contend with, it’s unsurprising that some procurement teams lack the confidence and motivation to achieve complete visibility of their organization’s tail spend. This is especially true given that the value of most of these transactions is negligible.
The truth:
Today, there is so much new technology at procurement’s disposal. This means there is no excuse for failing to keep track of all spend, from the biggest strategic sourcing projects to the smallest stationery orders made by employees throughout the organization.
The digitization of procurement, which includes the adoption of advanced analytics, big data, artificial intelligence (AI), and automation, can provide visibility into hundreds of thousands of transactions. This enables procurement to tackle tail spend with greater ease and precision than ever before.
The myth: uncontrollable tail spend is a fact of life
Procurement professionals all too often adopt a defeatist attitude to their organization’s tail spend. When professionals don’t believe they can control 100% of tail spend, they’re simply setting themselves up for failure.
The truth:
It’s important to implement proper policies and procedures for managing tail spend but it’s equally important to effectively communicate these strategies to the organization at large.
Remember, keep things simple. When buying from an approved vendor is too complicated and time-consuming, employees will revert to maverick spending. Similarly, a procurement policy shouldn’t be too dictatorial. Employees should be given some choice and autonomy in what they are buying, but it’s important that procurement teams set rules and boundaries.
To prevent maverick spend, procurement should consider establishing a guided buying (catalog) system for the most sought-after items. It’s also worth applying restrictions on who can buy what and how much buyers can spend.
Some organizations implement a system whereby an employee requests what they want to buy and then the buying team provides a few options via pre-approved suppliers, before completing the transaction on behalf of the employee.
The myth: investing time in reducing tail spend won’t drive cost savings
Tail spend may well consist of low-cost purchases but when you group many thousands of those transactions together, they account for significant value.
The truth:
Consolidating supplier lists and establishing where tail spend can be moved to a preferred supplier will result in significant savings.
According to BCG, organizations that leverage technology to effectively manage their tail spend can cut annual expenditure between 5% and 10%.
The myth: the best way to manage tail spend is to eliminate all tail-end suppliers
When procurement has the resources and motivation to do so, no one would contest that consolidating tail-end suppliers is the best thing to do.
The truth:
Having said that, the process is a little more nuanced than simply eliminating every tail-end supplier. Procurement professionals must always consider a range of factors, which include supplier diversity and sustainability as well as cost savings. Similarly, some tail-end spending will be with single-source suppliers, and these vendors will need to be kept on procurement’s books.
Historically, procurement professionals have avoided investing their time and effort in managing tail spend. But with the resources now at their disposal, there’s no excuse to delay tackling the challenge of tail spend head-on, and reap the benefits for their organization.
For most organizations, the task of managing tail spend is a massive challenge. Consider outsourcing this difficult-to-manage category to a group purchasing organization. By scheduling a consultation with Una, you can learn how to unlock cost savings and other benefits through tail spend management.
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