Taming Tail Spend
Welcome! This comprehensive guide will go over tail spend in procurement and provide resources for how to implement an effective tail spend management strategy.
You’ll hear from industry experts who have been there, done that, and can share best practices for managing tail spend.
This guide also covers three key reasons why it’s worth getting your tail spend under control, and show you five ways to effectively manage your tail spend.
Let’s dive in.
Don’t forget to download a free PDF of this comprehensive guide:
Introduction
For the sake of simplicity - and maybe humor - we’ll start by comparing tail spend to a house cat.
Cat’s aren’t your thing? (We don’t blame you.) Try to imagine something bigger like a tiger or lion. This shape represents your entire procurement spend.
The figure’s head represents the top 1% of strategic suppliers to your organization.
This is where strategic sourcing professionals spend most of their time, communicating directly with their top suppliers and using procurement software to analyze spend and track risk.
Further down the spine, the torso represents the next 19% of an organization’s strategic suppliers. It's not as critical as the head, but the torso accounts for the bulk of your total spend and therefore needs plenty of time and attention to ensure it’s kept in excellent condition.
Next is the tail. Anatomically it may seem like an afterthought, but this end of the beast that is your procurement spend contains 80% of your suppliers and only 20% of total spend.
In large organizations, the tail could be enormously long with tens of thousands of suppliers, while smaller entities may have a stubby tail with only a few hundred suppliers.
What is Tail Spend?
There are dozens of definitions of tail spend in circulation, but here are the main features you need to know:
Download a full PDF copy of Una's tail spend guide:
The Pareto Principle
The “Pareto Principle” - otherwise known as the 80/20 rule - has today become a golden rule in procurement.
It’s particularly useful for spend segmentation and helping sourcing professionals determine where to focus their attention, with one major flaw. It segments suppliers based solely on spend.
Looking beyond cost, the strategic importance of a supplier can be determined by:
In aerospace, for example, a jet engine manufacturer would be regarded as a high-cost, high-risk supplier and would most likely sit in the top 1% (or the head of the cat).
But lower-cost procurement can be risky, too. An airline meal caterer might belong to the spend tail, but a food safety breach could cause food poisoning and massive brand damage for the airline.
Tail Spend and Sub-threshold Spend
Chief Procurement Officers (CPOs) have to draw the line somewhere to determine how much the procurement team will manage centrally and how much will be decentralized to the business.
This is called a spend threshold and can vary significantly depending on the size of the company.
A small organization might have a spend threshold of $10,000, while the procurement team in a major organization such as a bank may only focus on transactions over $1 million.
Procurement teams create policies and procedures for decentralized buyers to follow, such as requiring them to source three quotes for goods or services before choosing a supplier or directing buyers to purchase certain categories only from an approved catalog.
Procurement software is increasingly effective at blocking maverick spend, or buyers who don’t follow the rules set by procurement.
Getting Tail Spend Under Control
Even with the help of procurement tech, it takes time and resources to bring an unruly tail spend under control.
Is it worth it?
Let's see what some procurement professionals have to say:
“If left unchecked, that tail spend will push its way into the critical spend spotlight soon enough, potentially catching procurement off-guard.”
– Karthik Rama
“One ERP or procure-to-pay system doesn’t work for all categories and for all business needs. Putting a strategic, easy to us solution in place can free up resources, automate manual processes, and save money.”
– Sarah Scudder
Rama, a practitioner with over 16 years experience, advises that organizations must first identify what constitutes as tail spend and develop a strong business process for handling that spend. After that, bring in other tools like spend management software to help.
Sarah Scudder, President of Real Sourcing Network, agrees that despite the effort required, the benefits are too good to pass up.
They both raise some valid points, but only scratch the surface of the many questions and concerns your leadership team will present. Are you prepared to state your case?
Let’s dig in a bit deeper to uncover exactly how your organization can benefit from a well-behaved spend tail, and what other procurement professionals are saying about the impact of an unruly tail.
Benefits of Actively Managing Tail Spend
Actively managing tail spend would allow your organization to:
For more details regarding the benefits of managing tail spend, download the full copy of the guide here:
How to Tame Tail Spend
Convinced that this category is worth taming? Here are five ways you can get it under control.
Visibility is an essential prerequisite because you can’t save what you can’t see. In most cases, this involves implementing a purchasing system and requiring every buyer in the business to purchase through this unified system, rather than making “invisible” purchases via spreadsheets, emails or phone calls.
Spend mavericks add unnecessary costs to your bottom line, damage supplier relationships, expose the organization to additional risks, and leave gaps in your spend data.
Automation and software will be able to help you determine quickly what information is useful and what isn’t. Deciding which KPIs to include is an important step, too. Procurement spend analytics software can analyze thousands of data points at once. AI and machine learning are able to segment and sort suppliers by costs, risk, category, and other factors to enable different types of analysis.
Tap into the transformative power of procurement AI, machine learning, big data, advanced analytics, and process automation. While procurement software can be costly, it will inevitably save time, reduce risk, and increase visibility.
Utilize consultants who have experience integrating tail spend management into the overarching category strategies. Consider partnering with a group purchasing organization to help get it done right.
Outsourcing Tail Spend to a GPO
Here at Una, we use our spend analytics tool to identify issues within our clients’ tail spend and find categories that could benefit from access to Una’s impressive volume driven contracts. This will generate immediate savings in the tail spend.
Outsourcing some of the categories within your own tail spend is one of several ways to bring this issue under control, and should be used in conjunction with other strategies.
Learn more about how we operate and what partnering with Una could mean for your business.
Conclusion
In the end, tail spend is an important part of a company’s make-up, and leaving it unmanaged welcomes unnecessary risk and leaves cost savings on the table. With all of the technology and data available to procurement professionals, it’s time to acknowledge the value to be found in this category.
Take the cat (or tiger or lion!) by the tail.
Schedule a consultation with Una today to learn how to unlock cost savings and tap into the value hiding within this area of spend.