Tail spend refers to all the unmanaged high-volume and low-value transactions that take place within an organization. Tail Spend Management Solutions by Simfoni actively manages maverick spending by consolidating 80% of suppliers who account for 20% of procurement spend and thus positively impacts the firm’s financial performance due to its impact on operating margin.
Management of spend across a business is always the responsibility of all Procurement and sourcing professionals. Most of the procurement department’s energy is focused on the top 20% of their supplier relationships as this usually accounts for about 80% of their company’s spend, ie the 80/20 Pareto rule.
But then what about the remainder of it? Almost all sourcing stars tend to ignore this seemingly invaluable volume of spending even though these transactions take place with the bulk of their suppliers. We understand that there is a chance to take advantage of the untapped value that sits within this unforgotten category generally described as Tail Spend.
What is Tail Spend and how can you manage it?
Tail spend refers to all the high-volume, low-value transactions that take place within an organization which is normally unmanaged by the procurement guys. Chirag Shah, Chairman of Simfoni provides his viewpoint on Tail Spend and what it entails: ‘’At a headline level, I think most procurement folks are now familiar with the concept of tail spend – the low-value spend items that are non-core but still essential to the smooth operation of an organization. And of course, as the segment matures, even the tail itself comes under greater scrutiny or micro-segmentation with expressions such as tip of the tail, tail of the tail, mid-tail, tactical spends, spot buys, catalog buys, guided buying, “precision buying” (Simfoni’s own attempt to join the party!) and so on.’’
In nearly all corporations, nobody typically actively manages the tail. The procurement department might however put in place certain processes, strategies, or techniques for buyers to adhere to. This is commonly known as a “set and forget” tactic. When we talk about ”buyers” we refer to any individual within the business who utilizes the business’s money by making a low-value purchase. An example of these purchases could be anything from, a salesperson ordering a printer, a HR employee coordinating and booking a hotel for a business trip, or the office manager ordering a celebratory cake for a team celebration.
Purchases of such ‘’low-value’’ are normally placed either via email, telephone, apps, or on a third-party website which indicates that they are unclassified and practically hidden from the procurement force. Spend in the tail, therefore, consists of these one-off type purchases or transactions that hardly take place often enough to be added into the cataloged system. Furthermore, not many businesses are aware of just how much capital is involved, let alone knowing how to handle it in a way that allows them to realize possible savings and deliver overall business value within the organization. A considerable number of firms also think that they are in control of all purchases which are of high priority and ultimately end up ignoring the tail – with a substantial percentage of their total spend made up of purchases under a certain level; of course, this differs from company to company.
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The Best Method to Curtail Tail Spend
One of the most challenging aspects of managing and taming this spending is the lack of visibility when it comes to data. The reasons for this can vary – from working with several suppliers to purchasing and contract teams operating on separated systems.
Stage 1: Understand the theory.
Tail spend can comprise of anything from misclassified purchases to maverick spending. This is why it is especially crucial that a business is able to identify tail spend and ultimately establish where it is transpiring within the business. To determine this, you would need to first start by extracting your data from all sources and then examine it, once this part is done you are then able to accurately classify your company’s definition of overall tail spend and finally assess it based on these grounds.
From here you can then section out the products or services and start your process of exploring possible opportunities to save through reducing cost at both transactional and spend level.
- The Hidden: This is perhaps one of the most understated tail spend and is very easily missed off. Within this classification, we are introduced to mainly all the major suppliers that the organization deals with and where the spending sits with a contract in place but without a purchase order. It is important to note that sometimes when we consider the ‘big’ suppliers within the supply chain, the spending within this segment is not at all times represented by a contract. This could be since the contracts do not always contain supplies or services being procured, or for the reason that this could also be non-compliant use.
- The Head: Within this segment, you will mostly come across spending which is not properly controlled, even though the spend supplier could be costing you anything from $50,000 to $1 million per year.
- The Core: In this section, you can typically find those assets that consist of a larger quantity of vendors – they could be within the range of $3,000 to $300,000 per vendor. The core of the tail would not be tactically controlled due to the spend per vendor being too little.
- The End: This portion comprises of venders with a smaller amount of roughly $2,000 or less spend. The spend is extremely fragmented and transactional, as it consists of many one-off acquisitions with a substantial number of vendors.
Learn More – What Exactly Is in the Tail Spend?
Stage 2: Restructure Internal Activities.
In order to properly control spending within the tail, it is crucial that you restructure internal activities which ultimately means having a much clearer and concise visibility of data, lowered sum of total suppliers, and maintains a clear focus on spending. Preferably, you ought to be tapping into an e-procurement solution that involves your employees having to complete proper purchase requests for approval before transferring them into purchase orders. This e-procurement solution ought to have a catalog of certified suppliers and goods you can opt from, allowing you to reduce expenditure outside any strategically handled agreements. Execute a trialed system where you cut back on spot buying. You should concentrate specifically on shifting the small one-off spend into strategically controlled spend regardless of if it is handled well or not, through catalogs or other automated purchasing channels.
There are 5 recommended stages to a properly managed sourcing strategy outline when considering a sound tail spend management approach:
- Implement Spend Analytics, which categorizes all spending including Credit Cards, Expenses, and Travel.
- Create reports which easily identify spend at the product or service level.
- Consider a Buy-Desk that will efficiently intercept requests.
- Enforce adoption of negotiated agreements through the use of a Marketplace.
- Build strategies to meet each of the objectives.
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Simfoni's AI-Powered Spend Analytics
Stage 3: Let Your Data Do the Talking.
Once you have restructured your activities through the introduction of appropriate and harmonizing procurement solutions, it would be wise to then act on sourcing and contracting as you would want to make sure that the majority of your business’s purchases are processed tactically. When you adopt this approach within your Procurement department, it would be extremely wise to start assessing progress within your tail spend execution through the use of numerous metrics i.e., cost reduction and prevention, enhanced visibility of spend, and overall operational costs.
Learn More – How does Tail Spend Analytics work
Additionally, a knowledge paper written by CIPS focuses on Tail Spend Management and outlines below How Procurement teams can manage this effectively:
- Obtain spend data from the companies reports.
- Run a spend analysis; the Pareto theory will help here.
- Granular analysis of spending will also identify these smaller vendors and transactions.
- Undertake a supplier positioning exercise, this will assist in understanding who the important and nonimportant suppliers are, thus low value/low spend items can then be classified.
- Present clear-cut data to the company on what value they can spend and with who before they advise procurement of the spend incurred.
- Offer the business the tools to reduce risk transactions.
What is Maverick Spending?
Maverick spend consists of spend which does not fall under a contract and is not controlled by the procurement team – also referred to as non-compliant. Maverick Spending is also known as rogue spending and can be damaging to a business as expenditure of this type can inflate outgoings. A major source of maverick spend comes from P-card purchases which is normally the type of purchases that are part of spend in the tail however they require a separate set of tactics to get it under control.
How your company benefits when managing:
Companies that shine the spotlight on a successful and efficient tail spend management approach can start seeing benefits of 10 to 20% in savings just by spot buying. This isn’t the only benefit which they can obtain from following this approach, as with continued adoption of this year on year, companies can continuously save 2 to 5% savings on average each year.
Efficiency and productivity are enhanced:
Efficiency is automatically increased once a company starts looking at consolidating its supplier base – whilst limiting the amount of supplier’s within procurement, you are also cutting costs, and this ultimately assists employees and management within the procurement department to concentrate on the grander contracts that offer more value within the company. When you combine this with the added features of additional cataloged exposure and e-procurement service, you’re allowing the team to focus more of their valuable time on assignments that are of a greater benefit to the company.
You lower overall risk and improve compliance:
Another great advantage is that by adopting this method you ultimately improve compliance through your company procedures and contractual terms with all your vendors and internal users. Not only are you supporting a more transparent and strong procurement process through prevention and detection of issues such as fraud, but you are ultimately eliminating any suppliers who may be considered unreliable thus diminishing any risks within the business. Management solutions which focus on the tail, allow your business to take command of all transactions and to observe, and track them too – this means there may be some hiccups along the way, but you can catch these problems in time and rectify it before it is relayed to your supplier. Solutions like such are extremely valuable at avoiding Rogue Spending i.e., Maverick Spending and they also deliver comprehensive insights into your companies spend performance. Overall, through proper management of the tail, you can guarantee that up to 95% of your acquisitions are conforming to procedures and agreements.
You reap the benefits of improved Customer Satisfaction:
When you consider your internal customers and applying solutions that make their job easier through user-friendly systems, not only does this make them happier but also enhancing customer satisfaction. The lines are no longer blurred, and users can better understand who is accountable for what, and what contact person to get in touch with if any problems were to arise. It also improves the entire procurement process cycle and boosts company procurement systems.