Tail spend, and the importance of properly managing it, has been widely discussed on our blog and elsewhere recently. By now, most senior business managers should be aware of the concept and tail spend management.
That said, let us take a look at some of the problems associated with unmanaged or improperly managed tail spend in any organization, and some potential solutions.
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A few of the key challenges presented by poor tail spend management are:
- Inexperience. Purchases are often made by staff members who, while possibly very skilled and experienced in their core functions, are not very experienced in making purchasing decisions.
- Fragmentation. Small and/or infrequent orders for items from suppliers that make up a very small proportion of the total spend have the effect of fragmenting the total tail spend so much that it becomes very hard to control.
- Visibility. Because tail spend purchases happen outside of the strategic spend framework used by the company’s procurement department, purchases are not easy to track and analyze, and may actually violate internal purchasing rules and standards.
- Higher Cost. Tail spend items may simply be ordered from a traditional or favorite supplier, with no thought to whether the price of the goods is fair or market-related.
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In order to achieve better control of their tail spend purchases, many businesses simply make this activity the responsibility of their internal procurement team.
Doing this achieves several key objectives:
- Purchases are subjected to tighter, more comprehensive management controls
- More visibility and compliance with purchasing policies is achieved
- The network of potential suppliers is increased, usually leading to more aggressive pricing and possible supplier consolidation
However, adding to the workload of the purchasing department, which may already have limited capacity, is not always the best solution.
Another option that businesses may want to consider is outsourcing some or all of their tail spend procurement. This can be done by using a procurement agency that offers similar benefits to managing the process internally, but at a potentially lower cost.
The decision whether to make internal procurement team responsible for tail spend purchases or to outsource this activity is highly individual to each business, and the final decision will have to take into account factors like:
- Cost. How does the real cost (factoring in salaries and other running costs) of using internal procurement specialists compare with the charges levied by a 3rd party procurement agency?
- Focus. Is there a potential dilution of focus away from managing strategic spend towards tail spend purchases? Does the procurement department have the capability and capacity to effectively manage both types of spend?