Senior Writer: Sindhu Bharathi
Today, commodity prices fluctuate, and the supply markets endure high risks. Procurement departments experience several challenges and problems. Given that the ultimate objective of sourcing and procurement teams is to get more with fewer funds, they are under pressure to purchase more responsibly.
Irrespective of the size and scale, almost every organization experiences difficulties managing its tail spend. Though these are low-volume transactions and less harmful, a robust tail spend management strategy is important to minimize costs and achieve efficiency.
The blog covers all aspects of tail spend, from the challenges in tail spend management to the benefits and steps involved in streamlining the tail spend of an organization.
What is Tail spend?
Tail spend refers to those one-off, high-volume, low-value transactions that are not strategically accounted for as a part of the company’s procurement policy.
Most companies neglect tail spend management because such uncategorized transactions are low in value, volume, or frequency. They are too small to be accounted for through formal procedures, so they are often ignored. A common challenge businesses encounter regarding tail spend management is the lack of availability of reliable data.
Why Manage Tail Spend is Important?
Today’s highly competitive business environment demands effective cost-cutting strategies and sustained savings in procurement and sourcing.
Irrespective of the organization’s size, tail spend involves many risks, including the following.
1. Excessive spending
Because tail spends are not appropriately negotiated, there are chances that the business could be paying more than what is needed for the purchase. An effective strategy to manage tail spend widens the spending bandwidth for firms and organizations.
2. Loss of quality
Tail spend bypasses the formal procurement steps and procedures. Because they are fragmented and unclassified, the spender runs into a risk of purchasing low-quality products. This could impact the flow and quality of internal operations of the organization.
3. Lack of control over vendors
As mentioned above, vendors part of tail spend do not go through formal checks and procedures. In case the vendor lacks reputation and responsibility and exercises unethical behavior, there are chances that your brand’s reputation would also get adversely impacted in the community. The organization also risks legal action.
An effective tail spend management strategy helps organizations mitigate these risks and establish proper control over their vendors and suppliers.
What is Tail Spend Management?
The Pareto principle or the 80:20 rule serves as a guide for understanding and managing tail spend. The 80/20 rule can be applied to an organization’s procurement and sourcing functions.
Usually, procurement departments invest their time and energy into managing the strategic, high-value transactions that make up 80% of the total spend. It must also be noted that just 20% of the total suppliers make up 80% of the total spend.
The remaining 80% of suppliers make up just 20% of total transactions. These are non-core, low-value transactions that remain fragmented and unmanaged.
Tail spend management is about monitoring, controlling, and tracking transactions in real-time to ensure that the purchases comply with the contractual policies and procedures.
The organization gets to build an efficient supplier base by mapping expenditures that incur at the level of fragmented, non-strategic vendors. It can also exercise control over tail spend and derive better insights about spending and expenses. The traditional way of tracking tail spend through spreadsheets or paper forms is challenging and burdens the resources.
Challenges of Tail Spend Management
Common challenge organizations encounter regarding tail spend management is the lack of good-quality data. Absence or incorrect data, broken links, duplicate data, and junk entries impact data quality.
Decentralized purchases happen in organizations where procurement, contract management systems, and other departments work in silos. This impacts the data quality and makes it difficult to keep track of and derive insights. Even when the data is available, consolidating data from various departments is time-consuming and challenging.
Because tail spend is about high-volume, low-value transactions, several sub-categories, and suppliers exist. The high volume of transactions and a greater number of suppliers complicates the process of tail spend analysis, even though the volume of spend is lower.
As tail spend involves low-value transactions, most organizations do not prioritize tail spend management.
Moreover, the tail spend transactions are usually placed outside the formal procurement policies and happen through phone, apps, or email. They are invisible and hard to track. Using excel sheets or other manual means to record these transactions is cumbersome and hard to consolidate. This is harder when businesses have offices in multiple locations, each of which works in silos.
What are Key Benefits of Managing Tail Spend?
With an efficient tail spend management system in place, organizations can save costs and time. They can also strategize their low-volume transactions.
1. Boosts cost savings
Though there are several reasons for implementing tail spend management, cost savings are the most important. In the highly competitive landscape, procurement teams strive to cut costs.
Tail spend management using technological and software solutions improves the visibility of the total spending of the organization. Strategically managed spend helps them identify rogue spending. Overall, strategically managed spend helps organizations achieve 5 to 10% cost savings; this could run down into billions in large organizations.
2. Increased productivity and efficiency
With a robust tail spend management system, organizations gain an understanding of the consolidated supplier database. This helps them derive better insights and identify avenues for continuous improvement.
With a consolidated database, the procurement team shall identify high-value transactions and contracts that are of salience to them. It also reduces the number of suppliers the team has to deal with, improving overall efficiency. With SaaS spend management, the productivity of organizations improves by 20%.
3. Improved compliance and reduced risk
Though tail spend involve low-volume transactions, the chance of dealing with a risky business profile is high. Using technological solutions and SaaS management software, tail spend management help identify, monitor, and track transactions as soon as they happen.
The organization becomes immune to unethical behaviors and reduces the risk. With proper tail spend management in place, suppliers undergo thorough checks and verification. This helps identify compliance breaches, minimize risk, and avoid fraudulent behaviors.
4. Better satisfaction for all parties
Tail spend management remains complicated because of the silos and not-so-centralized procurement plans and policies followed by the organization. The team tends to bypass procedures because they consume more time.
With a well-thought-through tail spend management system in place, there is more clarity on the process, responsibilities, and ownership. This improves the efficiency of resources involved in procurement and reduces the cycle time of the processes. This results in better satisfaction for all parties, both internal and external.
Tail spend examples
Following are some examples of tail spend:
- On-spot purchases
- One off purchases
- Packaging services
- Petty cash expenses
- Low-volume transactions like office products
- Ad-hoc services
- Custom catalogs
- Uncategorized supplier purchases
- All low-value transactions that bypass the formal procurement process
Though these are non-core purchases, managing them efficiently has the potential to boost savings and cut down on unnecessary expenses. A study by BCG consulting group shows how firms can leverage digital technologies to minimize 5-10% of their annual spending. This could be significant, especially for MNCs, as their yearly expenditures run into billions.
What is Tail Spend Analysis?
Using technology to manage the tail spend helps businesses derive crucial insights. Tail spend analysis helps organizations make informed decisions, trim their costs, streamline the procurement process, and achieve greater efficiency. Tail spend analysis empowers them with insights on vendors, purchase metrics, etc., to understand what can be improved.
How to Manage Tail Spend in Just 5 Steps?
The following are the basic steps involved in tail spend management.
1. Identify your tail spend
In general terms, tail spend refers to a broad range of actions, from unclassified purchases to ad-hoc services. Tail spend could be different for different organizations. What constitutes tail spend varies for different business units in the same organization.
The first step in tail spend management is to define tail spend, identify what it means to each of the units, and retrieve spend data from all possible sources. This helps determine the avenues for tail spend. For ease of calculation, tail spend is identified as the transactions with vendors that fall beyond the top 20% that make up 80% of the total transactions.
2. Streamline internal processes
The next step in tail spend management is to streamline the internal processes. This helps the organization gain control of the spending and reduce the suppliers. Having a centralized process flow reduces risks and faulty behaviors. A typical process should have a system that mandates the employee to fill out forms, choose only from the selected list of vendors and then seek approvals before pushing out purchase orders. This would promote transparency and help identify opportunities to cut down costs. So, it is highly important to streamline internal processes.
3. Organize the data
The centralized, tail spend management system provides data and actionable insights. Once the organization streamlines the process flows, the next step is to organize the data for analysis. Using data, the stakeholders can make informed purchase decisions. The data should be classified to identify price variance, spot buying, off-contract purchases, etc.
4. Leverage the insights
Using the data, deploy technologically sound procurement strategies and solutions. Incorporating workflow automation, AI-based solutions, big data, ML, analytics, etc., into your process enhances the performance and efficiency of the procurement team. They help identify possible savings at both transactions and spend level.
5. Monitor the benefits
Deriving performance metrics and monitoring the outcomes is key to improving the tail spend management strategy. Businesses can determine the effectiveness of tail spend management by analyzing the cost reduction, visibility of the spend, transaction costs, and overall efficiency. The organization shall tweak the strategy based on these metrics.
4 Steps for Better Tail Spend Analytics
The following are the steps involved in better tail spend analytics:
1. Thorough Spend Analytics
An efficient framework should be deployed to identify, define, and record different spend data to identify savings and productivity enhancement possibilities. This improves the visibility of spend and helps devise strategies to handle organization spends at the level of suppliers or spend category.
2. Sourcing Helpdesk
Organizations also consider deploying a full-time helpdesk to streamline procurement and sourcing queries. Based on a pre-defined framework, such queries shall be routed to either the in-house department or existing vendor agreements. This can be achieved through outsourcing tail spend management program.
3. Tail Spend Consolidation
Supplier consolidation is a notable aspect of tail spend analytics. An efficient tail spend management framework focuses on the limited number of otherwise spread-out vendors. This consolidation reduces complexity as the organization has to deal with a limited set of suppliers. This reduces the time spent handling low-value orders, and the procurement teams can focus on transactions that add a greater value to the organization. It also reduces lead time as the business deals with suppliers who align more with the business requirements.
4. Online Marketplace Provider
The framework should allow online marketplace providers to perform sourcing and procurement wherever appropriate. A Mckinsey study on B2B online marketplace shows how such marketplaces streamline purchases under a roof. Online marketplaces reduce supplier management costs and time involved in long-tail catalog purchases.
Managing tail spend using excel sheets or forms can be complex and cumbersome. By efficiently leveraging technology, the entire process can be automated, and visibility can be improved. Whether measured in terms of cost savings or productivity enhancements, the returns of tail spend management strategies are way higher than the costs. Ignoring tail spend management in today’s competitive landscape can prove to be a costly affair for businesses.
Tail spend FAQ's
Organizations often analyze tail spend by using the spend ratio to suppliers. Tail spend typically refers to all purchases with vendors that happen outside the top 20% of suppliers with whom the organization transacts by the highest value (80% or more).
Managing tail spend is a high priority for procurement teams in today’s competitive world. Tail spend management is about identifying, tracking, and monitoring the purchases to ensure greater visibility and arrive at an efficient supplier base.
Following are the key steps to improving the efficiency of the tail spend management process.
- The first step is to identify and define tail spend.
- Use AI, big data analytics, and tech-based solutions to improve data visibility
- Streamlining the entire procurement and sourcing cycle reduces process turnaround time, saves costs, and enhances productivity.
- Create a time-bound strategy and use relevant metrics to evaluate their outcomes.
As per the Pareto principle, 80% of suppliers merely represent 20% of the company’s total spending. They are called the tail-end suppliers. In the graph that plots suppliers versus spends per supplier, the spend per supplier decreases as we move from left to right resulting in a long-tail after a point. They represent the tail-end suppliers.
Updated : December 26, 2022