If you Don't Dig, the Silver Remains in the Mine
While procurement professionals are busy concentrating in generating value through a focus on core areas of high spend, strategic or key suppliers, there is still spend which is not actively managed. This spend which normally is wrongly assumed as trivial or not so important spend is referred to as tail spend. While having lesser suppliers for large spend can be a strength, yet it is observed for majority of the organizations that 80% of the suppliers are present in lowest 20% of the spend.
Organizations have a lot to lose in case tail spend is not managed well, such as:
- Costs - the costs of managing tail spend suppliers from onboarding , PR, PO, Risks ,Invoices processing works out to be same or even greater than managing the larger and more strategic suppliers.
- Risks - the inherent risks of managing a large number of small suppliers is huge. Tail spend management enables better Compliances as it reduces maverick spend.
- Efficiencies - the company does not take advantage of scale of economies and pricing discounts.
- No results inspite of efforts - buyers spend a lot of time firefighting, non-strategic but noisy spend
- Savings - there is a potential which has not been explored.
- Spend Transparency - a penny saved is penny earned. Put every penny spent in the umbrella of addressable spend.
Challenges: The challenges of tail spend includes low spend visibility, lack of effective controls, limited market coverage, low potential savings, lack of stakeholders interest ,large number of categories with low value, unique one off items & lack of category expertise.
Tail Spend Management Framework: When we focus on tail spend in a manner which is professional, systematic and use the right combination of e-procurement along with external expertise or managed services, we can attain significant savings.
Supplier Classification: In order to provide a better visibility to tail spend suppliers & understand where it falls we recommend categorization applying the Kralijic model which classifies suppliers on the basis of spend & supply exposure' or 'business risk' defined across four quadrants - strategic security, strategic critical, tactical acquisition and tactical profit. Using this framework, a sourcing strategy should be drawn for tail spends as a commodity. Procurement goals will also enable you to know the quadrant in which your maximum tail spends lies.
Supplier Rationalization: We all realise that urgent one time purchases & emergency purchases lead to increasing numbers of business suppliers. For example, stationary, packaging, small computer supplies have several suppliers, where for small price discounts new suppliers are introduced.
Spend Analysis: When tail spends are analyzed there will be an ongoing spend, periodic spend or spend which can be moved to existing core category which provide savings opportunities. There will be also be spend which will be actually tail spend, which cannot be negotiated to lower or better.
Tail spend management tool: A tail spend management tool Integrates POC suppliers of Blue chip companies and marketplaces. It also increases scalability due to supplier self-service & provides faster turnaround time using proprietary workflow tools, improved MSP efficiency, increased user adoption driven by friendly UI and Non-intrusive system, and quick go-live.
Catalogues & Authorisation Channels: Low-value spend can be moved to platforms as procurement cards, online catalogues, e-commerce through internet ,consolidation of purchase requests between units, electronic data interchange and punch outs, enabling a better visibility and control over tail spend.
Consolidators: This can be one of the best solutions as solves the problem of tail spend as well as the problems that traditional approach of managing tail spend do.
Tail spend is like a genie in the lamp, you would need to rub it in order to benefit from it. But in case its challenging for an organisation to manage Tail spend from a cost & headcount perspective it can be always delegated to a managed service provider who has knowledge & resources to deliver benefits of tail spend management.