October 30, 2023 | Spend Management
Procurement managers know that tail spend - the numerous low-value transactions that account for a large portion of overall spend - can be an elusive source of savings.
While maverick and ad-hoc purchasing often drives tail spend, new artificial intelligence solutions are arriving to help organizations rein it in.
While tail spend may only represent 10-20% of addressable spend for many enterprises, it consists of thousands of small purchases.
Individually, these purchases fly under the radar, but together they represent significant potential savings.
The long tail of spend has traditionally been challenging to manage because it is both dispersed across many suppliers and fragmented across many different product types and buyers within an organization.
AI and machine learning tools are now mature enough to analyze tail spend at scale and detect patterns that humans cannot easily see. These algorithms can ingest transactional data, cluster similar purchases, and identify potential consolidation opportunities.
For example, an AI could determine that 500 employees are purchasing the same off-brand USB drives from various retailers and then recommend creating a preferred supplier agreement with one vendor.
The AI accomplishes this by clustering transactions based on product descriptors, supplier information, pricing, and other attributes to find commonalities.
AI can also flag unusual purchasing activity, like a single employee making frequent small purchases from an unfamiliar supplier. This allows procurement to investigate potential fraud or policy violations. The AI is trained to baseline typical employee purchasing patterns and alert when anomalies occur.
And rules-based AI can automatically flag purchases that breach policy, like expenses submitted without a valid purchase order. By codifying procurement policies into machine readable formats, violations can be detected in real-time.
Once they have analyzed tail spend patterns, AI tools can actively guide employees toward more optimized purchasing through several methods:
Recommendation engines prompt employees to select preferred suppliers when they browse catalogs or e-procurement platforms. The AI matches their search queries or basket contents to supplier contracts and pricing data to provide suggested options ranked by savings potential.
Guided workflows enforce compliant purchasing by only allowing requisitions through authorized suppliers and channels.
For example, if an employee tries to purchase through a non-approved supplier, they may be redirected through guided steps that reroute the order to a preferred source.
Chatbots can handle simple purchasing tasks like office supplies entirely through natural language conversations. By leveraging NLP and knowledge bases, AI assistants allow touchless transactions while still ensuring policy compliance.
The common thread is using AI to steer employees away from fragmented, rogue spending toward centralized sourcing agreements. This maximizes leverage, drives contract compliance, and reduces maverick spend.
While the application of artificial intelligence to tail spend management is still in its early stages, the promise is clear. AI-enabled analytics can finally shine a light into tail spend like never before. Leading enterprises are using these emerging technologies to optimize tail spend in ways that drive real value for the organization.
As the technology matures, we can expect AI to take on even larger roles in automating elements of tail spend management.
For example, reinforcement learning algorithms may begin to optimize supplier choice and purchasing policies dynamically based on results. And natural language processing will allow AI assistants to handle a growing share of routine purchasing interactions.
Procurement managers owe it to their function to stay ahead of the curve on these innovations. While change can be challenging, mastering new technologies like AI is the only way to keep driving savings and impact in a rapidly evolving world. The long tail of spend represents massive potential value, and AI is the key to finally unlocking it.
The long tail of spend has always been a stubborn challenge. But by embracing AI's pattern recognition capabilities and guided buying tools, procurement managers can gain new visibility and control. As this technology grows more powerful, enterprises who leap ahead stand to benefit the most from maximized savings and efficiency.
Know how GEP can help your organization tame tail spend.