How to Manage Tail Spend and Improve the Bottom Line
- Tail spend management can help a business realize significant savings
- To manage tail spend, it is vital to consolidate the supply base and reduce the number of low-value transaction suppliers
- Procurement automation brings more spend under management
Tail spend accounts for a significant portion of unmanaged spending, especially in large businesses.
But it’s often neglected.
Yet, managing this spend has perhaps never been more crucial (and beneficial) for businesses, given the cost pressure due to the slowdown and the lingering effects of the pandemic.
Procurement teams have often ignored tail spend for two reasons.
1. Tail spend management is complex and involves a huge volume of transactions with several suppliers.
2. Managing tail spend has traditionally not been a top priority for a business.
Procurement teams, instead, like to closely monitor strategic spend that accounts for on average 80% of the total spend volume. As a result, tail spend often goes out of hand and impacts the bottom line.
The new definition of tail spend
Tail spend was earlier defined as 10-20% of the total spend with more than 80% of suppliers.
But over time, this definition has changed. As it is understood today, tail spend includes any spend that is not actively managed across categories.
In this sense, managing tail spend effectively has assumed a lot of importance since the pandemic has completely changed business priorities. Along with ensuring supply continuity, the biggest challenge for procurement teams is to implement a rapid cost-control strategy while meeting new business demands.
Prince Kapoor, Senior Director - Consulting at GEP, spoke about this growing emphasis on managing tail spend in a recent webinar.
“Procurement priorities have changed dramatically in a short span of time,” he says. “Tail spend has been redefined to adjust with the evolving procurement needs. It’s vital to gain an understanding of tail spend, both quantitatively and qualitatively.”
Time to adopt latest tech to tame tail spend
The most effective way to deal with tail spend is to leverage advanced technology in procurement. Replace manual procurement processes with a source-to-pay platform that is powered by artificial intelligence, machine learning and automation.
Advanced technologies can sort huge volumes of data and break down unstructured data sets into actionable insights. Not only can the use of technology aid in curbing tail spend, it can also help consolidate the supplier base and improve contractual terms.
Technology can also aid in setting up a B2B marketplace that enables a buyer to choose from a range of pre-loaded suppliers with pre-negotiated rates across categories. This model does not require contracting or onboarding new suppliers and allows the buying organization to tap into a wider supplier network.
Tail spend and a closed loop
To successfully address tail spend, a business must adopt a closed-loop approach that combines proactive and reactive components. This approach enables upfront rationalization of tail spend as well as ongoing management of the remaining portion of overall spend.
Reactive approach: This involves ongoing management of all requisitions received via sourcing.
Proactive approach: This involves analyzing spend trends and opportunities to drive more value via multiple channels, including three-bid-and-buy, RFQ and accelerated sourcing.
Advantages of automation
Procurement automation can provide several opportunities to bring more spend under management.
For example, a business can deploy catalog implementation for categories such as office supplies that involve many transactions. In this strategy, a business must identify its preferred suppliers and use this data in the form of a visual catalog.
Spot buy is another key area of focus for automation. With this, all transactions below a certain spend threshold can be processed faster. This process classifies and groups new purchase orders into different buckets and routes them to a limited group of people for quick review.
Where to begin
A business should first clearly define what is included in this spend segment. It should then identify and evaluate opportunities to reduce unmanaged spend. There are several ways of doing this:
1. Move a portion of tail spend to strategic addressable spend.
2. Reduce the number of low-value transaction suppliers.
3. Carry out a deep-dive analysis to enhance tail spend visibility and choose an appropriate strategy to deal with the spend at a category level.
4. Create a time-bound action plan that includes an operating model for the program along with planned savings and outcomes.
There’s room to save
Continuing to ignore tail spend, especially in today’s uncertain business environment, can prove to be costly. The stakes are high. Not only can tail spend impact your savings, it may just grow bigger and bigger each year and remain unaddressed.
Plus, as the supplier base largely remains unidentified, businesses have little idea who they are buying from, which enhances risk and makes them miss out on savings opportunities.
Want to learn more about managing tail spend?