The traditional view of procurement, promoted by large consultancies, is to focus on managing the top 80% of spend and ignore the 20% of spend in the tail. The argument for ignoring spend is that there are few opportunities for savings. However, as "sourcing doctor" Michael Lamoreux points out in the recent white paper An Introduction to Tail Spend and Why You Need a Technology-Based Solution, this argument for ignoring tail spend is wrong. So here are 5 good reasons why you should tackle tail spend.
Significant Savings Opportunity
The savings potential for an organization that manages its tail spend is real. Organizations can expect to save up to 15% over the 20% tail. Accenture show in their white paper Getting a Grip on Tail Spend that companies that use spot buying management to transform their tail spend realize a one-time saving of a least 10% to 15%.
Unlike strategic spend, tail spend represents an ongoing savings opportunity. Overspend in the tail is typically high, usually in the 15%+ range, many products are purchased at around 30% over their real cost and most of the spend in the tail is on commodities which get cheaper over time. Managing this spend will result in on-going savings as new opportunities continually present themselves in different categories of spend over time.
Excellent Return on Investment
The idea that addressing tail spend is expensive is a myth! Research continues to find that tail spend management could generate a return of up to $8 for every $1 invested.
ROI of up to $8 for every $1 invested
Most transactions occur in the tail
80-90% of all procurement transactions occur in the tail. Ignoring this huge volume of spend will mean that the vast majority of transactions in an organization are not properly controlled and potential savings opportunities will be missed. To take your procurement to the next level, you need to tackle tail spend.
Tail spend consitutes at least 20% of spend in an average organization. If this spend is unmanaged and invisible this constitues a considerable amount of risk to the organization. These risks include: high process cost, reputational risk, supply risk and non-compliance risk.
Therefore, if you tackle tail spend, you will also be strategically minimising risk to your organization.
Tackle Tail Spend
This article is based on the white paper "An Introduction to Tail Spend and Why You Need a Technology-Based Solution". For more in-depth look at tail spend and the points raised in this article download the white paper.
An Introduction to Tail Spend
This White Paper, written by Dr Michael Lamoureux, Editor of Sourcing Innovation and a contributor to Spend Matters, is an introduction to tail spend and tackles some of the most important questions.