The critical issue with buying low cost products and services (often termed Tail Spend) is that everything has to flow smoothly and be made as simple and easy to action as possible.
To give you an idea of the challenges, the following table compares the nature of Tail Spend to that of Strategic Spend.
Comparison of Tail Spend and Strategic Spend
|FOCUS AREA||TAIL SPEND||STRATEGIC SPEND|
|Number of suppliers in the market||High||Medium|
|Number of suppliers being used||High||Low|
|Number of categories of spend||High||Medium|
|Average supplier transaction $||Low||High|
|Number of supplier transactions||High||Low|
|Number of decision makers||High||Low|
|Number of requisitioners||High||Low|
Number of suppliers per Category Manager
|Maverick Spend Issues||Yes||No|
|Multiple business units and many people involved||Yes||No|
|Achieving Impact (savings/controlled growth)||Difficult||Easy|
Critically large numbers of employees and suppliers can be involved, making any automation of the process challenging.
2: Tail Spend
The definition fo Tail Spend for this article includes spend in the following categories:
- Print and Packaging
- Signage and Display
- Business Services
- Marketing Services
- Professional Services
- Office Supplies
- IT equipment and services
- Uniforms and Apparel
- Gifts and Premiums
- Temporary Labour
This spend can make up 20% of an organisations total expenditure.
3: The Trouble with Tail Spend
Demand within Tail Spend categories is unpredictable and spread across every part of a business. To bring this under control, whilst continuing to focus on wider Strategic and Direct Spend issues, is the challenge faced by Procurement.
Order ranges can vary from just a few hundred pounds to a few thousand pounds, but they can be significant in number.
Employees are used to interacting directly with suppliers by simply phoning or emailing them. Either using online searches to find potential suppliers and products or using Marketplace sites.
This direct employee activity opens the organisation up to compliance issues, as well as the obvious issues of buying products at inflated prices. Plus, of course, issues of supplier bias and undue supplier influence with employees.
How much do you actually spend, when it comes to Tail Spend? Perhaps this is the best indicator of the struggle, as most organisations cannot give an exact number. In fact, the numbers they give will have significant ranges. Ranges of many millions, tens of millions or 100’s of millions of dollars depending on the organisation size.
4: How Can I Manage Low Cost Spend?
An organisation usually has some form of purchasing control in place and may perhaps believe that current Strategic automation systems should be used by employees. Neither of these encourage a user to use company systems and processes to place their low value orders.
Another approach can be to allocate key buyer resources to spot buy requirements and act as purchasing agents for employees. This unfortunately ties these resources up on transactional activities and is far from efficient for the employee.
Finally, other than totally ignoring the problem, there is Outsourcing. Specialist Procurement Service Providers (PSPs) can provide the necessary service and their costs can be assessed against an insourcing approach for the organisation.
Note: totally ignoring the problem is not as rare as you might believe. Missing savings and taking risks related to CSR and governance.
5: The Right Tools for the Job
The tools used have to be simple. It has to be easy for employees to place and progress orders. Remember the competition is online searches and Marketplace sites, which offer ease of access and rapid ordering.
The catalogue will need to contain a wide range of standard products, services and suppliers to support purchases that will range from branded paper through hiring temporary labour to furniture and office equipment. The catalogue of products also must support RFx capabilities for employees to be able to request non-standard or one-off purchases. Leveraging RFx templates and questionnaires to ensure key details are included.
Management of stock and integration to stock control systems would also be expected. Plus, integration into wider MIS and financial systems.
For ease of use, single sign on and catalogue-based user views are essential. Plus, access anywhere and at any time. Effectively mimicking an online shopping experience for the employee.
Rules and access rights would be under Procurement control. Process steps and any governance aspects covered as part of the system configuration set up by Procurement teams.
Defined approval levels should trigger on any purchase of significance. Advising appropriate management and Procurement resources of the request.
See example case studies of companies automating their Tail Spend activity.
6: Expertise on Demand
Tail spend requirements, when not automated, are typically left to inexperienced or junior buyers. If Procurement are involved at all! When Procurement are not involved it is often administration resources or trainee employees. Neither of these has any significant experience in sourcing, negotiation or in-depth knowledge of the company’s policies with respect to procuring goods and services.
Automation provides the knowledge base and structure to ensure even the most inexperienced of users can effectively procure appropriate goods and services at competitive prices.
Automation provides the on-demand self-service functionality that will reduce the per order transactional activity for both the employee and Procurement. Guiding users through a simple structured process that is no more difficult than placing a Marketplace order. Reducing costs and improving efficiencies across the organisation.
Repeat orders, or orders placed by other users, can be accessed at the click of a mouse. Preferred suppliers selected as appropriate to the nature of the purchase.
7: Analytics is a key capability
Analytics is Procurements tool to explore and analyse the vast amounts of data that will be gathered by Indirect Spend automation. Comparing and contrasting spend across the organisation. Seeking efficiencies and cost savings, with data available at your fingertips.
For the user analytics is a means of breaking down their spend and more effectively managing their budgets.
In both cases the full power of a BI (Business Information) suite linked, or an integral part of the solution, is essential.
It is essential when addressing Tail Spend automation that tools designed to address this specific domain are used.
Key things that your automation must deliver on are:
- Faster processing of P2P transactions
- End user confidence to use
- Process Efficiencies (for the organisation and their suppliers)
- Increased coverage of Spend
- Fewer variations
The business case for Tail Spend automation can be justified based on savings alone. However, demonstrating how the automation will impact on operational efficiencies should not be ignored: this will get support from across the organisation. Plus, do not underestimate the importance of governance and corporate social responsibility in context of low value purchases.
Claritum Customer Case Studies