What is Tail Spend and why should you manage it?
Tail Spend Definition
Every year, companies make millions of purchases that are too small to be handled by procurement or too infrequent to be included in a single vendor catalog. These purchases are known as tail spend.
As you can see from the chart in most companies
- The bottom 20% of total spend will come from 80% of your suppliers
- 80% of indirect suppliers account for 20% of business spend
In most businesses this tail spend will account for approximately 60 – 80% of all purchasing transactions.
Why Tackle Tail Spend Management
Tail Spend is often seen as too complicated to address for many reasons such as a lack of resources and time. Many companies take the view that the work involved in addressing this type of spend cannot be justified.
However, in our experience we have found that most companies can realise significant cost savings and benefits from tackling tail spend management.
Among the benefits that can be realised are:
• Savings – typically between 15 and 30% of total spend
• Visibility and control of expenditure
• Improving compliance to contracts
• Containing future costs and preventing spend creep
Strategies for Tail Spend Management
So how can you tackle indirect spend? Here are a few strategies to consider:
Use Prime Contractors
One solution some business have implemented is to ask their tail spend suppliers to deal with them via a third party or prime contractor. This has the effect of eliminating the tail spend from the businesses point of view.
However, this approach assumes that simply because spend can be classified as tail spend, that it is also less important to the business. This may not be the case for many of these suppliers. Some suppliers not be happy about being asked to deal with you via a third party and this may be an impractical policy for other providers.
This approach also does not really allow the business to directly benefit from potential cost savings that could be available to them if they attempted to tackle the spend directly.
Utilize Technology Designed to Tackle Tail Spend
Deploying an easy to use cloud based spend management platform (such as Claritum) will allow your business to achieve visibility of your spend and help you manage your supplier base.
A good cloud based spend management platform will allow you to automate your order process, set up and manage supplier profiles, set contract terms and rate and monitor your suppliers based on their performance and value to your company.
Additionally, the platform should have reporting capabilities that allow you to provide you with data in real time and analyse your spend with suppliers to a detailed level.
Outsource to a Third Party
Another strategy is to outsource the tail spend to a service provider to manage. These providers will usually be using an eprocurement system or cloud based spend management platform to simplify the process and impose automated control on to the tail supply chain.
If you would like to discuss these approaches to tackling your tail spend then please contact us