Over the past year, procurement trade magazines have stressed the significance of identifying and managing tail spend in large or geographically distributed organisations. Tail spend’s popularity highlights two major changes in our space:
First, procurement professionals’ mindsets have changed since resources didn’t provide them the time or tools to expose low-value spending. Thus, even the most attentive procurement specialists had to focus on the 20% of suppliers that accounted for 80% of their costs.
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The second shift is tech. New technologies like business software and real-time communications have helped organisations understand their tail spend and uncover profit-maximizing opportunities.
Tail spend is often the 20% of an organization’s spending sourced from 80% of its suppliers. These transactions are too small or infrequent for procurement to control, therefore they don’t profit from purposeful purchasing tactics. Variance in Purchase Price
Tail-spend is complicated since it happens in the bottom 20% and can be hard to manage without the correct systems. Much is made of the tail being where maverick spending lurks, which is true, but there’s more.
Tail expenditure also includes understanding
- Purchase from approved vendors outside contracts
- Low-cost, frequent goods
- Large one-time purchases
- Low-cost, low-volume items
- Misclassified items
These groups require different procurement management tactics, but enhanced systems can solve numerous commonalities. Most of them are too small or uncommon to draw attention, thus nothing is known about them. Without data, senior executives are unable to motivate about tail spend’s true cost, even if it may save millions if managed well.
Good news, though.
Understanding and managing tail spend is becoming clearer. Thousands of Google results examine this hidden spend in detail. Companies are creating case studies as they save millions. A recent Accenture report found that firms who transformed their tail spend saved 10–20% by enhancing spot buying processes and corporate buying compliance.
Technology is also helping. Streamlined ordering systems are replacing tail expenditure enablers including weak communication channels and inefficient corporate bureaucracy, making low-volume spend easier for end-users and better for procurement. Integrating these systems with developing analytics tools quantifies and aggregates tail spend savings, giving the C-suite a solid return on their procurement system investment.
All these changes make procurement departments worldwide excited. While the chance to save a percentage point with a major supplier will never go away, managing the tail can boost profitability by applying procurement best practices to under-the-radar spending.
