The long time elephant in the room of every big business – a tail-end spend management is finally becoming a procurement priority. Usually, procurement organizations have been focused on managing their strategic spend and that means 80% of total spend. The tail-end of a procurement department’s spend refers to the 20% of non core transactions that are left unmanaged, usually due to a high volume of suppliers and limited in-house resources.
How can that be, you may ask? Well, the fact is that many of these transactions are either too small or made too infrequently to be handled by internal strategic sourcing staff.
However, those small and “insignificant” purchases eventually add up and can in the long run impact a company’s bottom line. Companies are discovering that they can’t use the same procurement methodologies for tail-end spend as they have for their strategic spend. For one thing, tail-end spend is far more complex than strategic spend: there are many more suppliers, it’s very fragmented, and there are a lot more individuals buying. A large number of suppliers, smaller spend volumes and a perceived lack of economies of scale mean knowing exactly where to focus attention on the tail is a daunting task.
So, who are the tail-end spend “buyers”?
It’s the people in HR, marketing, finance, IT, and so on — ordering goods and services when needed. They are not professional buyers, in the traditional procurement sense and as long as the total cost is not surpassing the allowed threshold, they can place various types of orders with whomever and however they want.
The tail spend team ends up handling different spends such as rush orders, new spend projects with products that have never been bought previously and other random spend that either doesn’t belong to the corporation’s existing spend structure or buyer resource is not sourced properly.
Therefore, managing these common challenges is something that should be explored. There are a number of additional inherent characteristics of tail-end spend that make it hard to optimize. Some of those include: misclassified spend, high volume - low price, one-time spend, maverick spend, fragmented spend and low volume - low price. Other challenges associated with managing tail-end spend may include factors like poor data quality and visibility, seemingly low savings potential and lack of a dedicated team to manage it.
Why is proper management of tail-end spend important?
Until recently, it was practically impossible to find any company managing their full strategic spend properly. For example, ten years ago, most organizations were only confidently managing 40 maybe 60% of that spend. Luckily, this is not the case anymore.
These days due to procurement’s increased visibility and greater strategic role, as well as significant cost cuts wherever and whenever it’s possible, many companies are managing their entire strategic spend effectively.
Effectively managing the tail spend remains both a great challenge and opportunity for many procurement departments. Improved process efficiency and better allocation of time and resources for tail spend can result in significant cost savings up to 15% and increased ROI for the company as a whole.
This has left many companies thinking about what they can do with the remaining 20%, despite a handful of challenges. And not only because of the financial benefits which can increase procurement outsourcing savings potential by 1.5 times and which has been tested by a handful of companies not willing to let the 20% slide. But this is just one reason to manage tail-end spend.
Tail-end is a fertile soil for many activities that can be damaging to company’s reputation.
The 20% tail-end spend is not only complex, but risky as well. With the 80% spend, companies typically have an experienced buyer managing key suppliers. The company knows everything there is to know about their strategic suppliers: whom they work with, their values, their working conditions, who their suppliers are, etc. With unmanaged tail-end spend, nobody is looking after these suppliers and companies have no idea who they are buying from, making them susceptible to a number of risks.
With all of the corporate sustainability issues in the spotlight, unmanaged spend means companies may be doing business with suppliers that violate their own CSR principles. For example, it can be discovered that one of your suppliers was using child labor or heavily polluting the environment. The damage could be irreparable and the reputational impact alone could lead your company to a downward spiral.
Another type of risk that is common of unmanaged tail-end spend is a best practice risk. When companies let people from across the business buy from whomever they want, there is a chance that they will just buy from a personal connection, or from a supplier with whom they have a historic relationship. This often results in individuals overpaying for what they are buying, but what is worse, they may be violating fair practice regulations and putting the company at risk of being sued.
Companies that fail to address this complexity and risk are gambling with a lot more than they think, because the consequences may affect everyone.
What needs to be done in order to manage tail-end effectively?
Typically a company would start with a six month tail-end spend assessment where the goal is to define the tail spend, evaluate the opportunities and make a business case comprised of savings, investments and operating models to outsource the tail spend management. The process would look somewhat like this: analyze, source, contract, procure and pay.
To be effective in managing tail spend, organizations should look to address the following:
- Spend analytics. Perform thorough analysis to identify radical spending and transaction data classification in order to achieve greater tail-end spend visibility. Deep-dive analysis will identify appropriate strategies to tackle the spend at a category or supplier level.
- Sourcing helpdesk. A full-time sourcing helpdesk provided by a third party, for example a small procurement company, can perform as the one-stop-shop for all sourcing and procurement queries. Depending on pre-agreed spend parameters, each enquiry should be directed to either the customer’s in-house sourcing department or existing supplier agreements.
- Online supplier marketplace. A third-party provider usually enables the access to an online supplier marketplace. This helps to perform sourcing initiatives for customers, where it is necessary.
- Tactical buying. For true one-off purchases, quick turnaround benchmarking, tendering and negotiation services that ensure all purchases are done by procurement professionals.
- Local supply market knowledge. This is really important as local know-how means, not only better savings, but increased understanding and efficiency. Outsourcing providers now include a significant portion of local resources within the teams delivering tail-end spend management.
Best practice of tail-end management
For example, a major global telecommunications provider needed to control its tail-end spend so internal teams could refocus on their core business. At the time of engagement, this spend comprised $166 million across 12 countries with as many as 1,400 suppliers. Their objectives were to consolidate and centralize tail-end spend purchasing, implement purchasing best practices and controls, reduce the number of suppliers in the tail-end and generate savings. The solution was to implement a tactical sourcing model with comprehensive change management program, centralize tail spend across 12 countries bringing purchasing intelligence with a team of 10 third-party expert buyers, to put in place technology roadmap and enable workflow, supplier relationship management and a price benchmarking database. Tail-spend for this business covered items from $20 to $200,000 and required speed of response. Reactive procurement procedures were implemented based on lead times of three hours, three days and nine days depending on customer requirements and the purchase amount. By working closely with the customer team and supporting well-established processes with innovative technology, the delivered results included an effective change management program, 13% savings realized in year one.
There is growing recognition within procurement that tail-end spend management is of increasing importance. This doesn’t mean that common procurement practice should be put on the back-burner to instead focus on the tail, but it does mean it can provide significant savings and deserves significant consideration. With the best practices outlined here for ways to address the challenges commonly associated with tail-end spend management, it is our hope that you can secure an engagement that eliminates the risks and instead, reaps the rewards of managing tail-end spend.
Find out how CTA can help you optimize your tail-end management by contacting us or by submitting your RFQ.