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The concept of tail spend analytics is widely acknowledged but seldom optimized by the procurement departments. As for most organizations, tail spend management is an uphill battle. This article will spotlight tail spend and how the right mix of advanced analytics and technology can help you tame the beast.
What's Tail Spend?
To understand tail spend, we have to look at the procurement spend as a whole. To make it easy and fun, let us visualize spend as a bull, the head of which represents the top 1% to 5% suppliers, also sometimes termed as the "strategic suppliers" to your organization. Procurement professionals spend a lot of time focusing on this region to drive competitive advantage by developing and maintaining intense bilateral relationships with these suppliers.
As we move down towards the bull's torso, we come across the next 15% to 19% of the suppliers; due to the supplier's sheer volume, this region can significantly impact analyzing and managing spend.
Now it's time to grab the bull by its tail! Wondering why? Because this is where 80% of your suppliers sit, and ironically, this region just holds 20% of your spend. The considerable amount of diverse and sometimes anonymous supplier base, vast transactions, and multiple product categories make tail spend management a complex exercise requiring a lot of time and resources, which most procurement organizations lack.
That is why most companies miss out on the enormous potential of tail spend that we believe can be easily addressed with advanced analytics and the right use of technology.
According to Boston Consulting Group, "Firms that use technology and analytics to manage tail spend can cut their annual expenditure by 5% to 10% on average."
Additionally, some other benefits of managing tail spend include:
- Significant cost savings,
- Expanded visibility and thus, increased spend under management,
- Improved data and reporting, and
- Reduced risks.
What Makes Tail Spend Management so Difficult?
- Lack of Visibility
Stock Keeping Unit or SKU level details not reported or reviewed internally. The convenience of purchasing with p-cards also tends to obfuscate the spend data.
- Fragmented Spend
At times, for a given spend category, there are more than necessary suppliers. Additionally, with multiple categories to manage, companies fall short of resources and time to establish and support relationships, resulting in weakened buying powers.
- Inadequate Category Expertise
Each spend category is unique and comes with its own shades of cost drivers, market trends, contract terms, and other nuances. Effective management of each of these individual facets requires a deep understanding of the specific categories.
- Resource Scarcity
Procurement teams often fail to pay attention or dedicate adequate resources for managing tail spend. In terms of priority, for most companies, tail spend comes towards the end of the line.
Regardless of the tremendous savings potential of tail spend management, many executives overlook this area to realize strategies that offer more immediate rewards.
- Internal Control Deficiencies
Often, suppliers get added on an ad hoc basis, which hampers these suppliers from being a part of the strategic plan. Without a strategic direction, this maverick or rogue spend goes undiscovered and later repercuss as bloated spend.
How Can Advanced Analytics Help You Overcome the Tail Spend Challenges?
It wouldn't be wrong to say that it's impossible, in practice, to address the tail spend challenges without technology. Artificial intelligence and advanced analytics help procurement functions develop enhanced visibility into their expenditure.
At Ignite Procurement, we understand the necessity of accurate spend data and passionately work towards achieving it. While the challenges differ from organization to organization, we believe the right mix of technology and procurement expertise is key to managing complex and long tail expenditures.
What Are the Steps Towards Tail Spend Management?
Identify Tail Spend
Follow the Pareto Principle or the 80-20 rule to split your supplier base into top suppliers with 80% of total spend, and tail suppliers with 20% of total spend.
After identifying tail, depending on the value of items under purchase, divide it into the following three parts:
- Head of the tail - for preferred suppliers, spot buy, and contracts.
- Middle of the tail - for the marketplace and building catalogs around it.
- End on the tail - for p-card.
About 10% to 15% of spend sits in the hidden tail where even after having contracts in place, people do not follow them while making purchases.
Challenges Companies Face With Tail Spend Identification
- A large number of suppliers sitting in the tail,
- Maverick spend,
- Compliance issues,
- Savings target,
- Data aggregation issues,
- Overhead spend, and
- P-card data not mapped to the account payable.
Streamline Internal Processes
It's crucial to streamline processes to ascertain that they're upheld and adequately enforced. Furthermore, streamlined processes mean better data visibility, reduced overall suppliers, and a close check on spending, resulting in improved payment terms across departments and more strategic purchasing within your organization.
Organize, Classify, and Analyze Tail Spend Data
The first step in gaining the spend visibility is to classification and effectively visualizing that classification. To do so, you must split tail spend into categories and sub-categories - to look into where the spend is going. In Ignite, we have built-in algorithms for tail spend classification. Our flexible platform also lets you create rules to classify tail spend as per your respective taxonomies.
Category-wise visibility of tail is vital to get actionable insights. To achieve it, we categorize spend as per the UNSPC or taxonomies to understand the requisition pattern or buying behavior. Spend categorization is a stepping stone towards developing solid strategies about how to source the requirements to achieve the organization's objectives - not only in terms of savings but also compliance and risk mitigation.
Once you put tail spend under the lens of categories - both supplier and expense - valuable insights and trends start to surface. You can then formulate an approach to leverage your purchasing power and shorten the tail.
Also, it's essential to monitor and track the tail spend development to succeed with your efforts. This invaluable effort tends to impose more discipline within your organization because ultimately, what gets measured, gets done.
Want to See How Ignite Procurement Can Help You Tame the Tail Spend Beast?
Even though there are tremendous benefits to tail spend management, many companies eschew it because they lack the time and resources required to address it. Perhaps, your company is already aware of this issue but does not know how to take the first step towards it. To help you move forward, here is our on-demand webinar on Taming Tail Spend to Realize Savings and Enhance Compliance.
Click the link to instantly watch this 30-minute webinar that covers:
- What tail spend is, and how to tackle and ultimately drive value from it
- Case example: How a customer used procurement analytics to address the tail
- A live demo of Ignite Procurement focusing on tail spend.