All expenditure that isn’t strategically managed is referred to as tail spend.
Every year, companies make millions of purchases that are too small to be handled by procurement or too infrequent to be included in catalog systems. – Accenture
It can be explained using the Pareto principle (the 80/20 rule), which states that 80% of the effect can be accounted for by 20% of the cause.
In the case of procurement, 80% of your suppliers will account for only 20% of your total spend. Tail spend therefore is the remaining 20% of spend.
When you add all the tail spend together it becomes your biggest overall supplier.
In the current uncertain global economy, it’s more important than ever for companies to find a competitive advantage through cost reduction. A lot of organizations focus their efforts on their main suppliers – applying SRM strategies to reduce costs, innovate and minimize supply chain risk. Tail spend is often overlooked in favour of focus on key suppliers. Managing tail spend can be the difference between success and failure.
Procurement professionals who research every avenue carefully before making a purchase don’t usually address tail spend. Over time, the low-value, ad-hoc purchases can amount to millions, so it’s crucial for businesses to have a management strategy.
Improving the visibility of your tail spend helps you to identify saving opportunities. It can also help you with supplier relations. For example, if you frequently purchase products from the same category from multiple vendors and consolidate to one supplier, you can benefit from lower prices and save time.
Aside from cost savings, Capgemini point out that handling tail spend helps to eliminate non-complaint suppliers, which reduces the risk of fraud.
Due to the broad and ranging nature of tail spend, management is complex and purchasing departments often struggle with it.
One of the main reasons that purchasing departments struggle with long tail spend management is the poor data visibility caused by factors such as complex supply chains, different IT systems and data sources, and fragmented and disconnected business processes such as sourcing, contract management, and procurement. – Capgemini
The amount of work and effort required to maximise efficiency and get spending under control increases with the number of suppliers you have.
Although the details vary company by company, Accenture suggest the best way to deal with tail spend challenges is by segmenting the tail and addressing each segment individually. You can read their solution to the challenge of Tail Spend Management (TSM) here.
Tail Management suggest four key areas to address when starting TSM:
Start by reviewing all of your suppliers and eliminate those which are non-compliant and/or part of your tail spend.
After consolidating your suppliers, it will be easier to align processes across all aspects of the business. This synchronisation, as well as a consolidated supplier base, provides a greater visibility of stock inventory.
TSM is all about improving supply chain visibility. Once you know where there is waste, you can remove or negotiate sub optimal payment terms.
Outsourcing with fewer suppliers makes it easier to impose compliance and increase spend visibility among other benefits. By consolidating your supplier base, you can increase control as well as successfully leverage economies of scale.
Does your company employ any TSM strategies? Let us know your thoughts and experiences in the comments section below.