How to Drive Spend Visibility and Control in Tail Spend
Procurement organizations employ spend analytics as one of their major tools for proactively identifying savings possibilities, managing risks, and maximizing their purchasing power. Spend analysis data helps companies gain a better understanding of their spend from the top to the tail.
Tail spend purchases are frequently too little to go via procurement, and they don't happen frequently enough to be cataloged. This usually follows Pareto's 80-20 principle, where 20% of transactions account for 80% of your spend. The remaining 80% of transactions account for 20% of spend, which is the tail.
The absence of data visibility is the most difficult aspect of managing tail spend. It occurs due to distinct procurement and contract management systems, internal silos that employ the same vendors and other resources, having a large number of suppliers, and decentralized buying rules.
Natural Sources of Tail Spend
The largest suppliers are usually handled as part of the strategically managed spend and have a professionally structured contract in place. However, some spend is classified as hidden spend because it is not covered by contracts (e.g., specific supplies not covered by contracts, non-compliant purchasing, etc).
Because there are no existing contracts, a dedicated task force must be developed to discover and reduce this spend while also capturing savings. To prevent non-compliant buying, the team will need to extend existing contracts or negotiate new ones.
Since tail spend has a high aggregate value, it can have far-reaching implications beyond the procurement function. Some of the challenges of managing it include:
- There is a lack of transparency in terms of spending.
- Employees aren't being taught why indirect spending needs to be controlled.
- Internal controls and metrics for tracking and optimizing indirect spend require buy-in and accountability.
- Spend with unapproved or suboptimal vendors, raising the risk of invoicing fraud and lowering the accuracy of planning and reporting data.
Tail spend is becoming increasingly complicated to manage due to the issues described above. How might these difficulties be overcome? Here is a 4-step process:
Look at your historical spend data and identify spending patterns. You can do this by answering these key questions - What are you buying? Who are you buying it from? Who is buying it? How often do you buy? When did you buy it? and How much did you pay? Once you have this data, the next step is to look at your procurement function as a whole, understand its capabilities, and gauge its performance in terms of policy, process, people, and technology. A closer look at your procurement process will give you a clear picture of where you stand and where you have to go, as far as an ideal procurement process is concerned.
Procurement teams need to revisit their supplier base to identify the number of suppliers per critical category, supplier dependency, spend volume by suppliers, cost of switching, and forward integration possibilities. This is crucial to determining your suppliers’ performance and management. Bucket your suppliers based on the criticality of their operations and put together a risk response plan. From this, you need to prioritize your spend based on business impact. It will serve as a roadmap for cost savings and risk management.
Implement a Benefits Plan
Renegotiate with suppliers using your value levers (price-based, TCO, demand management, and supply base) to optimize savings and avoid risks. Execute the benefits management strategy and double-check that the actual savings meet your goals. Add additional vendors to the marketplace and use current vendors for cross-category procurement to increase competition. Calculate several contract awarding situations to find cost-cutting options.
Sustain (enhance capabilities, process, and technology)
To keep the savings, re-define your intended operating model in terms of policy, procedure, people, and technology based on the lessons learned. To monitor and make strategic course corrections, implement a compliance tracking system. Build a spend analysis capacity in-house to achieve long-term cost reductions and contract compliance.
Tail spend has emerged from the darkness of procurement to the foreground of value creation. Procurement can eliminate the inefficiencies and waste that have plagued this spend for too long by investing in the right eProcurement software and making essential best practices in managing indirect spend part of the overall strategy.
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