How the 80/20 rule can help you manage tail spend better

One of the key goals of the procurement business is to reduce unnecessary expenses. Cost reduction remains a top priority for most organizations, and this is where the 80/20 rule can be a powerful ally. But what exactly is this principle? Let’s break it down!

Back in the 19th century, the Italian sociologist and economist Vilfredo Pareto conducted a statistical study on income inequality in Italy. The study found that, on average, 80% of the country's wealth was held by 20% of its population. Later on, he converted this income-distribution law into a mathematical formula, and since then, the so-called Pareto Principle has been applied in many areas.

How is this rule applied in procurement? It’s simple: 80% of the expenditure comes from 20% of the purchases, and 80% of the suppliers account for around 20% of the spend.

Now, let's see how this principle can help you tackle Tail Spend:

1. Identify your high-impact 20

Start by analyzing your company's spend. Begin by categorizing your purchases to identify which categories and vendors contribute most significantly to your total spend. You can do this by measuring how much money is paid to a single vendor annually and how much is spent in a certain category in a year. If that amount is below the threshold value defined by your business, then it can be considered non-strategic. Another way is by identifying all transactions that contribute to the bottom 20% of spend.

2. Focus on your high-impact vendors and categories

Rather than spreading your focus over a thousand vendors, prioritize the 20% of your suppliers within your strategic categories that cover most of your expenses. Ask yourself:

How much time do you spend managing high-value suppliers vs. the numerous small vendors that add complexity without strategic value?

One way to focus on what drives real value to your business is to reduce your tail spend supplier base by creating a list of reliable vendors who can meet most of your needs. Another option is outsourcing supplier management through a Master Vendor Solution, where one partner oversees multiple smaller suppliers on your behalf. If you're looking for guidance on finding those key suppliers, check out our article, "Finding Your Perfect Procurement Match," where we provide tips on choosing the right suppliers for your business needs.

3. Analyze and simplify your low-value purchases

For non-strategic purchases, automation is key. Use purchasing cards and digital procurement tools to manage low-value transactions efficiently so you can reduce administrative costs and minimize errors. For categories with frequent low-value transactions, consolidate spending with a single supplier to secure bulk discounts and simplify procurement processes.

4. Implement Tail Spend Approval Workflows

Many tail spend inefficiencies arise through maverick spending - employees buying unapproved purchases through nonpreferred channels. To avoid this:

• Require employees to submit purchase requests through a centralized platform.
• Configure purchasing cards to require pre-authorization and block unauthorized purchases.
• Educate employees on approval processes and the importance of compliance.

5. Regularly monitor tail spend

Tail spend management is not a one-off effort; it requires ongoing monitoring and analysis. regularly review spending patterns to identify any changes, as these reviews will allow you to adapt strategies and responses as needed. For example, if a new supplier emerges as a significant contributor to your tail spend, you may need to impose new guidelines around its usage

Conclusion

Applying the 80/20 rule to procurement allows you to streamline operations and reduce costs. By focusing on high-impact vendors, automating low-value transactions, consolidating suppliers, and enforcing approval workflows, you can take control of your tail spend.

Do you want to learn more tail spend? Explore our blog for detailed articles, resources and expert advice on this topic!

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