Managing Procurement Challenges - Handling Tail Spend Problems

Managing Procurement Challenges - Handling Tail Spend Problems

Extracting Savings from the most fragmented 20% of spend.

Of late an emerging trend is to delegate MRO supplies directly to the end users. CPO's feel that their teams will be better equipped to handle core supplies of high dollar volumes or technical requirements if they are able to focus on large value and quantity purchases instead of being busy and engaged with small value PO's.

Inking big deals and keeping stakeholders happy seem like far better priorities for the typical category manager, since that’s how he can turn executive heads and make his daily life simpler.

These days tail spend is trending — But Not For That Many Reasons.

Tail spend can be a nuisance to deal with, as it comprises of multiple low-value spends which have to be managed with valuable organizational resources. And while purchasing cards help reduce the cost of invoicing and settlement for unmanaged tail spend, it's still difficult for companies to guide employees to save money. 

The time that could be utilized for strategy formulation is consumed by a tedious process of tail spend management. 

The most common challenge faced by organizations while trying to segregate tail spend is 'poor data quality'. Typically, spend data consists of incorrect suppliers and material names.

Tail spend frustrates many procurement groups. It’s messy, it’s complex and it’s time-consuming to tackle.

In the the last two decades, digital technologies have helped procurement claim greater savings. But now the obvious candidates for cost cutting have been tapped out, and there’s only one place left on which to focus:

Ask any procurement leader what his top priorities are, and he’ll invariably say reducing costs, getting more spend under management and gaining more recognition within the organization as a function. Luckily, tail spend offers the opportunity to tackle all three of these at once.

To expand its influence, procurement must focus on the 20% of spend spread across the remaining 80% of suppliers. This gap in control, the long tail of spend, is also the most reasonable way to alleviate continuing pressure to deliver new savings.

Do You have a tail spend problem?

Here is a list of 5 signs that show you could have a problem with tail spend.

1. Your finance team comes up with different numbers to your procurement team

Many organisations rely on poor quality information such as simple summaries of categories or supplier spend. Unless all departments are tracking all their spend in a consistent manner there are likely to be discrepancies. One reason why departments come up with different numbers could be because these departments treat ‘tail spend’ (those one off or small value transactions that are often not accounted for) differently. Yet this spend can account for 20% of total spend. One way to identify this tail spend problem is to undertake a spend mapping or spend analysis exercise. This will help you to identify what portion of spend is with your core suppliers and how many transactions are unaccounted for. 

2. Your ERP data doesn’t reflect the products purchased

If your ERP data doesn’t match up with the products you’ve purchased then you probably have a tail spend problem. An ERP system is great for capturing the data of purchases made through your core suppliers but the frequently ordered, low value transactions are often left out and this can add up to a significant amount, typically 20% of spend. This problem often arises because suppliers will not be included in the system if the cost of setting up new the supplier is greater than the value of the transaction. Every Year, companies make Millions of Purchases that are too small to be handles by Procurement or too infrequent to be included in a single vendor catalogue.

3. You have 1,000s of suppliers and nobody knows what they do

Having too many suppliers is a sure sign of a tail spend problem. If your company has too many suppliers it could be missing out on volume pricing deals that could be achieved. It also makes supplier management much harder and makes establishing and enforcing contracts with suppliers more difficult. If Department A doesn’t know that Department B buys the same product at half the price they could end up over paying for goods. Reducing the number of suppliers is therefore a key part of tackling your tail spend problem.

4. All your sourcing data is hidden away in emails & spreadsheets

If you find it hard to gather comprehensive accurate sourcing data quickly because the data is hidden away in spreadsheets and emails then you probably have a tail spend problem. Large repeat orders of low value transactions that typify tail spend are often not recorded or managed consistently, making this spend almost invisible. However, tackling this spend can drive significant, measurable and sustainable cost savings and efficiencies.

5. You are holding lots of redundant stock

Holding too much of the wrong stock is another symptom of a tail send problem. This arises because tail spend products are typically not accounted for and fall outside the usual system of inventory management.

Having too much stock causes extra expenses for your organization as it can incur excess storage costs and lead to cash flow problems. Holding the wrong stock results in lost sales. In contrast, holding the right stock in the right amounts will lead to increased sales and increased customer satisfaction.

CONCLUSION : Through addressing their tail spend, companies have found an opportunity to: ? Maximize savings and minimize the total cost of procurement. ? Coordinate and aggregate purchases across the organization. ? Cut-down on maverick and “off-contract”.

It is therefore very important for Buyers, Suppliers and experts collaborate and improve spend visibility and control, achieve cost savings and efficiencies and to reduce risk and waste.

============================================================================ Disclaimer - The article is based on readings of academic interest and compiled from procurement professionals.

Muhammad Zubair Khan, PMP?, CPP, CPPM

Procurement Manager/Purchasing Supervisor/Lead Procurement Specialist/Lead Buyer/Purchasing Lead

5 年

Great article Sir... Thanks for sharing your thoughts and give guidance to Procurement/Supply Chain Professionals.

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Talal Salem Al Mashjari

Procurement & Strategic Sourcing | Expertise in Giga & Mega High-Profile Projects

6 年

Good article! Thanks for sharing it

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ARUN GUPTA

Logistic Supervisor

6 年

You always post which is not easily available.

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Karim Helali

Strategic Business Manager

6 年

Well said sir.

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