Procurement & Tail Spend Management

Managing your smaller suppliers is more than a Procurement challenge as implications can be significant for your business.?Tail spend management refers to the strategic approach of optimizing and controlling the procurement process for low-value, non-core purchases to reduce costs, minimize?risks, increase efficiency, and improve overall supply chain performance. Well managed it is one more source of value-creation !

?What is Tail Spend and?What is Tail Spend Management?

In Procurement terms, Tail spend is the long list of suppliers providing you with goods and?services under a certain value or risk threshold. I would like to insist here that you cannot look at spend in isolation to determine your tail spend suppliers. You need to think about the broader implications.?

?Let's try to define what I mean more precisely then, starting by the thresholds.

• Defined based on spend threshold:?Any vendor with an annual spend below an arbitrarily defined number. This can range anywhere from $10k to $1 million, depending on the size of the company and its spending.?We generally talk about the 80% of total transactions making up about 20% of the company's spend by volume. There is no one size fits all definition for tail spend.?These purchases are often too small to go through procurement and are not frequent enough to be included in catalogued systems.?That 80% represents a great number of transactions by many suppliers, thus creating a long unmanageable tail that keeps growing.?

Then risk profile is another criterion to define tail spend.

• Define based on risk profile: More mature Procurement organizations will retain control over certain categories of spend even if the spend is small. So, here pens and pencils would be tail spent and software, as example, would be managed through Procurement. So, depending on your industries some subcategories of spend might not be “tail-spend” but “managed spend”.

It leads me to an important point, tail-spend is considered as unmanaged. It means that no procurement oversight is provided, it is not part of any catalogue, it is left to the business to order it in the way they need it. And there are too many suppliers to be effectively managed through procurement in a traditional way.

Why is it important?

For several reasons, ignoring it is not an option.

• Large compliance risk: low touch or, worst, no onboarding process leading to higher risks (corruption, environmental, child labor,...)
• No contract or suppliers’ terms & conditions leaving the company with minimal protection. I agree that it doesn’t matter for pens and papers but for marketing goodies for example: what happens if one of your customers gets poisoned as you bought items containing toxic chemicals?
• Service issues: many of the suppliers in the un-managed bucket will not be assessed against traditional key performance factors such as timeliness, price, quality, diversity, responsiveness and other KPIs
• Financial cost: many transactions mean high transactional processing costs. Time spent by financial teams to record, reconcile, and pay.
• Financial cost bis: no discount, no spend consolidation, loss of procurement opportunities

I am sure that we can come up with a lot more reasons why you should define an approach to better manage it. Now, when you think about it, we must manage tail spend to minimize costs, streamline processes, and enhance overall procurement efficiency, thus contributing to improved financial performance and operational effectiveness.

How do you do it ?

The 80/20 rule or the Pareto principle?applies:?Procurement teams have more incentive to focus on large, multi-year contracts driving bigger value. So, the traditional procurement engagement model could not work for tail spend. Plus, you don’t want your procurement experts to focus on small value purchases. Yet this leads too many companies to basically ignore almost 20% of their spend.?Number of options exist depending on what part of the tail you wish to address: the tail of the tail (the smallest ones) or the middle of the tail (where a more structured process could drive bigger value). The options include?removing?it,?simplifying?it, and?outsourcing?it. However, before thinking about this, you need to analyse it to determine the best approaches.?

Let's define few steps you should be taking:

1. Data Analysis and Visibility: Gain comprehensive visibility into tail spend by analyzing historical data, identifying patterns, and categorizing purchases to understand spending patterns and potential consolidation opportunities.
2. Remove it: Do we really need to spend this money??I know that it sounds obvious but too many companies end-up with nice-to-have purchases or duplicating goods/services already procured. Think about how the process can help "stop" those purchases; develop "smart-buy" communications and training modules.
3. Supplier Rationalization: Assess and consolidate the supplier base by identifying preferred suppliers, negotiating favorable contracts, and reducing supplier duplication to achieve cost savings and improved supplier management.
4. Automation and Technology: Implement procurement automation tools, e-procurement systems, and self-service portals to streamline the purchasing process and reduce manual tasks. There are as well solutions available to increase competitions through streamlined processes (automated sourcing platform).?Numerous solutions leveraging technologies have been developed. I would encourage you to look for the right partner who will best leverage automation, artificial intelligence, and data to optimize tail spend.
5. Tail Spend Policies and Guidelines: Establish clear policies, guidelines, and thresholds for tail spend, including preferred suppliers, approved spending limits, and purchasing channels to ensure consistent decision-making and compliance.
6. Collaborative Internal Stakeholder Engagement: Foster collaboration with stakeholders to gain insights, identify needs, and align priorities, enabling better tail spend management decisions and achieving buy-in from key departments.
7. Employee Education and Training: Provide training and education to employees on tail spend management, procurement policies, and preferred purchasing channels to encourage compliance, reduce maverick spending, and promote cost-conscious behavior.
8. Outsourcing, offshoring and Managed Services: Consider partnering with third-party providers or utilizing managed services to handle specific tail spend categories, enabling dedicated expertise and resources to effectively manage and optimize those areas.

In conclusion, I strongly encourage you to actively manage your tail spend. It will drive cost saving, reduce risk, improve data quality & reporting, amongst other things. Just do it in a meaningful way! Remember that these practices can be tailored and adapted based on the organization's specific requirements and industry dynamics.