Tail spend management (TSM) is an art and a science that helps in effectively managing the organizations spend activities and optimizing its procurement function and supply chain. Tail spend management is based on the Pareto principle, more commonly known as the 80:20 rule. The entire concept of Pareto principle is based on one rule that 80% of the effects comes from 20% of the causes. Likewise, out of the total supplier base of an organization, approximately 80% of the suppliers account for only 20% of the total spend. And this bottom 20% of the total spend are termed as tail spend.
Owing to lack of time, people constraints and growing complexity of supply chains, organizations often ignore the benefits of an effective tail spend management. Earlier, the management was of the opinion that the resources invested in tails spend management was not worth the end results. Tail spend can be defined as that portion of spend across different spend categories that is not managed actively and has an adverse impact on the organizations financial position. We, at SpendEdge, are here to solve these misconceptions about tail spend management and tell you why TSM is essential for your organization.
Why Do You Need Tail Spend Management?
Organizations are increasingly pressurized to reduce costs and create sustainable cost saving opportunities. This is one of the reasons why organizations are taking recourse to tail spend management. Apart from these there are various objectives to initiate a TSE program in the organization, which are as follows
- It aids in understanding spend coverage, enables spend visibility across various departments and thereby helps in identifying opportunities for cost savings.
- Tail spend management helps in identifying opportunities to enrich processes, thereby mitigating business risks and optimizing the organization supplier base.
- It also helps in driving compliance to set organization standards and internal policies.
- It facilitates effective spend management, identifying maverick spending and preventing scams.
Four Benefits of Tail Spend Management
Tail spend management as a concept may sound complex at first, but it is easy when practiced. A vast supplier base with smaller spend volumes means the business was unable to achieve economies of scale, which makes managing the tail spend an uphill task. However, organizations must note that TSM has several benefits that can be leveraged in order to drive profitability.
- Tail spend affects every function in the organization including the procurement function. Unlike procurement and sourcing practices, tail spend is an organization wide phenomena and needs to be tackled. It cannot be siloed as a procurement specific issue, but instead it needs an effective management program to address these issues and maintain the internal policies and controls.
- An effective tail spend management positively impacts the company’s bottom line and results in instant visible savings. This facilitates better spend visibility and improved spend management for the organization. The business instantly enjoys the benefits of an effectively implemented TSM program.
- It helps in optimizing the organizations supplier base, by combining all the low volume suppliers and enabling the management to focus its spend on fewer suppliers. This automatically reduces costs such as transaction expenses, process and storage costs. TSM facilitates a better supplier relationship management and helps the organization to retain suppliers who positively contribute and deliver value to the organization.
Tail spend management has multiple benefits that can drive the organizations profitability and enhance spend visibility, help in allocating funds and making strategic business decisions. At SpendEdge, we assist organizations to identify their needs, monitor their tails pend and thereby reduce procurement costs by using our tail spend management methodologies and help them in devising effective strategies to drive cost savings.
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