Typically in each organization the 80/20 rule governs that the highest spend category absorbs 80% of the cost and 20% of the cost is absorbed by tail spends. Going by the same rule, a majority of the organizations that are looking for procurement efficiency have possibly already optimized 80% of the spend, leaving only the remaining 20% to be optimized. But in reality, even 20% of such spend is still a lot. Aditionally, such tail spends include spend categories with possibility of higher savings rate. Here are the top 5 things you need to know about tail spend:
Tail Spend Matters
Revisiting the 80/20 rule, most organizations direct their resources in negotiating with suppliers whom they spend the most on; thereby, giving little importance to savings from the suppliers making up the tail end. Consequently, the tail end suppliers face fewer cost pressures and command higher margins, giving rise to significant cost saving opportunities.
Big Suppliers can be a Part of the Tail Spend
The belief that tail spend consists of small suppliers is a common misconception among businesses. Although this case stands true most of the time, there can also be large suppliers down there. Businesses should realize that large suppliers may be supplying small amounts, contributing to the tail. Managers can take measures to increase savings by using sophisticated procurement technology that enables them to streamline and consolidate the spend and get better value out of such suppliers.
Tail Spend is Decentralized
Unlike strategic procurement, tail spend is consumed by all departments such as finance, marketing, legal, and IT within the organization. Procurement teams have always faced challenges in maintaining policies and control to bring order to such decentralized spending, which can be solved by a neat tail spend programme.
Better Compliance, Risk Management, and Savings
The pressure on the organization to improve compliance has been increasing year-on-year. Handling multiple suppliers and multiple spend category calls for multiple contracts and increased documentation costs. Running a tail spend programme provides not only better control over suppliers but also reduces the procurement costs. Additionally, using procure-to-pay processes minimizes the transaction costs and increases the compliance efficiency.
Supplier Rationalization
Various tail spend programs can effectively reduce the supplier base by combining all low-value orders across an organization. Reducing the number of supplier results in lowered transaction cost and processing cost. Companies are now looking to reduce the supplier base by using prime contractors by forcing all small suppliers to work through larger primes on a category or a geographic basis.
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