How to Manage Your Tail Spend and Keeping it Under Check
Recent times have seen mounting pressure on sourcing and procurement organizations, like never before. In this time of volatile commodity pricing and supply market risks, not only are they responsible for purchasing, but they’re also expected to do so much more, with less funding. In addition to this, they are also expected to deliver business value via agile, flexible and innovative operations.
Amidst all these pressures, most of the procurement organizations acknowledge the fact that when it comes to low-value purchasing aka Tail Spend, they might not be managing their resources as efficiently and tail-spend consumes a lot of their budget. Let us first begin by taking a look at what constitutes as tail spend.
What is Tail Spend?:
Companies every year, make millions of purchases, which are deemed to be too small to be included in catalogue systems or be handled by procurement. Since most companies proactively take measures to keep their important purchasing categories under control, they end up neglecting tail spend, which eventually makes up for a considerable chunk of their spending.
If more than two of any of these scenarios apply to your organization, you need to keep a check on your tail-spend:
- Number of suppliers is greater than the number of employees
- 2/3 or more suppliers, supply only 5% of the spend
- Less than 70% of orders are negotiated by procurement
- More than 10% new suppliers are added each quarter;
- Less than 50% of transactions are taken up with preferred suppliers;
- Less than 50% of purchases are automated
To tackle this problem, we have divided tail-spend into four categories, hidden, head, middle and tail respectively and will look at segment-specific solutions:
- Hidden Tail: A company’s biggest suppliers, are generally treated as being a part of the ‘ strategically managed spend and have a professionally negotiated contract for them in place. However, there are some spends with the suppliers, that are not covered in contracts (specific materials not covered by contracts, non-compliant purchasing etc.); these are categorized as hidden spends.
A dedicated task force needs to be formed to locate and eliminate spends from this section and capture savings in the process, as there are no existing contracts. The team will need to extend existing contracts or negotiate new ones, to this end and prevent non-compliant buying.
- Head of the Tail: The head of the tail comprises of spend, that is not strategically managed, even though the spending range per supplier might be really high ($ 50,000 lakh to $1m).
The aforementioned task-force, can assist in this segment too by hunting for supplier consolidation opportunities. This will help in moving consolidated spend, into spend, that is strategically managed.
- Middle of the Tail: The middle of the tail contains a large number of suppliers that are in the range of $2000 to $200,000). Since the spend per supplier is not that significant, hence the middle of the tail is not strategically managed.
The middle of the tail also generally contains within it spend that can be shifted to strategically-managed spend, or by the selection of appropriate buying channels, become automated. However, since as compared to the vast number of suppliers, the spend per supplier is low in this category, hence, savings can only happen by the establishment of a spot buy desk and tendering small spend through it.
- Tail of the Tail: This category generally contains suppliers that are less than $2000 spend. This segment is highly fragmented and transactional in nature, involving many purchases that may be a one-off, with a lot of suppliers. Since the tail of the tail generally has a huge number of low-value transaction, hence, the only way for savings, is to rationalize the buying channels. This means alternative channels that can allow low-value buying without involving procurement, must be established.
Moglix is the leading supplier of MROs in the nation, with a single, automated platform acting as a one-stop shop for all your needs. So, save yourself from unnecessary expenditures, from multiple procurement and minimize your tail spend, reach out to us and let us take care of your sourcing needs.