In tough economic times, organizations usually cut budgets (in most cases, this means cutting inefficiencies in the supply chain).
But what if there’s a way to achieve cost savings without compromising the quality of your products or services? The answer to this question can be found in tail spend.
You’ve probably heard the term tail spend before. You may even have a basic idea of what it means, but how to manage it and why it’s so important may still be a mystery to you. In this article, we’ll take a closer look at what tail spend is and how effective management can help your business achieve optimal performance.
What is Tail Spend?
Tail Spend is not just another set of corporate jargon but a real phenomenon businesses of all sizes need to reckon with.
Tail Spend, or long-tail spend, is like a sneaky part of a company’s spending. Simply put, it’s the money we spend on things that aren’t the big, obvious stuff.
Think of it this way: imagine if we had a jar of money and wanted to save as much as possible. We’d usually look at the big, important things first, like rent or food, right? That’s what companies do too. They pay a lot of attention to the important stuff because it can save them a lot of money.
But here’s the twist: there’s also a bunch of smaller things in that jar that adds up. It’s like finding a bunch of coins at the bottom of your bag or pockets (you know the feeling, don’t you?) These small things, like paper clips or pens your organization needs, might not seem like a lot, but they make up a good part of the spending jar.
Here’s where the Pareto Principle comes in 80% of the good stuff comes from 20% of the work. So, most companies focus on the big, important 80% and don’t pay as much attention to the other 20%. That 20% is the long tail, representing the small end of the procurement spend spectrum.
It is typically managed inefficiently, leading to higher costs, and missed opportunities.
Managing Tail Spend can be tricky, but it’s a challenge to address as the rewards are pure gold!
According to Gartner, procurement teams that successfully managed their organization’s indirect spending in 2019 delivered an ROI of 6.88x and a savings rate of 6%.
How can I manage it?
So, how can you effectively manage your tail spend? You need to know where every penny goes to oversee the tail spend effectively.
The key is to use a complete plan for handling spending that covers all the different types of money you spend.
- Understand what counts as tail spend
Understand what tail is in your organization. Start small by identifying a specific department area with evident problems. Procurement departments can understand where potential cost savings lie by simply understanding what Tail Spend is made of.
- Use data
Data is King. Procurement departments can pull data from various sources, such as credit card statements, vendor invoices, and purchase orders to identify transactions that fall under the tail spend category.
- Consolidate suppliers
Identifying Tail Spend offers a great chance to get better
deals with current suppliers. By consolidating purchases, companies can
increase their leverage and negotiate better pricing. Many vendors offer
discounts based on volume, and companies can reduce costs significantly by
improving the volume of purchases.
What can you get? Rationalized supply base and 10-20% of cost savings
- Use the REO strategy
For the spend that cannot be consolidated, use the REO strategy. REO is a shortcut from Retain, Eliminate, and One Off.
Retain: This strategy is best suited for suppliers offering specialized products or services, providing a cost advantage, or operating within specific regions. It often involves frequent and swift renegotiations to improve commercial terms and eliminate pricing inconsistencies. The Tactical Sourcing team will navigate a large number of vendors using standardized playbooks and negotiation templates.The expected benefits? Improved contract terms, optimized rebate structures, and potential cost savings of 8-15%.
Eliminate: Apply this approach when products or services from a supplier are no longer needed. Begin by front-loading key demand management decisions and aligning functional budget leaders to drive aggressive reductions across categories. Establish clear governance and decision-making protocols, ensuring responsibilities are well-defined and decision-makers are empowered. The possible outcome? A significant reduction in demand or business needs, leading to cost savings of up to 20-30%.
One-Time Purchases: For non-recurring or infrequent spending, transition to payment methods that streamline reconciliation for simple, low-cost purchases. Implement a spot-buying desk or leverage business process outsourcing to handle tail spend needs while ensuring compliance with procurement policies and procedures. The benefits? Improved cost recovery, better visibility into historical transactions, and potential cost savings of 3-10%.
- Track progress and monitor success
Tail Spend management is an ongoing process. Identifying key performance indicators (KPIs) and setting up regular review periods is important to evaluate how well your tail spend management program is working. Here are a few examples of KPIs you should consider:
- Cost savings achieved compared to agreed benchmarks or targets
- Productivity improvements, such as time saved per task, reduced quote requests, and increased use of e-catalogs for tail spend
- Percentage of spend under strategic management versus unmanaged suppliers
By monitoring these indicators, you can measure your program’s success and quickly identify improvement areas.
- Consider a Master Vendor solution
Think of your tail vendors like different routes on a map – it can get confusing to navigate. Now, picture the Master Vendor as your expert GPS, guiding you through the maze.
The master vendor program is one of the best solutions for Tail, as it fixes many problems simultaneously and brings immediate results. It’s like your personal navigation system, ensuring you reach your destination hassle-free.
Gone are the days of individually onboarding suppliers or juggling orders and invoices.
Supplier enablement? Check.
Purchase orders? Absolutely.
Payments? You bet.
As your tail is strategic for MV providers, they will help you build an effective tail strategy for every part of the tail, create catalogs, implement fast payments for the smallest suppliers, and consolidate your tail database. The best part? It aligns with your current terms and conditions, so you immediately reduce risks for your organization.
Benefits of Tail Spend Management program
Incorporating a well-crafted tail management strategy is the key to securing a competitive advantage in the market.
- Save more money and reduce stress. Cut costs and save time, even on small purchases.
- Boost your efficiency to the next level. Streamline your suppliers to create a lean and productive machine. Allocate your resources to what really matters and become an efficiency pro.
- Take control of your spending with precision. Say goodbye to rogue spending and unethical practices. Get rid of unreliable suppliers and ensure a transparent, fraud-proof process.
- Make your stakeholders happy. Equip your team with the tools they need! Simple rules, user-friendly processes, and faster cycles will bring a smile to everyone’s face. Tailored strategies will bring joy to all!
Let us help you manage Tail Spend
Don’t Go It Alone!
Managing long-tail spend can be a challenge for procurement teams, but it doesn’t have to be! You can maximize your results by creating a dedicated team or project group and using clearly defined metrics.
Let SDI International Corp. optimize your company’s spending without hurting your bottom line. Our experts will help you find answers to all your procurement questions.
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