Getting control of your tail spend
Who’s wagging the tail?
With savings of between 10% and 15% achievable, tail spend management offers a way to unlock previously untapped potential.
Tail spend comprises 80-90% of all purchased items—primarily low-volume and often one-off or infrequent orders that go out to a wide range of suppliers. Despite the vast number of items included in tail spend, it accounts for just the bottom 10-20% of a company’s total spend.
The conventional wisdom is that a procurement function should focus its time and attention on the top 20% of suppliers. This often leaves the ‘tail’ – typically smaller ‘indirect spend’ suppliers – as a problem that never gets addressed.
Unlocking the benefits of Tail Spend Management
Our experience shows that significant benefits can be achieved through a structured programme of Tail Spend Management:
- Savings of between 10% and 15%
- Supplier consolidation – manage less suppliers and funnel more spend to preferred suppliers
- Spend consolidation – less invoices, less processing, less queries
- Catalogues and easy ways to order – higher requisitioner satisfaction
- Improved end-user service – reducing the true amount of ‘ad hoc’ purchases
- Purchase-to-pay efficiencies – defining the optimum P2P process for each type of low-value spend (catalogues, portals, p-cards and consolidated invoicing), linking closely to P2P initiatives
As an example, an organisation with £150m of spend, will have a tail of £30m-£40m. That could be £3m-£4m of profitability going begging.
The benefits are clear, but the issue is that procurement functions do not have the capacity, systems or the expertise to go after the tail.
Procura have developed a bespoke Tail Spend Management service which augments existing procurement resources, allowing your current team to focus on the top 20% of suppliers, whilst Procura restructure the tail. Our “hands-on” approach is a one-pass through the entire tail, putting spend in the right place, putting in the right suppliers and configuring tail spend processes to ensure sustainability.
Our approach takes tail spend through four steps
Step One: Tail spend analytics
The first real use of machine learning in procurement is in the tail.
Even organisations with developed spend analytics leave the tail as “uncategorised”.
Machine learning algorithms don’t stop categorising and our unique spend analytics tool ProIntell accurately categorises all spend, learning from an organisation’s preferred suppliers to provide a data-driven foundation to address the tail.
Step Two: Directing spend to Preferred Suppliers
Through an understanding of your Strategic and Preferred Suppliers, the first objective is to direct spend to the right existing suppliers.
Based on a category-by-category approach and working closely with buyers, the objective is to consolidate spend to preferred suppliers, increasing leverage with them and delivering savings on the re-sourced requirements.
Step Three: Consolidation, New Suppliers and Group Buying Frameworks
The second objective is to put in place the optimum suppliers for the remaining spend. Focus is on prime vendors and/or distributors who have more buying power in order to leverage improved pricing, provide simple catalogue ordering and consolidate and aggregate spend.
Innovation in this area is key.
For example, accessing group buying frameworks is an increasingly effective way of leveraging larger volumes for lower prices.
Procura have developed a unique a range of group purchasing frameworks – known as ProSource - that enable organisations to access savings immediately.
Step Four: Purchase-to-Pay optimisation
Finally, we ensure the delivery of process benefits by ensuring that ongoing transactions are managed through the optimum Purchase-to-Pay process.
The objective is to make the requisitioning process as easy and straightforward for end-users, whether that is through integrated systems, catalogues, consolidated invoicing, purchase cards or even Amazon Business.
In summary, let your procurement function worry about the top 20% of suppliers, and leave the tail to Procura.
Articles and insights
Tail spend is traditionally defined by the Pareto Rule: the top 80% of spend comes through the top 20% of suppliers.
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Tail spend comprises 80-90% of all purchased items—primarily low-volume and often one-off or infrequent orders that go out to a wide range of suppliers. Despite the vast number of items included in tail spend, it accounts for just the bottom 10-20% of a company’s total spend... Continue reading