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How effective Tail Spend Management can drive cost savings

Organisations all too often look under the exact same rocks for savings. Instead of looking at direct materials and purchased parts, the hidden opportunity is often found in effective tail spend management.

Sales may be the business growth heroes. But Procurement plays a vitally important role to plug the holes in the bucket, stopping the leakages from all of that new revenue that our Sales colleagues are generating.

There’s a perfectly logical reason that organisations go after the more “sexy” areas of spend. These are the spend categories that they typically understand best.

What many companies don’t realise though is that direct materials have been negotiated to death.

These categories can no longer yield the 3% year-over-year savings. Old school, pure-play price negotiations don’t work, especially in an inflationary market.

The best opportunities now lie in tail spend management. This is usually areas of indirect spend which have previously been relatively unexplored.

Yes, Supplier Relationship Management (SRM), supplier partnerships, and deeper collaboration with core vendors will deliver ongoing value over the long term and are an absolutely essential piece of ammo in every large organisation’s arsenal.

But they’re not the right levers to press to make some quick wins to the bottom line.

Why tail spend can be the bearer of golden goose eggs

Untapped areas of indirect spend offer the biggest percentage savings opportunities. Many categories or contracts have never been interrogated by a procurement professional. And even if they have, then it’s often just in the form of a global frame contract issued by someone in corporate procurement. These often end up never being implemented at country or site level.

The challenge is the amount of workload that usually goes into being able to get a grip on this type of spend.

Typically, if we take the Pareto principle, it’s the 80% of vendors that only make up 20% of the spend. The typical characteristics of tail spend are poor spend data and a relatively low value per purchase order. This obviously means that tackling it requires a lot of resources, which your procurement department probably doesn’t have!

Procurement technology providers have recently caught on to this. Automating or simplifying this process can capture a lot of purchases in their net that were previously not being actively managed by Procurement.

Let’s first look at the definitions of maverick spend and tail spend, before we then explore ways to use technology to help drive compliance and savings in these areas.

What is maverick spend?

This is essentially any spend that cannot be predicted or controlled. This can come in three varying levels of severity.

1) Unauthorised spend

Typically occurs in startups, or in organisations experiencing rapid growth or a period of turmoil. Processes either don’t exist or are not being actively enforced. Even if budgets have been set, there is very little control that a CFO or a procurement team can yield. A formal process either doesn’t exist or is often routinely being bypassed.

2) Uncontrolled purchases

This scenario is more remnant of companies who have some gaps in their internal controls. They are not firing on all cylinders with their purchase to pay governance. It may be a disconnect between corporate and local procurement. Or it could be an SME that has never really given much thought to how vendors are managed and purchases are controlled.

3) Vendors not actively managed

The biggest vendors are usually managed well. Direct materials that go into the production process are strategically sourced. Once you get into certain categories of indirect spend though, many low value or country / site-specific local vendors are not being actively managed.

So, while many enterprises don’t have drastic non-compliance issues when it comes to overall spend management, most companies will fall somewhere between examples 2 and 3. This usually depends on what’s being purchased.

What is tail spend?

There are many definitions, and none of them are right or wrong. It’s really down to the philosophy of any specific organisation, as well as the length of the tail in relation to the core, strategic vendors.

I’ll therefore go with the most commonly adopted definitions:

1) Annual spend below an arbitrarily defined figure

This can usually range from suppliers with an annual spend below $100k to $1 million. It depends on the size of a company and its total external vendor spend.

2) Following the 80/20 rule

The classic 80% of the total vendor count which according to Pareto’s law makes up 20% of total vendor spend. Your organisation may be at 70/30 or 90/10 but the general pattern will be the same.

3) Non-managed spend

Any vendor who is typically tactical in nature and is not being actively managed by Procurement.

It doesn’t really matter which of these you pick.

Common areas of maverick spend and tail spend

The savings opportunities are varied, abundant, and usually easy to pick out if you’re able to extract reasonably good spend data. This is a whole different topic in itself! I’ve covered this on The Procuretech Podcast at length!

Some of the areas where the biggest opportunities lie are:

Before we extol the virtues of fishing for savings in your tail spend, there’s an important issue we need to consider. CFOs tend to be more apathetic towards measuring and validating expenditure in these categories. Why? Because it’s usually not a predictable, repeatable purchase in the same way that production materials are.

You’ll need to align with them how you’ll measure the benefits first of all. Savings on indirect spend categories can’t usually be measured as Purchase Price Variance (PPV) against a standard or average price which can directly impact the bottom line.

 

5 effective tail spend management strategies and how procurement technology can help

Below are 5 ideas of ways to extract real savings from your tail spend while improving your overall purchasing governance. Of course, procurement software can help you to achieve all of these much faster.

1. Eliminate maverick spend

Implement a no PO, no payment policy to eliminate true maverick spend. 

Once this is in place, you can then work towards tackling some of the milder forms of spend infractions. For example, those when stakeholders just bypass procurement’s preferred vendors.

To do this, obviously you need to ensure that the stakeholders’ customer experience of dealing with Procurement and any requisitioning process is smooth. Forcing clunky software or even worse, an archaic ERP system, onto them isn’t going to make you many friends.

The key to this is giving them an app or a platform that they actually WANT to use because it’s easier than just calling the supplier and obtaining a quote themselves.

Implementing user-friendly purchase order processing software such as Procurify will get you halfway there. Then, combine this with an e-sourcing platform such as DeepStream that suppliers, stakeholders and procurement teams alike all enjoy using.

2. Implement a competitive bidding policy

One time purchases (such as project spend) can take up a lot of procurement time.

There are 2 issues here.

  1. These requirements are often not well negotiated because as long as the stakeholder is within budget, he/she probably doesn’t care so much about the cost.
  2. On the flip side, it’s a lot of administrative work for Procurement to help the stakeholder with negotiation and RFQs, especially if it’s not a strategic, big ticket investment purchase.

Having a threshold for competitive bidding facilitates two possible benefits.

Firstly, you now have visibility of spend requests above a certain amount before a PO is created. You can now help stakeholders if necessary to obtain 3 quotes and negotiate with the best vendor.

Secondly, it also enables Procurement to free up their time. If a Category Manager is spending 2 hours negotiating a few hundred dollars saving, the opportunity cost of that time being spent on a more productive task is significant.

Using software such as Fairmarkit for non-core items can unlock savings that would previously have been a massive time suck for procurement teams having to do this manually. Likewise, a tool such as Pactum can automate a lot of simple, price-based negotiations that would otherwise result in a lot of emails between buyer and supplier.

3. Consolidate spend with key vendors

Do you have several suppliers for simple, non-core items? Consolidating these from one vendor could reduce the administrative cost. Additionally, it can also help you with demand control and consumption reporting.

A great example of this is the use of vending machines for PPE and general industrial consumables, which can reduce theft and frivolous consumption.

High volume, low complexity, low-value items such as office supplies, industrial operating supplies, and IT peripherals don’t have complex supply chains—they’re off the shelf items.

Risk is zero. You don’t need multiple vendors. It’s also often worth paying a little bit more for certain products to have more spend under one vendor. The better data it will give you makes it worthwhile.

Technology can help with this, not only through catalogue purchases and guided buying but through using specialised providers as an integrator for things such as fabricated parts, lab supplies or print and promotional items.

4. Delete or block inactive vendors

Why not delete or block vendors in your ERP system who do not have any active POs or invoices over the previous 12 month period? You will need to check and align with stakeholders first though, to ensure no critical vendors are being removed.

Procurement can work on more added-value tasks with the time saved through not having to deal with day-to-day admin resulting from a long tail of non-strategic suppliers.

Each additional vendor you have is one more late delivery, unpaid invoice, change in VAT number, delivery discrepancy, or price increase request.

You may not see savings immediately, but by working smarter, not harder, you will soon see the benefit through the white space this creates in your team’s workload.

Technology can help here by using a central source of truth for managing vendor records and supplier intake. It also allows vendors to be activated and inactivated much more easily than managing this through an ERP system.

5. Implement catalogues to increase compliance and spend visibility

Catalogues are a win-win solution. For the supplier it usually means increased revenue for them, as spend is channelled through their catalogue as a preferred vendor.

For the buyer, they are a great way to improve compliance, spend visibility, and data quality. Using a supplier catalogue will reduce the amount of free text POs which can otherwise make your spend data a mess.

It will enable you to have deeper insights into your spend and consumption. Do they really need a Bosch screwdriver, or is a private label brand just fine at a 20% saving?

Catalogues can either be internally hosted or as a “punch out” vendor-hosted solution . If you’re considering implementing procure to pay software, then the ability to integrate with vendor hosted catalogues, or to create and host your own bespoke catalogues for frequently purchased items, should definitely be a consideration.

Conclusion

Of course, there are many more ways how tail spend can be better leveraged to help control costs and improve purchasing data.

Our procurement software directory allows you to apply multiple filters to help give you a quick snapshot of all the different solutions out there offering tail spend management solutions, that are relevant to your organisation’s size and maturity.

I hope these have provided a taster for how a clear procurement strategy to tackle your maverick spend and tail spend should be a high priority for your organisation, to quickly offset some of the inflationary pressures that procurement teams are facing at the moment.

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