After procurement departments source 80 to 85 percent of their companies’ purchases, the remaining 15 to 20 percent of purchases are referred to as “tail spend.”
According to a report from the consulting firm the Hackett Group, managing tail spend is an opportunity to not only lower costs, but also help procurement in tackling its bigger goals.
Procurement leaders who took part in the study said that lowering and steering clear of costs was among their leading priorities, and 81 percent said boosting procurement’s role at their companies is another critical objective.
The Hackett Group said by managing tail spend, procurement leaders can reduce costs by at least three percent. Managing tail spend is also a way for procurement to raise its affect on, or participation in, the company’s purchasing decisions. Finally, tail spend management can help streamline operations and release managers to work on more tactical purchases.
Procurement managers can take two general approaches to handling tail spend. They can add to the 80 percent of spend they already handle by taking on neglected spend categories, or they can examine categories they’re already managing and see if they are extracting all the value they can in those areas. For instance, sourcing decisions could also be adding value through collaborations with suppliers over activities like simplifying transactions.
Specific Steps to Take
Many suppliers, smaller spend volumes and a perceived absence of economies of scale mean understanding where to concentrate on tail spend is a tricky task. The complexity of tail spend is generally as a result of the fact that it has been under the radar for some time, and the result has been letting the regional operations team purchase what they want within budget. Because taking on tail spend can generate substantial savings, it’s worth checking out approaches to manage the standard challenges.
Many procurement managers have found success with a few simple, but effective steps.
- Due diligence – Doing a deep dive into spending practices can often reveal opportunities to reign in tail spend, like identifying rogue transactions that should be included under existing agreements.
- Consider consultation – A third party can provide an objective take of spending practices, including tail spend.
- Online marketplace – If possible, accessing an online supplier marketplace can assist with sourcing initiatives.
- Understand the local market – Often, the best opportunities for lowering tail spend can be found across town or in the next town over.
Is It Worth It?
Managing tail spend is generally worth the resources required to take it on, since doing so helps procurement lower cost, increase its role, and boost its impact. Once procurement leaders have a system in place to manage tail spend, some regular maintenance is enough to keep it going.
At ZDA, we help sourcing managers reach their goals by supplying them with the talent they need to succeed. If your procurement department is in need of a custom supply chain staffing solution, please contact us today.