From a highly competitive marketplace to volatile commodity pricing and shrinking margins, the procurement organization is under increased pressure to allocate resources efficiently, keep a sharp eye on costs and ensure operational stability.
Unlocking supply chain opportunities through closer tail spend management is an increasingly viable method of delivering new value to an organization.
Tail spend is the small and non-critical spend that doesn’t present a significant supply risk to the business due to low dollar amount and an array of potential suppliers. Typically, there aren’t any complex supply agreements nor are they managed with “spot buys.”
Tail Spend Defined
Based on the Pareto Rule, also known as the 80/20 rule, this ranking separates the critical few—the high-value suppliers that account for 80 percent of the spend—from the final 20 percent, or the tail end. Spend is typically considered “tail” from one or all three of the following vantage points:
- Non-core categories (e.g. office supplies and equipment for a janitorial supply company);
- Low dollar value transactions;
- Suppliers below an established annual spend level.
It can also include one-time, higher value purchases. These individually unmanaged transactions may be relatively small in dollars, but cumulatively can add up to be far more than the spending from the largest supplier. However, these diversified purchases are typically not managed as tightly. In short, it’s fertile ground for rogue spending.
Slipping Through the Cracks
The effective management of tail spend continues to be both a great challenge and opportunity for any procurement organization. Most internal efforts are focused on the strategic sourcing programs of high-value categories and tracking big-ticket items, leaving numerous little items “slipping through the cracks.”
Why does this elusive slippage occur? Key reasons include a scarcity of resources that simply don’t have the bandwidth to address the volume of suppliers and ordered line items. Often there is poor visibility into tail spend patterns. Add to this a questionable ROI and the end result is a lack of targeted initiatives aimed at corralling these non-core, often ad hoc purchases.
Perhaps more worryingly, even though the procurement organization recognizes that there are inefficient processes and non-compliant purchases, trying to plug all the holes can be enormously frustrating and exhausting.
Addressing the Not-so-Obvious Costs
When uncontrolled tail spend goes unchecked, the obvious impact is the higher amounts paid to vendors due to lack of scale and negotiated pricing. However, mismanagement of tail spend results in a series of hidden costs.
The high volume of invoices resulting from uncontrolled indirect spend adds considerably to processing and accounts payable administrative costs and time needed to manage suppliers. In a recent study, APQC reports that, “Organizations adopting enterprise-wide standards have an average cost per invoice of $5.00 compared to an average of $7.02 among other organizations. “1
Unmanaged indirect purchases cause procurement waste—from unused stock sitting idly (e.g. as a buyer purchases the same item, without knowledge of the available surplus) to mismatches between supply and demand (e.g. over buying in anticipation of potential need). The lack of management also opens the door to potential increased risks like supplier fraud and cost overruns.
The Sutherland Solution
What if you could leverage a procurement solution that brings together skilled talent, best-in-class processes and leading technology to help wrangle tail spend? With Sutherland, you can benefit from a procurement solution to help fill a gap in many organizations that works on a gain-share model. Our procurement specialists have a deep market understanding and category spend expertise. Sutherland can provide contract validation, contract negotiation and vendor recommendations that improve efficiencies as well as deliver bottom-line results.
Interested? Get in touch with one of our procurement experts.