Don’t Put the Veil on Your Tail (Spend)

Spend Matters welcomes this guest post from Sanyam Khurana of GEP.

In today’s day and age, procurement folks have to be vigilant about their spend. The spend in question here is the strategic big dollar spend, for the simple reason that higher the spend, higher the savings when negotiated well. In some cases, while concentrating the efforts on the big savings, we let go of the small dollar spend. One should look at the top 5 spend categories. Miscellaneous items may not stand out in the large chunk of data, but when cumulated, they result in a chunk of money (to the effect of about 15-20% of total indirect spend) and may result in the top 5 categories of spend. More often than not, these have been put under a veil far too long. From my experience, here are some of the simple steps and strategies that one could look at to effectively manage this tail spend:

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Cohesive Spend Analysis

The first step in any direction procurement takes is getting a hold of their spend. In the case of tail spend, the challenges quadruple. One needs to increase their spend visibility by period data refresh. If there are multiple sets of data, they need to be consolidated and cleansed for accurate analysis. Many times, tail spend items might not even get to the spend sheets or with sufficient detail, and finally the spend might not be repeated. When procurement does not get involved in small spend, it results in maverick spending or spot buying – two classic cases where no value is added by procurement. Looking at these in a cohesive, concurrent and periodic fashion will reveal insights into purchasing patterns.

On another hand, a procurement organization also needs to identify segments of tail spend – different business stakeholders buying similar items at different prices – a well-known phenomenon called price variance; urgent demand spikes for items resulting into quick and dirty spot buying; non-assessment of contract items leading to off contract purchases, etc. Once these patterns are analyzed, it makes the job of building strategy far more effective and less stressful.

Diligent Sourcing Turnaround

Knowing what kind of tail spend we have makes way to a quicker strategy-building exercise. Categorizing tail spend is a good idea, and one can apply basic sourcing strategies to tail spend. A quick turnaround is the key to managing tail spend sourcing. Assessing what has been previously sourced helps aggregate spend and finish the sourcing quickly. It also gives the leverage during negotiations leading to a good price in the desired timeline. Drawing the fine balance between savings and project timelines is the key to a diligent sourcing execution.

Effective P2P Mechanism

Contract implementations for tail spend help ensure compliance. There are various methods such as e-catalogs, punch out contracts or p-cards that can be instruments to a better management of tail spend. Not to forget that a well-tied policy for management of these methods must be in place to ensure reduction in maverick spending using these methods. Another loose end that must be looked at is Contract-PO-Invoice 3-way link up that will complement the first step of spend analysis and provide the much-required visibility to the organization. Lastly, for an effective P2P mechanism to be successful, communication and compliance are two main areas that the procurement folks must use with the business folks. A well-structured process of communication can reduce the gaps due to lack of information residing with non-procurement departments about variety of easy and quick processes deployed for their advantage.

Adopting these simple strategies can help increase the contracted spend, reduce maverick spending and transaction cycle and costs along with increasing efficiency in the current P2P system. On the softer side, there is an increase in stakeholder satisfaction, a better supplier relationship and proficient compliance monitoring making it a win-win for all parties involved.

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First Voice

  1. Omar Khan:

    The author has made an excellent point of exposing a spend category that continues to fly under the radar in many companies. Fact is that tail end spend category presents an excellent opportunity for Procurement organization to assert its position. What we have found working best and very cost effectively is by creating a two person team within purchasing organization with one senior and one junior buyer / intern. This team can create a data base of manageable number of suppliers for tail end supplies and establish pre-negotiated contracts along the lines of “Fed Bid” concept. This process will help the junior buyer to cut teeth on vendor negotiations on the one hand and help rein in the “rogue buyers” on the other hand. Similarly, departmental purchase requisitions can be routed to Fed Bid and here again a junior buyer can supervise the activity as part of his / her professional developmental plan.

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