Spend Matters welcomes this guest post from Amol Jagdale, of GEP.
Fortune 500 organizations typically have a good level of control over most of their spend. The focus is always on strategic spend to maximize savings, but with changing dynamics, procurement organizations are under immense pressure to look for new avenues to deliver value and incremental savings. One area in which they can certainly get hard savings and benefits is “tail spend.”
The origin of “tail spend” as a term lies in the Pareto principle: tail spend represents 80% of suppliers that relate to only 20% of the spend by value. Application of the Pareto principle to spend management has meant that “the tail” has traditionally been ignored, allowing procurement professionals to focus on the core spend categories.
A better definition of tail spend is spend on commodities and categories that have not been formally addressed by procurement in the last two to three years.
Tail spend is fraught with characteristics that render traditional sourcing approaches ineffective — poor data visibility, low volume, time sensitivity, unique and often unstable specifications, just to name a few. What's more, apart from the natural dearth of contracted suppliers, non-compliance and maverick buying often lurk here.
Tail spend management (TSM) refers to the deployment of procurement strategies to directly address categories considered as tail spend. Tail spend represents 10%–15% of overall spend, and savings potential for spend addressed could be as high as 15%.
A successful approach should cover proactive as well reactive components of tail spend.
Periodic spend analysis and opportunity assessment leads to the identification of a list of opportunities that the team pursues in a planned fashion.
- Spend analysis of ERP data
- Study of existing contracts — what’s excluded
- Discussions with stakeholders and continuous identification of opportunities
- Formal strategic sourcing and leveraging total spend
- Negotiating existing contracts to include spend areas currently not included (e.g., if some equipment models are not covered under existing maintenance contracts)
The sourcing process is triggered by a requisition from the user group that the team would address using the most optimal approach.
- Requisition details, specifications, spot buys and business requirements
- Urgent and time-critical requests
- Assess requirements based on time criticality and savings opportunity
- Select appropriate sourcing approach — sole-sourcing, three-bid buy or a mini RFP
As the name suggests, it is a repetitive sourcing process and you get continuous improvement with every iteration. It can be used for both proactive and reactive approaches.
- Spend analysis of ERP data
- Requisition details, specifications etc.
- In year one, the team could negotiate the cost across common suppliers.
- In year two, the team could reduce the number of suppliers and finally go with single specialist suppliers.
Taking Control of TSM Involves an Iterative Process
- Spend analysis : Cleansing and classification of data from a variety of source systems using a state-of-the-art spend analysis tool to identify the true tail spend.
- Filtering: Deep-dive analysis within the tail-spend to reclassify the tail and identify appropriate strategies to tackle the spend at a category or supplier level.
- Sourcing: Accelerated execution of identified opportunities that includes bringing tail-spend purchases into the purview of existing contracts and leveraging the knowledge base of category data, RFQ templates and RFX/Auction tools for faster sourcing.
- Ongoing spot buys: A highly efficient “buy-desk” to extract value from each purchase at the point of requisition — these teams use a variety of tools and methodologies to balance cost savings and business criticality for every purchase.
- Tail-Spend Reduction: Reducing maverick buying at source by implementing online and punch-out catalogs, p-cards and improved compliance reporting.
Results of Tail Spend Management
- Savings potential could be as high as 15%
- Value beyond savings
- Supplier consolidation
- Reduce spot buys and maverick spend.
For more interesting thinking on procurement, visit the GEP Knowledge Bank.