10 Things You Always Wanted to Know About Tail Spend – Part 1

Hot Topic(We're delighted to have a guest article - in two parts - on our Hot Topic for June, Tail Spend Management. It comes from Chirag Shah, Executive Director, Xchanging Procurement Services).

Chirag_Shah_XchangingFrom relative obscurity a few years ago, interest in Tail Spend Management is today the most sought after of all the offerings in the Xchanging Procurement portfolio. I thought I’d provide a quick 10 point guide about what it is and why it’s causing so much interest:

 

1. Tail-spend is about the “Tail”!  Peter has already described the concept of the 80/20 rule and that most organisations – quite sensibly - focus their limited resources on the suppliers with whom they spend the most money. Left unchecked the suppliers contributing the tail end of the spend suffer less price pressure and consequently there are greater savings to be had. We typically witness 5% - 9% savings on Category Management work yet this rises to 8% - 15% when we hit the tail.

2. Tail-spend is not (only) about the Tail. Whilst it is a neat simplification for us to use the phrase tail spend, a better but less exotic term for this kind of spend would be “Ad Hoc spend”. We very often find that the tail spend team ends up handling all manner of different spends such as rush orders, new spend projects (i.e. the product has never been bought previously), and other random spend that either falls out of the corporation’s existing spend structure or sufficient buyer resource is not available to source properly.

3. Small spend does not mean small supplier. A common misconception is that the tail is full of small suppliers. Whilst it is true that all small suppliers (somewhat by definition) sit in the tail, there are also some very large suppliers in there. Sophisticated procurement technology can then be enabled to streamline and consolidate some of the low value spend requirements – in effect taking those suppliers out of the tail.

4. Tail affects everyone. All organisations have a tail spend, and unlike strategic procurement, which is typically controlled by a smaller group of procurement professionals, tail-spend is consumed by everyone and anyone in the organisation – from Marketing, Finance, IT, Legal, and in production environments, even staff on the factory floor. Historically this widespread consumption has created the challenge for procurement in terms of how to maintain policies and controls. A tail spend programme provides a neat means to addressing this. For the same reason, it’s a great way to build the profile of the Procurement department within an organisation.

5. The power of small numbers. Tail spend is estimated around 15% - 20% of an organisation’s total spend – often defined as most orders between $2500 and $100,000 in value although we’re seeing this upper bound number increase as the benefits of managing tail spend are better understood. With typical savings between 8% - 15%, the commercial benefit can be as much as 3% - 5% of the total cost of purchases in an organisation.

(More from Chirag Shah in part 2!)

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