10 Things You Always Wanted to Know About Tail Spend – part 2

hot topic jpeg(We're delighted to have a guest article - in two parts - on our Hot Topic for June, Tail Spend Management. Here is part 2 and it comes from Chirag Shah, Executive Director, Xchanging Procurement Services).

In part 1 we looked at points one to five around Tail Spend; let's get back into our top ten.

6. Instant savings. I’ve never seen another supply chain initiative that delivers bottom line results to an organisation so quickly. Obviously these ad hoc and low-value spends are usually required by the user within days and at Xchanging we generally operate with a Turnaround Time (TAT) of 2-5 days – that’s from receipt of an order request from an end user, to conducting the sourcing, to placing an agreed PO with a supplier. Consequently the client organisation benefits from any savings derived from the sourcing almost instantly.

7. Cost Avoidance. As a vendor who earns fees based on the amount of spend managed, this point is frustrating for Xchanging! We never seem to get the same level of tail spend as originally estimated in our initial analysis. The reason for this is quite simple – the additional scrutiny that comes with having another person manage low value orders results in a lot of spend ‘requirements’ being deferred or even avoided. Forecast spend literally disappears - which of course results in even more savings for the organisation.

8. Supplier Reduction. By combining all the individual low value orders across an organisation, a tail spend programme is able to concentrate spend with fewer suppliers. Achieving this provides additional pricing leverage of course, but increasingly organisations are more interested in the benefits arising from better Supplier Management. Reducing the number of suppliers reduces transaction and processing costs. In a typical Fortune 500 we estimate reduction from over 20,000 suppliers to as little as a few thousand over the course of a 3-5 year tail spend initiative.

9. Enables Community Sourcing. Within each category of spend, we create Category Cards which is essentially an approved list of preferred suppliers. The implementation of these category cards makes it much easier to implement community sourcing strategies such as focusing on minority-owned businesses, or local SMEs – an increasingly important issue and a hot political topic too these days. The use of tail spend techniques to manage CSR and other community initiatives is being increasingly commonplace, especially in public sector.

10. Compliance and Risk Management. Whether related to ethical business practices, conflict minerals, environmental practices, data confidentiality or any number of burgeoning compliance requirements, the risk associated with seeking out and eliminating non-compliance are now major topics for CPOs. Running a tail spend programme allows organisations to have better control and supervision over suppliers. In a recent survey that we carried out, this issue has risen into the top 5 CPO Agenda items as they grapple with the fear of seeing their organisation in the headlines, because a small supplier in the back of beyond has been adopting unethical or non-compliant business practices!

In summary, Tail Spend Management kills a lot of birds with one stone, and it should be easy to establish a business case to bring in experts (such as Xchanging) to run it – such a programme can be self-funding from day one.


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