Tail Spend Management – How Does It Work?

Hot TopicOur Hot Topic for the month of June is Tail Spend Management - how organisations can achieve better efficiency and effectiveness, not to mention savings, from the “final 20%” of spend. Today, let’s get into what usually happens when organisations look to address tail spend, then in part 2 we will look at a couple of issues that need considering – warning notes if you like - in terms of how management of tail-spend is often approached.

So let’s start with the question of how we define the tail spend.

The most usual way we’ve seen organisations address this is to carry out a classic spend analysis, then rank the suppliers based on annual spend. The smaller suppliers (i.e. starting from the bottom of the list) whose business in total adds up to around 20% of total spend are then defined as the tail. That could well be 80% or even more of the suppliers as a percentage of the total supplier base.

The other way of approaching the definition is to look at a similar exercise on a category by category basis. So a ranking of spend analysis by categories or sub-categories takes place, followed by again an identification of those that make up the “bottom” 20% or so of spend.

What happens next? That takes us into the key areas around the various strategies to address tail spend. The options include removing it, simplifying it, and outsourcing it. We will get into each of these I’m sure through the month, but in brief here are some of the common approaches.

We might look at removing it by using “prime contractors.” So some buyers force all their smaller suppliers to work through large “Primes,” perhaps on a category or geographical basis. The buyer just does not deal directly with small value suppliers. So the next time a spend analysis is run, there simply won’t be any small suppliers (in theory, at least). Now of course there must still be relatively smaller suppliers, but basically the long tail of really small volume and value suppliers is gone.

Simplifying takes various forms. It may mean the use of purchasing cards or other transactional options to reduce the cost of handling the tail. Or it could mean aggregating up small spend areas or small suppliers into larger contracts or identifying categories where a list of preferred suppliers can be used to reduce the number of suppliers.

And outsourcing is what it says – handing over the “problem” to a third party to manage. The outsourced service provider then presumably uses some sort of simplification, automation, or other strategies in order to mange that spend better than the original buyer. (That must be the theory at least!) We will certainly come back to how those suppliers approach that task, which is at the core of their offering assuming they are to provide a useful service.

The key point arising from all of these options is that, however good they may look, we need to be careful and understand the risks, as well as the benefits. So we’ll come back to that in part 2.

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Voices (5)

  1. Khairul:

    i dont get how we can reduce spend by reduce the 20% of the total spend. for example, let say we use the third approach – outsource. still those 20% spend supplier will be park in the outsource supplier list. when it come about the total spend, the tail spend 20% just hide into some of the outsource supplier. where can we reduce the spend?

  2. Paul Alexander:

    Outsourcing is the preferred route to many organisations , its the 80/20 rule

  3. Jussara:

    Related the consolidators, do they may absorb any king of products and services? What are the used conditions? May you indicate anyone?

  4. Karolina:

    thx that was very hepful to understand tail spend management.

  5. Ken Hamilton:

    I like this. It wet my apatite on better understanding tail spend management. Did you come out with part 2?

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