Tail end of a procurement department refers to the 20% of the noncore transactions that go unmanaged & uncontrolled due to high volume of suppliers. And limited in-house resources dedicated to managing them. In fact, many of these transactions are too small or done too infrequently to be handled by internal strategic sourcing staff. Effectively managing the tail spend remains both- a great challenge and opportunity for many procurement departments! Improved process proficiency and better allocation of time and resources for tail spend can result in significant cost savings and increased ROI for the company as a whole.
Do you have a tail spend problem?
Below is the list of 5 signs that shows you could be having a problem with tail spend management.
- Your finance team come up with a different numbers to your procurement team.
Many organizations rely on poor quality information such as simple summaries to categories or supplier spend. Until and unless, all departments are tracking all their spend in a consistent manner, they are likely to be having discrepancies. One reason why all the departments come up with a different may be because these departments treat ‘tail spend’ differently.
Tail spend can account for 20% of the total spend.
One way to identify this tail spend issue is to undertake a spend mapping or spend analysis exercise. This will help you identifying what portion of spend is with your core suppliers and how many transactions are unaccounted for.
- Your ERP data doesn’t reflect the data purchased.
If your ERP data doesn’t match up with the products you actually have purchased, then you probably have a tail spend problem. An ERP system is great for adding data of purchases by your core suppliers but the frequently ordered, low value transactions are often left out which later can add up to a significant amount at the end making up to 20% of the total spend. This problem often arises because suppliers will not be included in the system if the cost of setting up a new supplier is greater than the cost of the transaction.
- You have 1000’s of suppliers and no one knows what they do!
Having too many of the suppliers a sure sign of a tail spend problem. If your company has too many of the suppliers it could be missing out on volume pricing deals that could be achieved. It also contributes to complex supplier management and makes establishing and enforcing contracts with supplier more difficult.
For example: If department A does not know that department B buys the same product at half the price, they could end up over paying for goods.
Reducing the number of suppliers is therefore a key part of diagnosing with tail spend problem.
- All your sourcing data is hidden away in emails and spreadsheets.
If you find it hard to gather widespread accurate sourcing data quickly because the data is hidden away in spreadsheets and emails then you probably have a tail spend problem. Large repeat orders of low value transactions that epitomize tail spend are often not recorder or managed consistently, making this spend almost invisible. However, tackling this spend can drive significant, measurable and sustainable cost savings and efficiencies.
- You are holding lots of redundant stock.
Storing too much of the wrong stock is one of the symptoms of tail send problem. This problem arises because tail spend products are usually not accounted for and fall outside the category of inventory management.
Having too much stock would also result in extra expenses for you as it can incur excess storage cost and lead to cash-flow problems. Holding the wrong stock will lead to loss of sales.
Holding the right stock in right amounts will lead to increased sales and increased customer satisfaction.
So, tail spend is one of the biggest sources of incremental savings available. In fact, if you stacked up the individual spend on each supplier in that tail, you might find that, if taken together, the tail is your biggest supplier.
In such a economic and business environment where CFOs are leaving no stone unturned in the quest for cost reduction, no doubt tail spend can help you make numbers!