How to Reduce Tail-Spend

A problem that easily goes unnoticed

Procurement functions currently face an unprecedented range of disruptive forces. All parts of the supply chain have been affected by COVID-19 and its attendant impact on commodity prices and transportation. These have compounded the existing challenge of delivering value and cost savings.

Under these circumstances, it is beneficial for procurement and sourcing teams to be aware of the potential savings they could make by controlling and reducing their tail spend, i.e. the spending which is not currently strategically managed. Tail spend can easily go under-noticed as much of it occurs outside existing contracts and is typically composed of thousands of low-value transactions. The effect on the bottom line, however, is significant, as is the value that can be realised by monitoring and controlling tail spend.

Why tail spend should be confronted

Grasping the scale of this category of spending makes clear the potential benefits of addressing it. Typically being partly composed of many small transactions, it is common for tail spend to comprise the vast majority of the overall number of suppliers and to amount to between 10% and 30% of an organisation’s spend.

The inconsistent, spread-out nature of tail spend makes visibility and risk management challenging. Contract compliance becomes harder to ensure. The efficiency of procurement is diminished.

Tail spend comes in several forms

Large (and growing) amounts of spending can fall outside strategic management for a variety of reasons including the use of fragmented systems, dysfunctional internal stakeholder relationships, non-centralised procurement models and contracts and supplier onboarding processes that fail to capture all spending possibilities.

We can identify five distinct variants: supplier, category, business unit, number of transactions and location/site.

Supplier tail spend refers to the use of suppliers not covered by the spending strategy, either because they become suppliers after the strategy was established or because the spending with them is too low to be covered by it. Spend with non-contracted suppliers or suppliers used only once or very infrequently would also be included here.

Category tail spend encompasses spend in non-standard-specification categories or categories for which purchase order penetration tends to be low.

Business unit (or cost centre) tail spend includes spend occurring within particular business units which isn’t aligned with the organisation’s global procurement policies or doesn’t follow regular, prescribed procurement routes.

Transactional tail spend refers to spend falling below a specified minimum or contained in purchase orders which are non-catalogue or have insufficient order information.

Geographic tail spend refers to spending inconsistencies arising across different locations and sites. These include local spend that is not with prescribed suppliers, and spend which has been adapted ad-hoc to account for geographically-varying tax rules, legislation or business requirements, diverging from the prescribed global routes.

Recognising the warning signs

A tail spend problem can be detected by the presence of certain symptoms.

Among the most obvious of these is finding that a large proportion of orders (e.g. 30%+) aren’t negotiated by procurement. A very large number of transactions overall is also a warning sign, as is finding that only a minority of transactions are with preferred suppliers.

If the number of suppliers exceeds that of employees, it is likely that many of the suppliers fall outside the spend management strategy. Similarly, if a small minority of spend goes to a large majority of suppliers (e.g. 70% of the suppliers combined receiving less than 10% of total spend), this is a likely indicator of weak spend management. Rapid proliferation of suppliers (e.g. an increase of 10%+ per quarter) is also something to monitor for.

Other indicators include non-adherence to procurement policies. One form in which this occurs is purchases being made without using catalogues or other approved, regulated means. Organisations using more than one payment system will also tend to provide a fertile environment for tail spend to expand.

Identifying opportunities and implementing solutions

The solution will necessarily begin with obtaining and analysing the relevant data. This will bring greater visibility and enable the segmenting of spend by supplier, category, transaction, business unit/cost centre and geographic location.

Tail spend can then be classified into opportunity areas such as off-contract buying, spot buying, spend fragmentation and price variance. This makes it possible to determine the extent of spend which can be reduced or eliminated.

The next step is to prioritise categories by urgency and to identify opportunities for migrating spending into strategic suppliers. Appropriate sourcing levers can then be used. These will include sending RFIs and RFPs to suppliers, rationalising the use of suppliers and vendors, expanding and/or amending supplier contracts, aggregating spend where possible, and purchasing co-operatively through consortiums or e-marketplaces.

These measures will be complemented and secured by implementing standardised procurement policies and a governance structure designed to ensure compliance. This can include establishing a knowledgeable, dedicated spot buy team tasked with monitoring spend patterns and automating, managing and tendering purchases on behalf of other teams. The new set-up can also include the use of proprietary technologies to improve operating efficiency in purchasing and enhance the user experience for buyers.

Costs reduced and FTE released at a large automobile firm

A large US automobile company was missing major opportunities for cost optimisation due to a lack of focus on tail spend. In particular, spend was inflated by:

• a lack of standardised processes across locations

• multiple systems being used for purchase order management

• frequent buying of low-priced items in small numbers

• a huge number of suppliers

• high transaction volume for the accounts payable team

• the use of spend data that was incomplete or had no standard classification

Our consultant’s approach to resolving this began with:

• Conducting an opportunity assessment

• Collecting and collating data to qualify spend value by location, business unit and time frame

• Mapping relevant processes and defining what was in and out of scope

• Mapping and consulting stakeholders

• Outlining and recommending work packages

• Estimating the effort involved

• Presenting a business case to show the costs and benefits of addressing the problem

With the business case agreed, the solution involved:

• Implementing software for analysis and spend automation

• Introducing an improved end-to-end workflow

• Rationalising the supplier base by more than 50%

• Creating a spot buy desk for irregular or unpredicted purchases

• Optimising relevant processes to ensure value realisation

With the solution in place, the benefits for the client were:

• £60m annualised cost savings

• 15 FTE capacity released

• Reduction of the number of suppliers by 50%

Seizing the opportunity

Discovering the scale and causes of tail spend and bringing it under strategic management should be a high priority for organisations. Not only is there an opportunity to unlock significant amounts of value, but the measures employed to do so will bring improvements in operating efficiency and predictability. These gains would be worthwhile at the best of times, and are all the more so as procurement leaders face the challenges posed by the COVID-19 pandemic at every link in supply chains.