While tail spend accounts for about 20% of any given company’s spending, it’s an unruly category which can impact profitability.
So, why is taming this beast so hard? Let’s examine the problem and talk about some of its challenges and red flags.
A slippery category
Not only is tail spend slippery, it’s murky. This category of spending tends to fly under the radar, encompassing unclassified purchases which are usually for small amounts or which are infrequent.
Often, these purchases will be “rogue” (outside the auspices of your approved suppliers). These purchases are also referred to as “maverick” spends, as they undermine the integrity of the supply chain and procurement’s efforts to contain spending.
Tail spend or “long tail” can’t be ignored. When procurement’s charged with reining in the bottom line, then it’s the little things which matter most of all.
The Pareto principle states that 80% of effects derive from 20% of causes – and that’s an important clue!
Because of the nature of tail spend (small, infrequent, unanticipated purchases), procurement has not gotten its hands on it. This precludes the optimization of procurement’s function, as what they’re not managing is not being procured strategically. That means buying power is not being leveraged, which means waste.
Employees making purchases without the mediating influence of procurement are unlikely to shop around for the item they’re purchasing. Facing other priorities, they take short cuts and those short cuts cost companies significant money which need not be spent.
While tail spend can look inconsequential, multiply the effect of individual employees “going rogue”, every day. That adds up - and fast.
There are some red flags to look for to determine if your tail spend is wagging your procurement systems:
- You have more suppliers than employees
- 2/3rds or more of your suppliers account for less than 5% of your spend
- Less than 70% of orders implicate procurement
- You’re adding more than 10% of your suppliers per quarter
- Less than 50% of transactions are with your contracted suppliers
- Less than 50% of transactions are automated
With myriad suppliers in the tail, it’s tough to manage and the solutions will vary from company to company. But your best bet is to deconstruct that tail into manageable sections and examine each in turn, toward integrating these spends into the strategic work of procurement.
Key segments to examine include:
- Unseen tail: Occurs when required items aren’t covered by existing supplier contracts. But rogue purchasing is also part of the hidden tail.
- The tail’s head: This is spend which is not strategically managed.
- The tail’s middle: This is the smaller purchases, neglected due to the dollar amounts involved.
- The tail’s tail: One off, small purchases with many suppliers.
TSM with CenterPoint
At CenterPoint Group, we’re dedicated to creating procurement solutions that lower your business costs on everyday purchases – including the ones in the tail!
Unlike other category management services and GPOs, CenterPoint Group works with our clients to create customized pricing contracts. These not only provide access to our leveraged contract prices, but capture tail spend savings through optimization and SKU rationalization exercises.
Our data analysis wrangles your tail spend by exposing it to the light of day. Let us tame your beast with the power of data.