Tail Spend Management — What You Should Know
📖 Table of content
- 1. Identify your tail spending
- 2. Streamline internal process
- 3. Organize your data
- 4. Let your data work for you
- 5. Monitor the things you implemented
- 1. Supplier relationship management
- 2. The focus is more on the big spending
- 3. Each department in a company has different ways of handling small purchases
- 4. Complexity
- 5. Managing small purchases is not always practical
- 1. Increased in savings
- 2. enhanced efficiency and productivity
- 3. Improved compliance and reduced risk
- 4. provides better data and insights
- 5. Competitive Advantage
Tail spend management allows you to acquire cost savings. But how?
In this article, we will tackle what tail spend and tail spend management is. We will explore the importance of managing tail spend and the steps toward managing it. Additionally, we are going to discuss the challenges and benefits of tail spend management.
Once you are done reading this article, you will gain knowledge on how you can manage your tail spend. Thus, enabling you to save a lot of money in your organization. So, let’s start!
Tail Spend:What is it?
Tail spend is known in procurement as the amount an organization spends on purchases that make up approximately 80% of transactions but only cover 20% of the total spend.
Typically, there is no common definition for tail spend across different organizations. This is simply due to the fact that every organization unit’s spending is unique.
What is considered tail spend in one category may not be the same in others. These purchases are usually small and do not go through procurement and are not frequent enough to be included in the system.
It’s a good idea to decide how much of this tail spend is okay based on the important suppliers the company works with.
In simple words, tail spend is about all the small things a company buys that aren’t always well-organized and can end up costing a lot. Each company decides what these small things are, and it’s important to keep an eye on them.
Tail Spend Management:What is it?
Tail spend management is the strategic approach taken by organizations to efficiently oversee and optimize the procurement of low-value, low-impact items. These individual purchases do not seem like a big deal, yet their cumulative effect can significantly impact a company’s expenditures.
For example, imagine that you’re saving up your allowance. You buy pencils, pens, and notebooks every now and then. Each thing doesn’t seem to cost so much. However, when you add it all up, you will be surprised at how much you’ve spent.
This is where tail spend management comes in. Tail spend management helps companies to be smart savers. Instead of just buying things whenever they want, they plan and buy in a more organized way. This planning helps them save money because they can ask for better prices from the sellers when they buy a lot at once.
Additionally, when companies are organized in how they buy these small things, they don’t waste time. They know what they need and when they need it.
Furthermore, tail spend management is a careful method to make buying small items more efficient. By organizing things well, companies can save money, work smoother, and improve how they buy stuff. This helps the entire business work better.
The Importanceof Managing Tail Spend
Sometimes, we’re not sure how much we spend on things from less important suppliers, the ones at the end of the spending list. But when we work on managing spending with these C-suppliers, we can see clearly how much we spend, how people buy stuff, and how much we save.
Handling these C-suppliers takes up a lot of time for the buying team. They spend a big chunk of time getting small things from these suppliers, and it’s not really balanced. Getting good deals for these small buys is hard because each one takes a long time.
For many companies, getting the best prices for these things is really tough. Buying them needs a lot of time and effort. When we think about the costs, we need to look at the whole process, not just the direct costs. There are other costs like finding the right C-supplier, making sure things arrive on time, dealing with invoices, and managing how things get to us.
Steps on ManagingTail Spend
Here are the following steps to manage your tail spend:
1. Identify your tail spending
To identify your tail spending, you will need to retrieve your spending data from all sources so you can analyze it. From there, you will know your tail spending as it relates to your company. After that, you will calculate your tail spend based on what you have found.
At this point, you will segment tail spend commodities and start to look for savings opportunities. It is segmented into four categories which are the following:
- Hidden tail – This segment is where the organization’s biggest suppliers are and these are commonly dealt with as part of strategically managed spend.
- Head of the tail – You will find in this segment the spend that is not strategically managed.
- Middle of the tail – In this segment, purchases include a great number of suppliers. However, it is not strategically managed due to the spending per supplier being too small.
- The tail of the tail – This segment contains vendors with less than $2,000 spending.
By breaking down your spending, you can see where you’re getting the most and the least value. By doing this, you can find ways to save money and make your spending smarter.
2. Streamline internal process
Making things run smoothly inside your company is really important to handle spending well. This helps you easily see where the money is going and also cuts down on the number of different suppliers you use.
One way to do this is by implementing a procurement system or software. This system or software ensures that employees have to ask for permission first before they actually buy something. This starts with them filling out a paper that asks permission to buy the things that their department needs to do their work. Once the paper is approved, then they can go ahead and buy what’s needed.
By integrating a procurement system or software, the company can control its spending better and figure out more ways to save money.
3. Organize your data
Once you’ve looked at the data and analyzed it properly, you get reports with numbers and pictures that show the information in a clear way, like a dashboard. These reports can be changed to show what you’re interested in, like how you can save money by buying things together or which part of your organization is spending more.
Now, it’s time to take action! Use these insights to make your plans work. You decide to buy clothes from the store with the sale and gadgets from the one with the discount. This way, you save money and get the things you want without spending too much.
In your company, it’s similar. You gather data about your spending, create reports that show the important details, and then use these reports to make smart decisions. Just like planning your shopping helps you save money, using insights from your reports helps your company spend wisely and make the most of its resources.
4. Let your data work for you
After you’ve gained valuable insights about your spending by using procurement solutions, it’s time to use your information smartly. This means finding the best sources to get what you need and making clear agreements so your organization buys things in a smart way.
Think of it like planning your shopping trip. First, you organize your list of things you want to buy. Then, you find the best stores to get those items and make sure you get good deals. This is what your company does – it gets the best deals and makes plans for buying things the smart way.
5. Monitor the things you implemented
Checking how well your changes for managing tail spending are working involves choosing important measurements and deciding when to look at them. Here are some examples of these measurements:
- Saving Money: You can see how much money you’ve saved compared to what you planned or wanted to save. It’s like seeing if you spent less than you thought you would when shopping.
- Working Faster: You can measure how much time you’ve saved by doing things in a better way. For instance, if you used to spend a lot of time looking for the best prices, but now you don’t because you have a good plan, that’s a sign of working faster.
- Using Online Tools: If you’re using special online catalogs to buy things, you can see how much of your spending goes through these catalogs. It’s like knowing how much of your shopping you do online.
- Managing Suppliers: You can compare how much you spend with suppliers you’ve planned to work with (strategic management) versus those you haven’t planned (unmanaged). It’s like knowing how much of your shopping is done at your favorite stores versus other places.
Challengesof Managing Tail Spend
Here are some of the challenges that you may face when managing tail spend:
1. Supplier relationship management
Having many different suppliers can make it hard to keep track of relationships with all of them. It might require a lot of time and effort to manage these relationships properly.
If the company doesn’t dedicate enough resources, it can lead to missed chances for better deals and collaboration. It’s like having many friends but not having enough time to keep in touch with all of them – some friendships might suffer because of this.
2. The focus is more on the big spending
Often, the company’s management pays a lot of attention to big purchases and doesn’t focus much on the smaller ones. While big purchases are important, the small ones can add up over time. It’s like paying a lot of attention to the main parts of a picture and not noticing the small details that can also make a difference.
3. Each department in a company has different ways of handling small purchases
Different parts of the company might handle small purchases in their own way. Some departments might decide to buy things on their own without checking with others.
This lack of coordination can lead to problems, like buying something that the company already has or missing out on potential discounts. It’s like everyone in a group project is working on their own part without communicating, and in the end, things might not fit together well.
Dealing with tail-end spend is complicated because there are a lot of different suppliers involved. Each supplier might have their own way of doing things, which makes it harder to keep everything organized. It’s like trying to juggle many balls at once – it can be tricky to manage them all without dropping any.
5. Managing small purchases is not always practical
Creating a successful plan to manage these small purchases isn’t always practical. Since each purchase might be unique and not happen very often, it’s difficult to come up with a one-size-fits-all strategy. It’s like trying to come up with a single recipe for cooking all types of meals – it might not work well for everything.
Benefits of Managing Your Tail Spend
Here are some of the benefits that you can gain when you manage your tail spend effectively:
1. Increased in savings
Organizations that manage their tail spending effectively can realize 10 to 20% savings with spot buying
Additionally, an increase in strategically managed spend allows for a one-time savings of 10 to 15% when addressing the spending for the first time. Furthermore, the organization continuously saves 2 to 5% every year.
2. Enhance efficiency and productivity
Because organizations consolidate the supplier base, efficiency improves. Additionally, it reduces the number of suppliers that procurement has to deal with while reducing costs.
The tail spending management process can help organizations to find opportunities for continuous improvement.
3. Improve compliance and reduced risk
Tail spend management aims to control, monitor, and track transactions as they occur. This means that exceptions can be identified as they happened and addressed before it will be sent to the supplier.
Removing unreliable suppliers from the base decreased risk while providing a transparent procurement process to detect and prevent fraud.
4. Provides better data and insights
Effective tail spend management provides better data and insights. It’s like having a detailed report card that shows exactly how you’re doing with your spending habits.
With accurate and comprehensive data, companies can make more informed decisions, identify trends, and pinpoint areas for improvement. This helps in creating smarter strategies and achieving better financial outcomes.
5. Competitive Advantage
Mastering tail spend management gives a company an advantage over its rivals. It’s similar to having a special trick that makes your shopping choices exceptional. When a company can handle its small purchases efficiently, it shows how good it is at managing money and doing things well.
This reputation for smart shopping and using resources wisely can bring in customers, partners, and investors. In the end, the company becomes a leader in its field.
All in all, tail spend refers to the little purchases that add up over time, resulting in being a big part of a company’s spending. These might seem small, but they can severely affect the money spent overall. Tail spend management is about handling these small buys smartly to save money and make buying better.
Each company’s tail spend is different, but it is important to not overlook it because it can impact the company’s financial health. Companies may not have a universal definition for tail spend, but the idea revolves around identifying and optimizing these small purchases.
By managing the tail spend effectively, organizations can ensure that their resources are used correctly and that their financial health remains good.
+ What is tail spend?
It is known in procurement as the amount an organization spends on purchases that make up approximately 80% of transactions but only cover 20% of the total spend.
+ What is tail spend management?
It is the strategic approach taken by organizations to efficiently oversee and optimize the procurement of low-value, low-impact items.
+ Why is it important to manage tail spend?
Managing tail spend can lead to significant cost savings, streamlined processes, reduced risks, and improved efficiency in purchasing.
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