Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Tail Spend — Everything You Should Know
Key take-aways
- Tail spend is the amount an organization spends on purchases that make up 80% of transactions, but only 20% of the total spend.
- Tail spend management is an approach that oversees and optimizes the procurement of items.
- Mismanagement may lead to inferior products which can damage the company’s reputation.
Many people in procurement do not have an idea what tail spend is. This is because it is ignored and unmanaged by many organizations. However, it has finally gotten its time to get noticed after years.
This article will discuss tail spend and how you can manage it. We will also check its importance in the organization’s tail spend. Its benefits will also be further explored.
Once you finish reading this article, you will have a deeper understanding of what tail spend is. This will allow you to use it to acquire its benefits for the organization’s growth.
I created a free, downloadable spend analysis template. This includes an editable Excel template and a PowerPoint presentation to help you record and analyze your spending data. I even created a video where I’ll explain how you can use this template.
What is Tail Spend?
Tail spend is known in procurement as the amount an organization spends on purchases made up of 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 because 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, do not go through procurement, and are not frequent enough to be included in the system.
Tail spend may include anything from maverick spending to misclassified purchases. That is why it is important to know what tail spend is and define what it means in your organization.
Additionally, it is important to define the tail’s length based on the organization’s core and strategic suppliers.
There are three ways to define tail spend which are commonly adopted by others:
1. Based on the spend threshold
This refers to any vendor with an annual spend below an arbitrarily defined number. Normally, it ranges anywhere from $100,000 to $1 million based on the size of the organization and its spending.
2. Pareto principle
This unmanaged spend is on the traditional side of the definition of tail spend. In this principle, this spend is 80% of transactions that make up 20% of the organization’s spending.
3. Not actively managed spend
This spend can be defined as any supplier not actively managed by procurement. It does not matter which supplier you pick as long as it aligns with the business.
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 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 organize how they plan and buy. This helps them save money because they can ask for better prices from the sellers when they buy a lot at the same time.
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 smoothly, and improve how they buy stuff. This helps the entire business work better.
Why is it Important?
Unmanaged spend makes forecasting and planning inaccurate, incomplete, and complicated. Numerous issues are created when an organization cannot control its tail spend.
It can lead to a loss of savings as organizations tend to pay higher prices for products that can be obtained at a cheaper price. Negotiating the costs with the supplier, even if it is small in quantity, can result in savings of 20 to 30% of the total indirect spending of an organization.
Additionally, failing to manage your tail spend will lead to a decrease in product quality control. Tail spend mismanagement can lead you to the risk of acquiring inferior products. Consequently, it increases the harm it can cause your company’s reputation.
Furthermore, unmanaged tail spend can waste time due to unnecessary transactional purchasing activities that are not adding value to the organization.
How to Manage the Tail Spend
This is how to manage tail spend effectively:
1. Identify your tail spend
To identify your tail spend, you will need to retrieve your spending data from all sources so you can analyze it. From there, you will know your tail spend because it is related to your company. After that, you will calculate your tail spend based on your findings.
At this point, you will start segmenting tail spend commodities and looking 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 – In this segment, you will find that the spend is not strategically managed.
- Middle of the tail – In this segment, purchases include many suppliers. However, it is not strategically managed due to small spending per supplier.
- 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 cut the number of suppliers you use.
One way to do this is by implementing a procurement system or software. This system or software ensures that employees ask for permission before buying something. This starts with them filling out a paper asking permission to buy things 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 identify different ways to save money.
3. Organize your data
Once you’ve looked at and analyzed the data properly, you get reports with numbers and pictures that show the information clearly, like a dashboard. These reports can be changed to show your interests, 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 what 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 utilize 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 spend 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.
Challenges of 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.
4. Complexity
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 Tail Spend
Here are the benefits of managing tail spend that you may want to know about!
1. Increase in savings
Organizations that manage their tail spend 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 spend management process can help organizations to find opportunities for continuous improvement.
3. Improve compliance and reduce 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.
Conclusion
Understanding and effectively managing tail spend is crucial for organizations to optimize their procurement processes and achieve substantial benefits. This article has provided insights into this kind of spend, emphasizing its prevalence in procurement and the necessity of managing it.
Key concepts, such as tail spend definition, segmentation, and management strategies, have been discussed to empower readers with the knowledge needed to navigate its complexities.
Frequentlyasked questions
What is Tail Spend?
It is defined as high-volume, low-value transactions that are not managed in procurement. However, each organization has its own unique definition of tail spend.
Why is it important?
An unmanaged tail spending makes forecasting and planning inaccurate, incomplete, and complicated.
How to manage tail spend?
To manage your tail spending, you must identify it first. Once you identify it, you should streamline your internal process. After that, you must let the data work for you.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
