Tail Spending — Everything You Should Know
Many people in procurement do not have an idea what tail spending is. This is due to the fact that it is often ignored and can easily go unmanaged by many organizations. However, through the years, it has finally gotten its time to get noticed.
In this article, we will discuss what tail spending is and how you can manage it. We will also check why it is important to manage the tail spend of an organization. Furthermore, we will talk about the benefits that it has for your organization.
Once you finish reading this article, you will have a deeper understanding of what tail spending is. This will allow you to use it to acquire the benefits it has for the growth of the organization.
What is Tail Spending?
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.
It is common that 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.
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 length of the tail 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, the tail spend is considered the 80% of transactions that make up 20% of the organization’s spending.
3. Not actively managed spend
Tail spend can simply be defined as any supplier that is not being actively managed by procurement. It does not matter which supplier you pick as long as it aligns with the business.
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Why is it Important?
Having an unmanaged spend makes forecasting and planning inaccurate, incomplete, and complicated. There are numerous issues that 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 spending mismanagement can lead you to the risk of acquiring inferior products. Consequently, it increases the harm it can cause to your company’s reputation.
Furthermore, unmanaged tail spending can waste time due to the unnecessary transactional purchasing activities that are not adding value to the organization.
How to Manage the 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.
2. Streamline internal process
In order to manage to spend better, it is important to streamline all internal processes so that data can be visible, the number of overall suppliers is reduced, and better control of all spending.
It is ideal for organizations to have a procurement system that requires employees to fill out formal purchase requests for approval before it turns into purchase orders.
3. Let your data work for you
Benefits of Managing Tail Spend
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 after.
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.
Frequently Asked Questions
1. What is Tail Spending?
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.
2. Why is it important?
An unmanaged tail spending makes forecasting and planning inaccurate, incomplete, and complicated.
3. 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.
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