Tail Spend Management

Focussing time and resource on tail spend management can often appear daunting and to offer limited returns. When it comes to optimising value, it often makes sense to focus on the largest contracts.

However, Tail spend – or low value spend – contains many opportunities, which is why many organisations are now realising the benefits of tackling with our assistance.

What is tail spend?

There is no one size fits all definition for tail spend across different businesses as every organization and business unit’s spending is unique. These purchases are seen as “too small to go through procurement” or are “not frequent enough” to sit within managed systems.

Tail spend can have many definitions ranging from rogue spend to misclassified purchases, so it’s important to identify what tail spend is and define what it means to you. It’s also important to define the length of the tail in relation to your organization’s core, strategic vendors.

How is tail spend defined?

Here are the most common definitions:

The 80/20 rule or the Pareto principle: According to the Pareto principle, 20% of suppliers make up approximately 80% of spend. Procurement departments often have more incentive to focus on these larger suppliers because of the larger savings realized and the service enhancements that can be achieved.

There is a danger that this leads to companies ignoring almost 20% of their spend. This unmanaged spend is a more traditional definition of tail spend and is typically considered the 80% of transactions that constitute 20% of a company’s spend. Your organizations may be at 60/40 or 90/10 or any shade in between but the challenge is generally the same.

Non managed spend: Tail spend can very simply be defined as any vendor that is not being actively or strategically managed by procurement.

Spend Threshold: Any vendor with an annual spend below an arbitrarily defined number.

How do you manage tail spend?

When you boil it down, the most difficult aspect of tail spend management is the lack of data and visibility. Tackling tail spend can seem rather daunting, not least because of the sheer number of suppliers involved. And for many organisations, it’s simply not commercially viable to undertake such a project

Define & Identify your tail spend

As mentioned, tail spend is different for every organization. Define & identify what tail spend means for each business unit at your organization. This will assist procurement to take the appropriate steps to effectively manage, optimize and measure this spend.

Streamline internal processes around tail spend

In order to save money and gather relevant data, it is imperative to have centralized processes and ensure they are enforced. Streamlined processes mean better payment terms with preferred suppliers across departments and can lead to more strategic buyers within your organization.

Put your procurement data to work

Once you’ve streamlined your internal processes, organizing, classifying, and analyzing spend data will lead to greater spend awareness, informed purchases, and business decisions.

What are the benefits to managing tail spend?

Some of the benefits to effective Tail spend management include:

Cost savings
Increased spend under management
Reduced risk
Improved data quality and reporting
Improved SLA & compliance enforcement
Increased productivity per FTE

Where there are opportunities to consolidate spend, it is possible to not only increase buying power and leverage improved cost prices, but also to increase the importance of that organisation to the remaining suppliers. This may mean you can benefit from the improved & enhanced services. By reducing the number of tail end suppliers your team can make use of the existing supplier base. They will spend less time and effort setting up new supplier records, and the end-to-end internal purchase-to-pay costs are reduced.

Our approach to tail spend management

Ebit is highly experienced in managing and rationalising tail spend, with the ability to take on this resource-heavy task. This can be achieved without impacting an internal procurement team’s day-to-day work or taking resource away from other priorities. We can leave you with an organised tail spend which is more manageable for the future.

Here are a couple of examples of how we have helped clients manage their tail spend.

Retail client

This fast-growing online retailer had a large, fragmented supplier base that had grown with it as it expanded across Europe. Through a supplier rationalization project, Ebit delivered savings of 19% and reduced 45 suppliers down to one. Additionally, benefits achieved included single-invoice, extended payment terms, and payment for stock on call-off rather than up-front
After speaking to stakeholders and visiting sites to view stock, Ebit identified inefficiencies such as delivery delays. This was leading to stockpiling issues, which was bad for cashflowcash flow.
After discussions, the chosen supplier also managed stock and volumes to aid demand management. They delivered on a next-day basis to give confidence in the supply chain.
SLAs and commercial terms that were put in place. These incentivized the supplier to deliver great service and benefit from future cost reduction achieved

Manufacturing client

Ebit saved seven figures with a tail spend management project
Ebit increased spend consolidation, leveraged existing contracts, and mandated 60-90 day payment terms.
The procurement process was future-proofed through the implementation of a new triage process to funnel demand based on spend, improving governance.
Procurement was added as an approver for all PO’s over a certain value. A new principle of “no PO no pay” is being applied to all suppliers.
A senior Director was appointed as an escalation point in order to create a “psychological gate” to discourage unnecessary spending

Tail Spend Management