The procurement system is an essential part of any organization’s financial management. It involves purchasing goods and services needed for the organization’s operations. An effective procurement system aims to get the best value for money while maintaining good relationships with vendors. One area gaining increasing importance in procurement is tail spend analysis.
Tail spend refers to indirect spending with suppliers below a certain spending threshold. It comprises a significant portion of an organization’s total procurement spend. However, tail spend is often unmanaged in a fragmented manner. Performing tail spend analysis uncovers hidden costs and opportunities for cost optimization. Here are some compelling reasons organizations should go for regular tail spend analysis as part of strengthening their procurement system:
- Gain visibility into fragmented spending.
A key benefit of tail spend analysis is gaining visibility into fragmented expenditures that go under the radar. Individually, tail spend transactions are small purchases that do not warrant much oversight. However, when taken together, the tail spend can account for 20–40% of the total procurement spend. Lacking visibility into tail spending means organizations are missing out on potential savings in a significant spending area. Doing tail spend analysis periodically helps uncover the actual amount being spent across various suppliers and categories.
- Identify opportunities for cost savings.
A detailed tail spend analysis reveals opportunities for reducing procurement costs that organizations often miss otherwise. Consolidating tail spend and directing it towards preferred suppliers allows organizations to get better rates through higher volumes. Bringing tail spend under procurement oversight also reduces maverick buying outside of agreed contracts. This curbs leakages and improves compliance. Organizations can also optimize costs by rationalizing the supplier base and eliminating non-essential tail spend. The cost savings from tail spend analysis and management can be very impactful on the bottom line.
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- Improve supplier management.
The springing up of uncontrolled tail spending indicates poor supplier management. Tail spend analysis provides valuable insights to revamp supplier relationships in line with procurement best practices. It shows which suppliers are providing goods or services with poor value. Organizations can then limit engagements with such suppliers and diversify vendor networks. The data also reveals where spending is getting fragmented across too many small suppliers. Consolidating this spend toward fewer capable suppliers makes supplier management more efficient. Strong supplier relationships can also encourage further cost reductions.
- Boost Negotiation Leverage
Bringing tail spend under the ambit of procurement provides more leverage in price negotiations with suppliers. Even small-scale vendors are willing to lower rates to gain a share of the consolidated tail spend. This allows organizations to negotiate better terms and discounts. Since tail spends are recurring operating expenses, the cost savings from improved negotiation leverage really add up over time. The extra cost of competitiveness can be invaluable in difficult economic conditions.
- Enable data-driven spending decisions.
Tail spend analysis generates spend intelligence not available otherwise. The granular data on tail spend gives procurement teams greater insight into spend patterns. Organizations can identify the optimal procurement channels for various tail spend categories. This allows channel optimization to ensure the right purchases are happening through the right platforms. Fact-based spend analysis helps determine the most suitable procurement models. The data enables estimating the total cost of ownership accurately and conducting meaningful vendor bid comparisons. All this facilitates data-driven decisions on tail spend management.
- Gain better budgetary control.
Tail-spending transactions often fall outside the procurement team’s direct oversight. This leads to a lack of alignment between spending and budgets. Performing tail spend analysis reveals where budgets are being exceeded or underutilized. Organizations can then realign budgets to match actual tail spending. Analysing spending trends also allows for more accurate budget forecasting. This results in optimally aligned budgets and stronger financial control over procurements. Tighter budgetary control reduces wasteful ad hoc purchasing and the containment of maverick spending.
- Strengthen procurement compliance.
The decentralized nature of tail spending makes compliance difficult. However, non-compliance poses serious risks like fraud, policy violations, and missed savings. Analysing tail spend shows where compliance gaps exist, like off-contract spending. Organizations can then formulate compliance frameworks tailored to high-risk tail spend categories. Monitoring tail spend vis-à-vis contracts also improves compliance. Overall, tail spend analysis supplemented by automation enables organizations to achieve over 90% procurement compliance. This reduces leakage, deviations, and associated reputational and financial risks.
- Gain procurement analytics.
Tail spend analysis creates data troves that lend themselves to advanced analytics and reporting. Organizations can analyse trends to forecast future tail spend requirements accurately. Data mining helps discover correlations and patterns that support better spending decisions. Procurement analytics on tail spend provide market benchmarks to compare costs. It also enables the creation of appropriate KPIs to track tail spend management performance. Insights from analytics can feed into artificial intelligence to automate tail-spending decisions. Hence, tail spend analysis lays the foundation for procurement digitization and continuous improvement.
- Enable centralized control.
Fragmented tail spending means much of it occurs without centralized control. This hinders enforcing procurement standards and policies. Consolidating and analysing tail spend under procurement facilitates centralized governance. It enables unified workflows and controls aligned with the larger procurement strategy. Centralized tail spend analysis also allows different functions to coordinate procurement seamlessly. Oversight of the tail spending is not possible without a strategic and organization-wide approach. For operational efficiency and cost optimization, it guarantees the optimal use of tail spend.
- Support sustainability goals.
Tail spend analysis gives you visibility to do procurement more sustainably. Organizations can identify where to focus on for green improvements by analysing the areas of green spending. Through data-driven insights, there is a selection of vendors having strong environmental and social practices. Moreover, tail spend management in the centralized model helps in monitoring sustainability KPIs such as carbon footprint. This enables economies of scale in linking tail suppliers with organizational sustainability objectives.
Conclusion
Tail spend management, which is an area of procurement that is usually ignored but has a great potential to be improved, is one of the most interesting topics. Regular tail spend analysis delivers cross-sectional information on indirect spend. This thus opens up many avenues for cost reduction, improved supplier relationships, enhanced compliance, and decisions based on data. Centralization of tail spend evaluation and governance will enhance transparency, control, and oversight of procurement. It being a bottom-line amplifier, organizations need to direct their attention and resources to the tail-spend analysis in their procurement system. Data-driven tail spend optimization is the core of development of agile and responsive procurement expertise, which are the key in unstable times.
