Everything you need to know about tail spend management
Tail spend refers to any unmanaged expenditure across product and service categories. Typically, tail spend comprise low-value or high-volume transactions (e.g., transactions with 80% of suppliers that comprise 20% of the overall procurement spend). Organisations can identify and reduce this spend to significantly improve their financial health and operating margins. The common examples of tail spend in an organisation are:
- Print and packaging
- Marketing services
- Business services
- Signage and display
- Professional services
- Uniforms and apparel
- Gifts and premiums
- Office products
- Temporary labour
The need for tail spend management
With the recent pandemic and volatile markets due to geopolitical events, procurement managers are taking notice of their tail spend. The reasons organisations need to have a robust tail spend management include the following:
Spend coverage and savings:
- Improve the visibility of 20% of low-value spend
- Identify the opportunities and implement steps for sourcing savings
- Reduce the number of transactions and associated costs
- Lower the cost of procurement and optimise the supply chain
Process improvement and optimisation:
- Improve the quality of data and processes
- Increase the contract coverage and reliance to reduce business risks
- Eliminate low-value and trivial suppliers
- Adopt a global delivery model for procurement
Effective management of tail spend:
- End-to-end execution support to manage tail spend
- Increase diversity among the supplier base
- Manage maverick spending and eliminate any frauds in procurement
- Comply with internal policies and external laws
Challenges in tail spend processing
Poor data quality is the primary obstacle in managing tail spend. Common issues include incorrect supplier and material names as well as data linkages, duplicate data, and junk data.
Poor integration between systems:Inefficient integration between procurement and contract management systems makes it difficult to isolate non-contracted and off-contracted data.
More sub-categories:Despite the low value of spend, the high number of line items and the number of suppliers can complicate tail spend analysis.
Working in silos:Business processes often work in silos with decentralised policies and processes, making it difficult to consolidate data from different systems.
Focus on high-value transactions:Procurement managers often spend most of the time on high-value transactions but ignore the low-value and high-volume ones.
Steps to drive value chain using the tail spend
Identify the tail spend
Tail spend is a broad term, and it is important to identify specific categories and place them in buckets. You can classify the tail spend into the following categories.
Hidden tail:It comprises the big-ticket spend with large suppliers. While you may have a negotiated contract, the hidden tail may still contain non-compliant spend.
Head of the tail:This segment comprises any spend that is not strategically managed and could lie anywhere between $50,000 and $1 million a year.
Middle of the tail:This includes multiple suppliers with spend between $2,000 and $200,000 per supplier per year. It usually doesn’t fall under strategic supplier management as the expenditure is too small.
The tail of the tail:This consists of spends less than $2,000 per supplier per year. It is extremely fragmented and may consist of one-off purchases.
Streamline internal processes
By streamlining internal processes, you can make data visible, reduce the number of suppliers, and monitor all the spending. It helps to have e-procurement systems with intuitive dashboards that require employees to fill formal purchase orders and obtain approvals before pushing them to the suppliers.
Analyse the acquired data
Organisations need to ensure that the majority of the purchases are managed through strategic contracts. At this stage, you also need to monitor the spend using KPIs such as:
- Cost reduction and avoidance
- Improved spend visibility
Technologies such as big data and analytics, AI, and automation and digital platforms fast-track data analysis. This boosts your key procurement processes and the ability to float mass tenders.
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How can Infosys BPM help you manage tail spend?
As vast technological investments and the advent of AI and ML transform major business operations, enterprises cannot neglect tail spend. Infosys BPM provides AI-powered spend intelligence across its clients so that tail spend does not mar their procurement and spend management efforts.
The spend analytics services from Infosys BPM can help your organisation identify and analyse spend data and streamline the processes with features like spend classification, data ingestion, cleansing, de-duplication, actionable insight and opportunity identification.