Supply management organizations have tended to ignore tail spend, considering it non-strategic. But as they realize the cost savings that can be derived, organizations are becoming more aware of their tail-spend management problems and looking at solutions.
Tail spend is often defined as smaller-item spend that comprises 20 percent of a company’s annual spend and involves interaction with 80 percent of its supplier base. At Fairmarkit, a Boston-based software provider, it is any procurement spend that isn’t strategically managed, says Kevin Frechette, the company’s CEO and co-founder. For many companies, this includes most purchases under US$100,000, he says.
Tail spend can include professional and business purchases, MRO spend, and maverick or rogue spend. Because it doesn’t pertain to high-priority purchases, it’s often not strategically sourced, as mentioned in the “The Monthly Metric: Percentage of Rogue Spend,” from Inside Supply Management®’s blog in July 2018. Such purchases also can be outside the normal procurement process, so visibility can be an issue.
However, managing tail spend can offer organizations cost savings through measures like supply-base rationalization and addressing maverick buys. “Most companies know that if they managed their tail spend, they could save money,” Frechette says. “But the most common misunderstanding is that the time spent managing tail spend wouldn’t be worth the minimal cost savings. We’ve found the opposite of this to be true.”
Other advantages to managing tail spend include reducing supplier risk and improved team efficiency, including saving time. With any procurement spend, there is the risk of fraud, playing favorites, supplier exclusion and cybersecurity. By ignoring up to 20 percent of your spend, you are more vulnerable to these operational risks, Frechette says.
When managing tail spend, companies typically use software (supplier-as-a-service platforms), outsourcing to consultants, spot-buy catalogs and leveraging analytics solutions to categorize spend by looking for savings/consolidation opportunities, Frechette says.
When looking at software solutions, he recommends that companies determine what they want the software to accomplish: “Not all tail-spend management solutions address all the aspects,” he says. “For instance, outsourcing your tail spend may improve your team’s efficiency but not reduce your risk. Software solutions can be helpful in automating a lot of the manual labor that has traditionally gone into tail spend.”
In the future, tail-spend management may become even more reliant on technology. “Being able to automate processes using robotic process automation (RPA) has found massive success for organizations looking to help reduce manual touch,” Frechette says. “As technology has moved to the cloud, we’re now seeing processes moving to the cloud as well which we think will be the next wave of technology innovation.”