Understanding tail-spend management
The origin of "tail-spend" as a term lies in the well-known Pareto principle - that 80% of spend will come from 20% of suppliers; and that, conversely, 80% of suppliers will account for 20% of spend.
Tail-spend often falls outside the core spend categories where the savings are larger and Procurement is already doing a good job. In truth, the nature of tail-spend will vary but it normally displays a number of common characteristics:
- Large number of categories.
- High percentage of spend spread across multiple sites and locations.
- Suppliers that Procurement have never heard of before.
- High % of non-compliance and maverick spend leaving the company exposed to excess cost and risk.
- Low value indirect spend categories.
"Tail-spend management" refers to a variety of strategies to squeeze the last drop of savings from these areas.
What is the real cost and potential savings?
If you allow your organisation to spend that 20% of total spend with little or no sourcing support and with little focus on the large number of invoices involved, clearly that will result in paying higher prices.
But if Procurement and Finance tackle the challenges together they can deliver significant savings in terms of both reduced unit prices and process improvements – both of which free up money and valuable time.
To put it in another way, if you were told you could drive a 10% increase in net profit and it would only take 5% savings on a largely untouched area of spend, would you be interested? Of course you would.