Supply management organisations have tended to ignore tail spend, considering it non-strategic. But as they realise the cost savings that can be derived, organisations are becoming more aware of their tail-spend management problems and are looking into solutions.
Tail spend is often defined as smaller-item spend that comprises 20% of a company’s annual spend and involves interaction with 80% of its supplier base. “At Fairmarkit, a Boston-based software provider, it is any procurement spend that is not strategically managed”, says Kevin Frechette, the company’s Chief Executive Officer and Co-founder. “For many companies, this includes most purchases under US$100,000.”
Tail spend can include professional and business purchases; maintenance, repair and operations (MRO) spend; and maverick or rogue spend. Because it does not pertain to high-priority purchases, it is often not strategically sourced. Such purchases can also be outside of the normal procurement process, so visibility can be an issue.
However, managing tail spend can offer organisations cost savings through measures such as supply-base rationalisation and addressing maverick buys. “Most companies know that if they managed their tail spend, they could save money”, says Frechette. “But the most common misunderstanding is that the time spent managing tail spend would not be worth the minimal cost savings. We have found the opposite of this to be true.”
Other advantages to managing tail spend include reducing supplier risk and improving team efficiency, including saving time. With any procurement spend, there is the risk of fraud, playing favourites, supplier exclusion and cybersecurity. “By ignoring up to 20% of your spend, you are more vulnerable to these operational risks”, notes Frechette.
“When managing tail spend, companies typically use software (supplier-as-a-service platforms), outsource to consultants and spot-buy catalogues as well as leverage analytics solutions to categorise spend by looking for savings/consolidation opportunities.”
When looking at software solutions, Frechette recommends that companies determine what they want the software to accomplish: “Not all tail-spend management solutions address all of the aspects. 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 labour 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 organisations looking to help reduce manual touch”, notes Frechette. “As technology has moved to the cloud, we are now seeing processes moving to the cloud as well, which we think will be the next wave of technology innovation.”