In any organization, it is very important to ensure that all costs are controlled appropriately in order for the business to thrive. Although there is much concern with the large and more frequent purchases, there is growing understanding of the need to address the smaller and less frequent ones. This is where a relatively innovative concept known as tail spend management comes into the picture. Let’s take a closer look at this concept and highlight its advantages for any type of company in this article. We will also discuss the difference between procurement and sourcing and their positioning within the general source-to-contract (S2C) solution.
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What is Tail Spend?
But in order to discuss the advantages of managing tail spend, it is necessary to define what tail spend is. Tail spend means the last 20% of procurement spend that involves approximately 80% of the number of suppliers and constitutes only 20% of the entire spending. These are usually minor and sporadic draws that do not fit in any of the major expenditure categories of an organization.
Defining Tail Spend Management
Tail spend, on the other hand, is the process of recognition, reporting, and handling of small, unrelated, and unimportant purchases. It means employing focused methods and tools to bring awareness to this generally unrecognized segment of spending and searching for methods to optimize the costs.
Why is Tail Spend Management Essential?
It is true that various kinds of tail spend transactions are often small and one off, but taken together, their total value seems much higher and corresponds to a considerable segment of a company’s total expenditure. Thus, proper implementation of tail spend brought about considerable cost reduction, created quality and strong favourable supplier relations, and positively impacted that particular organization’s financial performance.
Key Benefits for Clients and Suppliers in Implementing Tail Spend Management
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Cost Savings
The first advantage of the integrated category management approach is the expected reduction in expenses resulting from the efficient management of the expenditures of suppliers with the lowest spend. Examining and studying such small purchases that are made in organizations assists in discovering strategies that can help companies merge different suppliers, negotiate for a better price, and reduce employment by some dollars.
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Increased Visibility
Tail spend management offers more transparency than traditional strategic sourcing and procurement methods. This increased transparency makes it easier for businesses to adjust their purchasing behaviours and find ways to become more efficient.
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Risk Reduction
Most of the tail spend purchases are done through other channels than procurement, and this, in turn, poses the following risks: Thus, by fine tuning the handling of expended cash and spend, organizations will be in a better position to check on non-compliance in purchasing and will have better leverage on containable policies that they would wish to put in place.
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Improved supplier relationships
Best practices for managing the tail spend may include reducing the number of suppliers and improving supplier integration strategies with some of the main vendors. This can result in improvements to services and the terms of service providers, as well as an enhancement of relations between the organization and suppliers.
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Enhanced Compliance
Tail spend can become more controlled, and organizations can have confidence that all bought supplies correspond to internal and external regulations. This is especially true where the industry has stiff compliance needs, as is the case with the financial markets.
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Time and resource savings
The same can be said for managing the organization’s tail spend to effectively streamline some of the burdensome activities of a procurement department. By removing those minor transactions and implementing straightforward guidance for using them, procurement specialists can spend their time on more effective and efficient activities.
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Data Driven Decision Making
The use of various tools and processes in managing tail spend is helpful for the generation of data regarding an organization’s spending patterns. Such information can be stored for later use when making other decisions, to be able to see patterns, and to continuously improve the procurement function.
Procurement vs. Sourcing:
With regards to tail spend management, it is important to familiarize ourselves with the concepts of procurement vs sourcing, two processes that are not alien to each other but rather two sides of the same commodity.
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Defining Procurement
Procurement can be described as the general process of buying things needed for an organization’s activities and functions. It is a process that ranges from need recognition and supplier selection to the actual ordering of the materials and their receipt. Procurement, on the other hand, is a continuous process that entails the management of the routine activities of acquiring the essential factors of production for a business.
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Understanding Sourcing
Sourcing, on the other hand, is a more tactical and formal aspect of procurement since it primarily focuses on searching for the right suppliers where to obtain goods and services necessary for organizations’ operations. Supply chain management, therefore, breaks down to the process of identifying, evaluating and acquiring possible suppliers with a view to getting the best value for goods and services needed by an organization. Sourcing play a critical role in the attainment of organization cost cutting goals, upgrades in supplier quality, as well as the general supplier management bringing about the whole competitive edge in the market place.
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Analysing the Procurement and Sourcing Process
In a nutshell, although there is a clear differentiation between procurement and sourcing, these concepts are interrelated because both activities enable an organization to obtain maximum value for its acquisitions. Strategic sourcing is the basis for efficient buying as it builds up relations with suppliers and agrees with the terms and conditions with them. Consequently, the data acquired through daily procurement activities can be used as a reference in the next sourcing process.
Conclusion
Tail spend management is an effective solution that can enhance the work of an organization or a company in moments when it aims to optimize its procurement and, respectively, achieve the necessary savings. Therefore, with a clear understanding of the fundamentals that underpin procurement and sourcing and the efficient implementation of the S2C together with the efficient management of the tail spend, organizations can well position themselves for competency as business environments get tough.
