ProcureAbility: Managing Tail Spend in Procurement

Tail spend represents a critical yet often overlooked opportunity for procurement teams to drive significant cost savings and operational efficiency.

Conrad Snover, CEO at ProcureAbility, spoke to Procurement Magazine about why tail spend is often overlooked due to its fragmented nature and how companies can implement a management strategy to better manage it. 

How would you define tail spend - and why is it often overlooked in procurement strategies despite its potential impact on a company's overall spend?

The term “tail spend” refers to high-volume / low-value purchases made by organisations and typically accounts for most of the transactions but only a small fraction of total spend.

Tail spend is often overlooked due to its fragmented nature and the low value typically associated with each independent transaction. Since each transaction seems insignificant on its own, the cumulative impact is not immediately apparent.

Interestingly, these factors are exactly why there’s often a significant opportunity to put strategies in place to manage the spend, create process efficiencies and generate cost savings.

What are some of the key challenges organisations face when trying to manage tail spend effectively?

Organisations often view tail spend as an annoyance, inconvenience, or inefficiency, placing a burden on constrained resources and systems and being difficult to analyse to inform action.

Decentralised purchasing activities result in maverick spending or spend going to non-preferred suppliers. Additionally, multiple buying channels with disparate data sources and oftentimes manual processes can make it difficult to create a single view of all tail spend.

Often the administrative costs of processing low-value transactions outweighs any perceived value of managing or controlling purchasing activities, which ultimately can serve to reduce the overall efficiency of the procurement function. Managing many suppliers can be resource intensive, especially with a lack of automation and data inconsistencies due to low spend and various channels.

Lastly, it’s common for there to be a perception of low ROI on tail spend transactions, which can lead to internal pushback against improvement initiatives. 

Can you explain the four-step approach recommended for implementing a tail spend management strategy?

A thoughtful, intentional approach is critical to getting this spend under control and ProcureAbility developed a four-step process for implementing a tail spend management strategy.

Step 1: Identify and classify tail spend through spend and supplier analysis. By analysing historical spending data, identifying low-value purchases that fall under the tail spend category becomes a straightforward process.

Step 2: Establish clear policies and guidelines for proactive tail spend management. Develop and communicate procurement policies and guidelines by specifying thresholds and criteria for when to leverage existing category strategies with preferred suppliers, when to use established buying channels - and what to do when neither exists. 

Step 3: Implement strategic sourcing practices at the category level. Enlist category managers who are subject matter experts to monitor all spend for their respective categories, including tail spend, with incentives to redirect it to their preferred suppliers.

Step 4: Monitor and measure performance. Foster collaboration between procurement, finance, operations and other relevant departments to gain a holistic understanding of spending patterns, track leakage and compliance - and identify opportunities for ongoing improvement.

How does establishing clear policies and guidelines contribute to proactive tail spend management?

This is pretty simple. By defining a policy for handling purchasing activities, procurement organisations can set specific thresholds for strategic sourcing, establish a clear process for buying channels within existing Category Strategies and when no channel exists. Policy will also govern who is allowed to make purchases.

With rules in place, procurement organisations can track compliance and exceptions, take action through training and education and implement technology to ease the buying process.

What role do category managers play in implementing strategic sourcing practices for tail spend?

Category managers should be seen as the stewards of the corporate spend within their categories. As such, they can then be incented to increase spend with their preferred suppliers, by continually looking for opportunities to re-route maverick- and tail-spend activities.

This shouldn’t be limited to only existing SKUs, pricing tables and catalogues, but can also include opportunities to expand supplier capabilities and services. 

How can technology and analytics tools improve an organisation's ability to manage tail spend?

There are two main solutions provided by technology. The first is the automation and routing of routine purchasing tasks to control channels and supplier access.

The second is visibility of data and reporting, which creates insight into spending patterns and helps identify savings opportunities. Leading technologies are starting to use predictive analytics for forecasting spending trends, so category managers can proactively modify or create catalogues and buying channel solutions, thus improving visibility and reducing maverick spend. 

What key performance indicators (KPIs) should companies track to measure the effectiveness of their tail spend management initiatives?

Companies should track:

• Overall spend volume
  
• Annual spend with the bottom 20% of suppliers
  
• Suppliers with very low transactions
  
• Maverick spend. 

How can cross-functional collaboration within an organisation enhance tail spend management efforts?

Fostering a collaboration between procurement, operations, finance and other relevant departments helps to establish a holistic understanding of spend management priorities and principles and facilitates joint identification for process improvements and cost savings.

Procurement governs the supply base and is steward of all spend, finance is responsible for managing investments, budgets, costs and expenses, legal is responsible for risk management.

Together they share an aligned responsibility to drive efficiency and effectiveness of the utilisation of the corporation’s finances. 

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