‘Tail spend’ describes a company’s low value spend that is made up of lots of purchases from many different suppliers, that are not under contract. Cumulatively this tail spend typically represents, a not insignificant, 20% of the total spend with suppliers and, more importantly, 80% of the total number of individual suppliers used.
Usually the tail spend is the last to be reviewed by procurement and finance teams, as the bigger impact wins are delivered from the larger spends with significantly fewer suppliers to negotiate with. The larger spend is controlled by negotiated contracts, where the value and terms are clearly defined, managed and regularly reviewed. These deals are based on many criteria, including the cost and quality of goods or services received, to ensure the company receives the ‘best value’ from the relevant supplier. In addition, there will be on-going due diligence carried out on the suitability of the supplier e.g. CSR credentials and valid insurances. Both the company and the supplier work in partnership to ensure that the contract terms are adhered to, and opportunities to deliver further efficiencies, e.g. reducing waste and consumption, are delivered upon. The company also benefits from consolidated invoices and payment terms and the further efficiencies that this delivers for the finance team, as there are fewer invoices to process and fewer supplier relationships to manage.
In contrast, the tail spend is made up of many smaller – and lower value – purchases, that are not typically deemed business critical. Therefore, they are not controlled by negotiated contracts. These purchases are made by a variety of employees, in different roles throughout the business, who have limited or no experience of negotiating best value from suppliers. The ad-hoc and often last-minute nature of many of these purchases also means that there is a greater risk of overpaying and, possibly, even fraud. In addition, for every new supplier, there will be the associated costs of invoice processing, from setting up a PO to paying the supplier.
The aim is to have better control and visibility of the tail spend so that efficiencies and additional cost savings can be delivered. There will always be a need for low spend. Putting in place a simple, documented purchasing procedure will help deliver these benefits along with a transparent audit trail which, equally importantly, can be shared by other employees so that work is not unnecessarily duplicated.
Working with existing suppliers to expand the categories purchased from them will strengthen the existing relationship and may lead to better overall pricing. Often nowadays, suppliers will offer far more goods and services than customers may initially be aware of, e.g. in the IT and office supplies spaces.
There are many software solutions that exist now to support companies finance and procurement teams, e.g. Procure to Pay. With the advent of cloud computing these have become far more cost effective for SMEs. These systems help to drive visibility of purchases, compliance and increase efficiency. They can also drive down the number of suppliers used and, therefore, deliver further efficiencies.
Article by: Adam Thomas
This is an article from: Insight & Innovation: Issue 2 – click here to read the whole newsletter.