In any organisation, the resources available to procurement are limited, and managers must necessarily prioritise purchase. This is why it’s so crucial to optimise supply chains, particularly the tail spend.
What is ‘tail spend’?
In broad terms, 80% of an organisation’s suppliers account for 20% of the company’s spend. This 20% is known as the ‘tail spend’, and it refers to the majority of transactions made, covering a wide range of services, products and indirect purchases. Most organisations view tail spend as unimportant and assume that it would require a lot of time and energy to justify any savings. However, the exact opposite is true and tail spend management can help to significantly reduce costs.
Tail spend management: The best practices to adopt
If your organisation is keen to optimise its tail spend, to take advantage of the potential cost and process benefits, here are some practices that you can implement.
Organisations should undertake a thorough and comprehensive review of every supplier to fully understand its supply chain. Any non-compliant supplier should be removed from the supply chain, and the spend should then be transferred to a select group of compliant suppliers who can guarantee efficiency.
Consolidation can also help to decrease the number of suppliers, which means that the organisation can subsequently enjoy instant cost and process benefits. Of course, it can be easy to lose track of this and for the supply chain to expand again, so it needs to be reviewed on a regular basis for ongoing efficiency.
When the number of suppliers is reduced, it makes sense to streamline and align other processes, all the way up the chain to the finance department. To do this, organisations need to address any issues in the P2P process and supply chain, as this will also help to improve demand management.
It is also important that organisations synchronise their IT systems so that the stock inventory is visible across the entire supply chain. This helps to reduce waste and, through effective demand management, will prevent departments from creating new suppliers and vendors outside the preferred list.
These are just some of the best practices in tail spend management that organisations can use to reduce cost and optimise their supply chain. It’s useful to consider all of these to ensure your company is operating as effectively as possible.
Steve has over 28 years of success as CPO, MD and Procurement BPO leader in a range of industries. Steve is COO at Odesma, responsible for Odesma’s delivery capability & infrastructure.