How Unaddressed Tail Spend Inhibits Procurement’s Performance
In April 2018 we discussed Tail Spend in our post “The Challenges in Solving the Tail Spend Problem.” In this post, we’ll focus on why addressing Tail Spend is critical for allowing Procurement Organizations to reach their full potential.
A Quick Reintroduction to Tail Spend
Have you ever looked at your credit card statement and thought “where can I save money?” You’ll easily be able to single out the big spend items, such as restaurants, groceries, and the cable bill. And by reviewing those areas, you’ll be able to determine a savings target and an action plan, such as reducing your grocery spend by 10% by buying frozen chicken in bulk monthly instead of fresh chicken weekly.
But what about the hundreds of smaller, one-off purchases like coffee, paper towels, toothpaste, fast food, parking meters, and smart phone apps. You’d quickly lose your patience attempting to find savings opportunities with those items.
Essentially, this is the Tail Spend puzzle that confounds organizations. There are thousands of Tail Spend suppliers that provide tens-of-thousands of SKUs which are unaccounted for and unmanaged by Procurement. And because it’s such a daunting challenge to confront, Procurement often takes the easy route.
Unaddressed Tail Spend Drains Procurement’s Resources
Tail Spend may be a bigger problem to Procurement Organizations than is realized. Take, for example, a company with $2B in spend; tail spend would account for approximately $400M. That’s a large amount of spend which Organizations often justify neglecting because they are strategically addressing the other $1.6B (80%). However, the problem is that the proportionately small 20% is what really drains Procurement’s resources.
Consider these statistics:
- The average procurement FTE touches more than $50M in indirect spend across 300 suppliers – of which more than 85% are in the tail – and 2,500+ purchase orders per year.
- 58% of their time is spent on non-strategic work, of which the majority amount is tied to the administrative burdens stemming from tail spend items1
Herein lies the critical nature of the problem. Most of Procurement’s time is tied to dealing with Tail Spend items. This is a real problem because savings opportunities are limited with low value Tail Spend items and Procurement does not generate a return on its costs while trudging through the administrative burden of processing tens-of-thousands of POs and invoices.
A Thoughtful Approach is Required to Meet the Challenge
Procurement’s role within an organization is as a profit center. It must limit costs and generate saving to increase its ROI. A Procurement Organization cannot improve its financial performance, or the financial performance of the wider organization, if it drowns its resources in activities that put downward pressure on ROI.
Poor and mediocre Procurement Organizations neglect the problem and let it fester as they turn a cold shoulder. Unfortunately, it lives and grows within almost every part of the Procurement Organization, and the problem is only exacerbated if left unaddressed. Top performing Procurement Organizations plan strategically and implement pragmatically to “tame the tail” and fulfill Procurement’s most vital role as a profit center for the enterprise.
Organizing all the pieces and implementing a sustainable solution is laborious task which involves complex analysis and developing a multi-step strategic approach. However, by implementing a sustainable, integrated approach, a Procurement Organizations can benefit by reducing Procurement’s costs, increasing savings, and boosting its ROI.
Stay tuned for our future blog post which will focus on Tail Spend Solutions.