The Challenges in Solving the Tail Spend Problem
Many organizations struggle with managing their “tail spend”.
Tail Spend is the group of up to 80% of suppliers that are responsible for the last 20% of the overall spend.
With oftentimes limited resources, Procurement is generally focused on being strategic and tail spend is often neglected. So, what is the best way to effectively manage this spend without consuming an unnecessary amount of resources? Are new technologies the solution?
Procurement processes are typically not adapted to low spend and non-recurring purchases which is what leads to ineffective management. Processes are developed for large strategic purchases and are too slow, too unresponsive or too cumbersome for small or one-time purchases.
The typical approach to tackling tail spend has been one or more of the following:
- Outsource it. Use an outside provider to buy these products or services and manage all spend under a given threshold through a BPO buying desk.
- Simplify it. Use transactional options such as P-cards or e-procurement to reduce the cost of handling tail spend and/or move to self-service via e-marketplaces.
- Remove it. Force all spend through preferred suppliers, on a category or geographical basis.
Each of the providers of these services or technologies have been marketing their ability to solve the tail spend conundrum. But none have been able to fully solve it, largely because it requires more than just advanced analytics, intelligence and expertise. It requires those things combined with process efficiencies and compliance on a wide range of service and product categories. The optimal process that will generate the lowest cost in an efficient manner will also vary by category. For example, some categories may be solved through catalogs with providers like AmazonBusiness. But a specialized provider is best equipped to provide outsourcing of Facilities Management services.
Lately, the concept of Guided Buying has been introduced and marketed notably by SAP as the solution to Tail Spend. With the emergence of AI, Guided Buying is aiming to create an expert system that relies on a knowledge base to automate the process. This is promising technology requires a large amount of data and process standardization. These machine learning engines are being built with companies like Infosys are working on pilots to automate using machine learning.
Check out this interesting article posted on Spend Matters:
Short term, the best solution remains category adaption as the approach that provides the best level of expertise and the best tools. But keep a close eye on these emerging disruptive technologies. They will likely to become the future of tail spend management.
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