28 October 2024
Research shows that effective tail spend management results in significant value-adding savings. But with the difficulties in tail supply for many procurement managers it isn’t easy to unlock this potential. Often overlooked, these small purchases can significantly impact your bottom line. Let’s explore how to transform this expense into a strategic asset and unlock hidden value in your tail spend by teaming up with MAG45.
What is Tail Spend Management?
In almost every manufacturing company supply spend follows a Pareto distribution. Around 80% of purchase orders for goods and materials, including the activity and effort surrounding them, accounts for 20% or less of external spend – the tail spend. Opposed is strategic head spend and body spend that together sums up the other 80% of the spend value.
Tail spend management is the strategic process of overseeing and optimizing these typical high-volume, low-value purchases. The costs of tail items often fall outside the main procurement categories – making tail spend complex and challenging to manage.
Figure 1: Spend distribution according to the Pareto principle
Key Components of Managing Tail Spend
Key components of tail spend management include identification, classification and categorization of purchases, supplier management, process standardization and cost optimization. Given the rising expectations of stakeholders and regulators, ESG (Environmental, Social & Governance) considerations, as well as effective risk management and mitigation, have to be characterized as ‘key’ too. Pro-actively adopting and integrating sustainable practices and managing risks effectively, ensures long-term resilience, driving both innovation and responsible organizational growth.
The Importance of Tail Spend Management
Managing tail spend effectively reduces costs, improves efficiency, and minimizes risks associated with this spend. It ensures product compliance by vetting suppliers and verifying certifications, ensuring adherence to quality and safety standards and reducing the risk of non-compliant products entering the supply chain. Research by the Boston Consulting Group shows that actively managing tail spend can generate 5-10% in cost savings.
Implementing integrated tail supply management, which starts by aggregating demand and product information across all sites, functions, and users, allows the Integrated Supplier to analyze tail spend for improved reliability, quality, and cost-effectiveness.
Standardization reduces the number of managed tail items and suppliers, enabling order consolidation and process simplification. With fewer part numbers to manage, it becomes easier to optimize stocking levels, locations, and gain system insights. This facilitates stock transfers and sharing, increasing system confidence and delivering value by ensuring a reliable tail supply chain at optimal cost.
The Problem of Tail Suppliers
Due to their low-value nature, tail suppliers typically receive less attention from procurement teams, leading to suboptimal pricing, increased risks, and disproportionate administrative costs. To mitigate these issues, organizations should focus on identifying and effectively managing tail suppliers.
Consolidating purchasing requests for these suppliers can streamline processes and reduce costs. Additionally, negotiating better terms and conditions through supplier selection and leveraging volume-based purchasing can improve overall tail spend performance.
While tail suppliers represent a specific challenge within tail spend, addressing them is just the beginning. To truly optimize tail spend, a comprehensive approach is necessary. By implementing strategies to optimize interactions with these suppliers, organizations can lay a solid foundation for broader tail spend optimization.
Impact of Strategic Spend on Tail Spend Management
Organizations and procurement teams often juggle competing priorities, with a strong emphasis on high-impact, strategic spending. These high-value and highly visible purchases that involve long-term relationships with key suppliers, are essential for driving business growth and profitability. While this focus is critical for overall business success, it can overshadow the potential impact of tail spend.
Procurement teams, under pressure to deliver value from high-impact suppliers, may allocate limited resources to managing tail spend. This imbalance can lead to stock shortages, increased risks, and suboptimal cost and performance management within the tail supply category.
However, a strategic approach to tail spend can yield significant benefits. By focusing on optimization initiatives within this area, organizations can not only unlock cost savings but also reduce supply chain vulnerabilities. Ultimately, a balanced approach that effectively manages both strategic and non-strategic spend is essential for overall procurement success.
How to Optimize and Manage Tail Spend
Optimizing tail spend requires a strategic and integrated approach. By conducting in-depth tail spend analysis, organizations can identify opportunities for cost reduction, quality improvement, and supply chain efficiency. Strategic sourcing plays a pivotal role in anticipating market changes and fostering innovation. Supplier rationalization, through standardization and consolidation, can lead to increased purchasing power and improved supplier relationships.
Ultimately, integrating tail spend management into the broader supply chain strategy is essential for achieving long-term cost savings, process optimization, and enhanced overall performance. Continuous evaluation and improvement are key to sustaining these gains.
Tail Spend Analysis and Other Essential Steps
To effectively manage tail spend, organizations should start by conducting a tail spend analysis to identify opportunities for higher reliability, improved quality, and increased cost-effectiveness in the supply chain. Centralizing procurement processes ensures the availability of tail parts when needed while minimizing costs.
Leveraging technology and automation facilitates the maintenance of clean, updated data, providing visibility for the organization. Finally, regular monitoring and reporting create a foundation for open discussions about emerging supply issues and opportunities for further improvements, ensuring a proactive approach to tail spend management.
After identifying competitive opportunities, a similar analysis should be carried out when it comes to items and product: the item supplier analysis. By assessing factors such as delivery performance, pricing, and compliance, organizations can make informed decisions about supplier selection and management, leading to improved quality and cost savings.
Through evaluating supplier performance, organizations can consolidate their supplier base, uncovering opportunities for negotiation and strategic partnerships. This ongoing approach not only enhances supplier relationships but also ensures a more efficient supply chain, ultimately contributing to the overall effectiveness of tail spend management.
As procurement teams know only too well, managing tail spend isn’t without its challenges, particularly when dealing with suppliers that account for a small portion of spend but a significant number of transactions. These vendors often introduce complexities that can hinder effective tail spend management, leading to issues such as fragmented procurement, higher administrative costs, and inconsistent supplier performance.
Various Tactics for Tail Spend Management
Understanding that effectively managing tail spend can lead to cost savings and efficiency improvements within this often overlooked area of procurement is vital for unlocking hidden value. Streamlining procurement processes and enhancing supplier relationships drive overall business efficiency and competitiveness. To achieve these benefits, companies and organizations can implement tactics, based on their unique procurement landscape.
Common tail spend management strategies include procurement tactics based on the following approaches:
- Data visibility and analysis: use advanced analytics to gain visibility into tail spend, identify spending patterns and reveal opportunities for consolidation.
- Strategic sourcing: negotiate better contracts and align procurement with business goals through strategic supplier relationships.
- Supplier consolidation: reduce the number of suppliers to simplify management, lower costs, and improve supplier relationships.
- Categorize activities: segment tail spend into categories and apply tailored management strategies to optimize procurement.
- Governance frameworks: establish policies to align procurement with organizational goals, ensuring appropriate application of sourcing strategies.
- Technology & AI: leverage AI and technology to gain insights to enhance in decision making and reduce administrative activities, ensuring compliance and facilitating automation.
Determining which tactic (or tactics) suits your organizations, requires a thorough assessment of multiple organizational factors. And the knowledge of key stakeholders to ensure the chosen strategy matches needs and expectations.
Evaluate current tail spend, identify inefficiencies, risks, hidden costs and pain points in the existing procurement process, as well as taking a close look at resources and technology available to the organization. Define business objectives and align the tail spend management approach to broader business goals.
By carefully assessing these factors, a company can select the tail spend management strategy that best aligns with its objectives, resources and procurement profile, ensuring a more efficient and cost-effective procurement process.
How MAG45 Can Help You
MAG45 offers a comprehensive solution to optimize your tail spend management through an integrated approach encompassing procurement, inventory and process management. By taking ownership of your tail challenges, we unlock significant value often hidden within this complex area. Our specialized approach delivers measurable results in performance, pricing, risk, quality, efficiency, sustainability and continuous improvement.
Our unique integrated approach delivers a powerful solution that drives efficiency and cost savings. Leveraging deep supply chain expertise, MAG45 acts as a strategic partner, identifying cost-saving opportunities and optimizing the total cost of ownership. Moreover, working with a single supplier simplifies processes, enhances efficiency, and enables greater control over the tail spend category.
By partnering with us, you can unlock significant value hidden within this often-overlooked area. As an integrated supplier, we provide a comprehensive solution that addresses performance, pricing, risk, quality, process efficiency, sustainable procurement and continuous improvement.
