What is tail spend?
It is assumed that tail spend is the last 20 percent of spend. In our experience, tail spend goes up till 35 percent which becomes a significant number.
Start with your hidden tail. This is around 15-20 percent of your spend. Then, aggregate your spend and consolidate your suppliers.
How do I manage my tail spend?
TAIL SPEND EXPLAINED
Purchasing cards or p-cards are used across organizations due to their flexibility in buying items without having to go through the formal, time-consuming procurement procedure for purchase of small-dollar and off-contract items. They are usually used as they increase process efficiency and reduce the P2P transaction cost.
However, with this flexibility comes lack of active control and visibility of the p-card spend, leading to compliance issues, very high usage of business to business transactions, and maverick spend. The challenge also arises during the reconciliation process, when the p-card spend is being mapped on with the total organizational spend for spend reporting and analytics. Due to the nature of the p-card data and meta-data, it is difficult to identify purchasing patterns and opportunities for spend-savings.
Hence, it is important to not only have a well-defined p-card policy, but also greater spend visibility for the p-card data. Our solution, The P-card analytics helps aggregate, organize, and monitor data across the organization’s p-cards to analyze potentially high-risk transactions, top suppliers, earned rebates and most commonly ordered P-card items or used vendors. For example, If a certain item or vendor can be part of the hosted catalogs or web forms in the P2P systems. This will be an opportunity for spend optimization and enhanced compliance.
Hence, with increased visibility, organizations can better manage and spot maverick spend and achieve cost savings.
Tail spend is best explained by the 80-20 rule. Here, 80 percent of the supplier base is said to be associated with the lowest 20% of the spend in an organization.
Low value purchases and non-core buys make up a large part of the tail spend. Often, due to the infrequent nature of these purchases, items that fall in the tail spend are not included in catalogs and are not managed by the procurement organization. In addition, processing the large number of purchase requisitions and invoices becomes costly and uses up the firm’s valuable resources.
However, organizations are starting to realize the potential savings locked in the tail spend.
Our tail spend analytics program will segment the suppliers viz. head of tail, mid of tail and tail of tail to apply optimization strategy for each part. The aim is to channel more purchase requisitions through catalogs and preferred suppliers. For example, we will identify one-off opportunities like aggregating the recurring tail spend requests by type of goods or services into an existing contracted supplier.
We would set up a buying-desk to manage the requisitions below a certain threshold limit. It would obtain competitive quotes including preferred and diversity suppliers, conduct bid walks and help execute contracts to bring tail spend savings. The P2P transactions are optimized through intelligent automation to achieve accuracy, efficiency and cost reduction.