How Your Company Can Tame the Tail Spend Beast
What Is Tail Spend?
Is your company familiar with the concept of tail spend? Even if you’re not familiar with it, you have it. Simply put, “tail spend” refers to approximately 20% of non-core procurement transactions that are largely left unmanaged, usually due to a high volume of suppliers and limited in-house resources. The best way to illustrate tail spend is through the Pareto Principle, wherein 80% of an organization’s spend is strategically managed with 20% of the suppliers. This 80% spend typically includes the cost of goods, tooling, and other capital expenditures, insurance, occupancy, and utilities.
Conversely, 20% of the spend, or “tail spend,” is with 80% of the suppliers. Included in this 20% segment are thousands of operating consumables SKU’s (MRO, PPE, packaging, shipping and warehouse supplies, janitorial and sanitation supplies, industrial gases), logistics by multiple modes, telecom circuits and services, and other services such as waste, uniforms and payroll processing. Consider, too, that the cost of processing and paying invoices for these purchases often exceeds the value of the goods or services received. This spend segment is not only challenging to manage effectively but also to realize industry-best pricing with suppliers that most closely align with your requirements.
For example, a recent manufacturing client with $56M in spend revealed the following:
This $9.4M tail spend is comprised of MRO, packaging, insurance, information technology, logistics, telecom, uniform and waste services, office supplies, marketing, education, regulatory, etc.
Savings of 10-40% or more are typically available in certain expense categories. These potential savings are often overlooked due to a low expectation of return, lack of visibility and internal resources, and benchmark data. Executives and procurement leaders must change the way they look at tail spend. Executives might reason that tail spend is too costly to manage from a process point of view, but that’s the reason they should not ignore it, as it’s too costly from a business point of view.
Read the full whitepaper from our partner Expense Reduction Analysts or contact us for more information.