A Comprehensive Guide to Tail Spend Management

Jul 3, 2024

The procurement department faces several challenges and immense pressure to maintain cost control and make smart purchasing decisions without engaging in practices that lead to heavy losses for the company.

While they put great efforts into enhancing their purchasing practices, they often overlook one aspect: Tail Spend Management.

For them, cost cutting is the utmost priority, which is right, especially in strategic categories, as these categories make up about 80% of the total spend and offer the greatest potential for savings. But what about the rest 20%? That's where Tail Spend Management comes in!

If you are new to this term, don't worry, as in this comprehensive guide you will learn everything about it and also know how to address this issue.

So let's get started.

Definition of Tail Spend

Tail spending refers to unmanaged expenses in various categories, usually involving low-value or high-volume transactions. Organisations can greatly enhance their financial health and operating margins by identifying and reducing spending.

Some examples of this tail spend in any organisation include:

  • Low-volume raw material
  • Temporary staffing
  • Tools and equipment
  • Replacement parts
  • Safety supplies
  • Software licences or subscriptions
  • Waste management services
  • Specialised equipment rentals

Although these purchases are indirect and do not directly affect the organisation, overlooking them can lead to high costs and procurement inefficiency.

This is why tail spend management has become crucial in identifying wasteful spending and finding potential savings, as it is a crucial aspect of financial management for any organisation.

Efficient Strategies for Tail Spend Management

The Need for Tail Spend Management

In today's competitive world, it is crucial to have efficient strategies for reducing costs and continuously saving money in procurement and sourcing.

Here's why it is crucial to manage your company's tail spend:

  1. Excessive Spending :

    The organisation may be spending more than what is required for petty expenses without being aware of it. In this case, implementing an effective strategy to manage tail spend can help expand spending options for firms and organisations.
  2. Lack of Control Over Vendors :

    The lack of control over vendors in tail spend can have negative consequences for a brand's reputation if the vendor engages in unethical behaviour. Additionally, there is a risk of legal action for the organisation.
  3. Process Improvement and Optimisation :

    Process improvement and optimisation is a key reason for implementing tail spend management. This involves enhancing the quality of data and processes, increasing contract coverage to minimise business risks, getting rid of insignificant suppliers, and adopting a global procurement delivery model.
  4. Improper Integration of Systems :

    Finding spending patterns and possibilities for cost savings is challenging when there is a lack of connectivity between systems. Also, one cannot make improved financial decisions because of limited visibility.
  5. Focus on Only High Value Transactions :

    Procurement managers tend to prioritise high-value transactions while neglecting low-volume and high-volume transactions. In this case, tail spend management becomes necessary as it allows you to save costs in the long run.
Benefits of Tail Spend Management

Benefits of Tail Spend Management

Now that we know how unmanaged tail spending can lead to various limitations, risks, and challenges in an organisation, let's now move on to the benefits an organisation gets when using tail spend management practices.

  1. Increased Efficiency and Productivity :

    By consolidating the supplier base, businesses can enhance their efficiency and allocate resources towards more productive endeavours. This reduction in the number of suppliers allows for a greater focus on key suppliers and enables the completion of more productive tasks. Furthermore, providing self-service procurement facilities can free up expensive resources.
  2. Results in Cost Savings :

    By managing tail spend, businesses can enhance their spend coverage and realise cost savings by increasing visibility into the 20% of spend that provides little value. This allows for the identification of sourcing opportunities to drive savings, streamlining transactions to reduce associated costs, cutting down on procurement expenses, and optimising the efficiency of the supply chain. Ultimately, this approach can lead to significant improvements in overall financial performance and operational effectiveness.
  3. Reduced Risks :

    Failure to properly address tail spend can leave companies vulnerable to various risks, such as fraud, non-compliance with regulations, and disruptions in the supply chain. Thus, by effectively managing the tail spend, organisations can minimise these risks by implementing controls, enhancing transparency, and tracking expenditures more effectively.
  4. Improved Decision Making :

    By utilising tail spend management tools, organisations can gain valuable insights and analytics that enable them to make better decisions regarding their procurement spending. This data allows companies to recognise patterns, uncover potential cost-saving opportunities, and implement strategic measures to enhance the efficiency of their procurement practices and expenditures. Ultimately, leveraging tail spend management can result in more informed decision-making and improved overall procurement performance for organisations.
  5. Greater Visibility and Control :

    Tail spend management can improve the visibility of a company's overall spending. By effectively managing uncontrolled expenses, organisations can easily obtain a comprehensive overview of their procurement costs, enabling more informed choices. This approach also enhances financial oversight, mitigating the potential for fraud and ensuring regulatory compliance.
  6. Better Supplier Relationships :

    Can you even improve your relationship with your supplier by effectively managing your tail spend expenses? Through the consolidation of suppliers and the skillful negotiation of improved agreements, organisations can cultivate robust and mutually beneficial relationships with their primary suppliers. As a result, they can attain enhanced service quality, favourable contractual conditions, and a steadfast and dependable supply chain.
  7. Improved Party Alliance :

    Implementing a comprehensive tail spend management system brings clarity to the process, clearly defining responsibilities and ownership. Since difficulty in tail spend is the result of the existence of separate divisions within the company and the absence of a centralised approach to purchasing. This enhances the efficiency of procurement resources and streamlines the process, ultimately leading to increased satisfaction for all stakeholders involved.
Read more: How can Refteck Solutions help in Tail Spend Management?

The Bottom Line

By reading this comprehensive guide, we are sure that now you are well aware of how challenging it can be for procurement teams to tackle cost-related decisions. But by finally considering this, organisations can leverage several benefits and protect themselves from unwanted risks and challenges. All you need to do is find a reliable partner like Refteck Solutions who can not only improve your financial performance but also enhance your operational effectiveness, at the same time.

So, what are you looking for?

Get in touch with our experts now!

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