Products and Platforms
TCS TAP™
TAP™: A Cloud-based AI-powered Source-to-Pay Platform
Highlights
- Tail spend management transforms an often-overlooked area into a strategic advantage.
- Effectively managing the tail can reduce hidden costs (like administrative overhead), improve compliance, and unlock incremental savings.
- Organizations should streamline their supplier base through a structured supplier rationalization process to manage tail-end spending successfully.
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Low value purchases
Procurement has always been complexing for organizations. Sourcing professionals are constantly pressured to deliver year-on-year savings and ensure fulfillment under crunched timelines. With volatile commodity prices and rising supply market risks, they’re expected to secure critical resources while stretching their budgets further.
Under mounting pressures, many procurement organizations recognize that low-value purchases, commonly called tail spend, are often a source of inefficiency and lost savings. However, few fully grasp the extent of the financial impact or how to effectively manage tail spend to unlock significant savings and drive strategic business value across the organization.
What is tail spend
Every year, companies make countless purchases that are too small for procurement teams to manage directly or too sporadic to be included in the catalog systems. While organizations often feel confident about controlling their core purchasing categories, they frequently overlook tail spend—the significant portion of total spend that comes from smaller transactions, typically under $200K (though this threshold can vary with the company)
Figure 1:
Nail the Tail
Figure 1:
In the above example, 93 suppliers account for 80% of total spend, while 489 suppliers account for the bottom 4%, thus providing a significant savings opportunity.
Let's try to understand organizations' spending by dividing them into three main categories that will help prioritize strategies for controlling costs and maximizing value. Here's how these categories are defined:
- Head spend: High-value, high-volume purchases: This typically includes strategic spend categories like direct materials, critical services, and major supplier contracts. These categories contribute significantly to the overall spend and directly impact on the organization’s core operations. 5 -10% of total suppliers manage a large proportion of the expenditure, often 70-80%. Relationships with suppliers are strategic, involving significant collaboration and value-added services.
- Body spend: Mid-value, mid-volume purchases: Often includes non-core yet essential categories like indirect materials, IT services, or secondary raw materials. 20-30% of total suppliers cater to mid-value and mid-volume transactions. These suppliers typically provide essential but less strategic items.
- Tail spend: Low-value, low-volume purchases Often fragmented, involving many small transactions across multiple suppliers. Includes ad hoc or non-strategic purchases such as office supplies, marketing services, or one-off vendor engagements.
60-80% of total suppliers contribute to tail spend, but their share of the total spend is small (typically 10-20%). These suppliers are often fragmented, with a high volume of low-value transactions.
While the head and body spend are traditionally managed for cost savings and supplier relationships, tail spend is often overlooked.
However, effectively managing the tail can reduce hidden costs (like administrative overhead), improve compliance, and unlock incremental savings.
Optimizing tail spend
Organizations should streamline their supplier base through a structured supplier rationalization process to effectively manage tail-end spend. This approach involves the following steps:
Step 1: Assess current vendor landscape
- Use spend analysis tools to categorize and segment spend by supplier, category, and department
- Identify duplicate or overlapping suppliers in similar categories
- Assess suppliers based on performance metrics like cost, quality, delivery time, and compliance
- Identify low-performing or non-critical suppliers
- Determine which suppliers are critical to operations or provide unique value
Step 2: Define rationalization goals
- Set a target to reduce the number of suppliers by 20% by consolidating spend across key suppliers
- Align goals with overall procurement strategy (such as cost savings, risk reduction, or innovation)
- Evaluate suppliers based on spend volume, strategic importance, service quality, contract compliance, innovation, and value-added services.
Step 3: Segment and prioritize suppliers
- Categorize suppliers as strategic, preferred, and transactional suppliers
- Identify opportunities to consolidate categories with fewer but better-performing suppliers
- Increase volume with preferred suppliers to leverage better pricing and terms.
Step 4: Implement policies
- Establish guidelines for procurement to control spending
- Collaborate with departments to promote awareness and compliance
Conclusion
Consolidating spending often leads to better pricing and reduced administrative costs. By consolidating suppliers and leveraging technology and analytics, organizations can effectively manage tail spend, reducing inefficiencies and unlocking hidden savings. Tail spend management transforms an often-overlooked area into a strategic advantage. This approach ensures that even minor expenditures contribute positively to the bottom line.
