Archive for January, 2015

Tail-Spend Management: There’s always money in the banana stand!

For a Procurement professional, the search for cost savings is a journey that never ends. Be it at a Fortune 500 firm that has mature Procurement processes and tools or at a recently established firm that just started down the path of Strategic Sourcing, one thing is a constant – The Pressure to Deliver Cost Savings!

What is Tail-Spend?

As we all know, Spend Analysis is an excellent means to identify potential opportunities. Most companies have already begun tapping into their Indirect Spend – supplier consolidation, improving contract

The costs add up!

The costs add up!

administration and compliance, identifying new spend areas from other departments and so on. But as we dig deeper and deeper, we will find that the avenues for cost savings are shrinking. After a certain level, it defies conventional wisdom to analyze 10,000 line items spread over 500 suppliers that comprise 1-2% of your spend – these are simply not worth your time and effort.

This bottom 10% of your Indirect Spend is what is known as a company’s Tail-Spend. This is often categorized by:
1. One-off purchases below a certain threshold (say $100,000)
2. Purchasing done at the plant level by engineers or other departments that don’t fall under the purview of Procurement

The Tail-Spend Opportunity

It is estimated that within this bottom 10% of your Indirect Spend, lies a lot of waste – sometimes to the tune of 15-20%. Imagine for a company that spends $100 million in Indirect Spend, the savings opportunity within Tail-Spend (10 million) can be between $1.5 – 2 million! This is a significant number that cannot be ignored.

Managing Tail-Spend

Given the nature of the tail-spend beast, it becomes counter-productive for companies to focus on smaller ticket items and instead they focus their attentions (and rightly so!) towards large-scale purchases. And given the cost of hiring an exclusive resource, the numbers don’t work out in favor of managing tail-spend internally. Companies that want to stop the drain of savings in their tail-spend and manage it in a cost effective manner have created outsourced tail-spend management teams, often in lower cost countries. These outsourced teams at third party providers are able to provide the necessary expertise at a significantly lower cost.

In summary, while the pressure to deliver cost-savings does not look like relenting, tail-spend provides a hitherto new area of focus for companies in their quest to deliver savings. In order to balance the cost vs benefits equation, it becomes incumbent on companies to explore outsourcing tail-spend management to lower cost countries. For more information, visit our website or write to me

Posted in: Analytics, Indirect Spend, Outsourcing, Procurement, Strategy

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