A tail with a happy ending for procurement
- Outsource Magazine
- On September 18, 2015
From relative obscurity a few years ago, Tail Spend Management is now having its day, as more and more companies recognise the significant benefits this can bring – from cost savings, supplier rationalisation and risk reduction, to increased control and visibility over spend.
Mitigating risk and protecting reputation
Our 2015 Global Procurement Study of 830 procurement decision-makers across the UK, Europe and North America revealed that risky supply chains are the single biggest external threat to businesses’ operations; seen as a challenge by more than three quarters (77%) of all respondents, and as a “major challenge” by 17%.
The potential for damage to business reputation as a result of problems in the supply chain is one of the key reasons why companies need to gain greater visibility of suppliers being used and their credentials. This is undoubtedly driving the increased interest in managing Tail Spend, as ‘the tail’ typically accounts for around 80% of an organisation’s suppliers.
There are three main categories of supplier risk – financial, supply chain and corporate social responsibility – and then there are multiple tiers within each of those categories, across multiple dimensions. It’s those multiple levels, as you move further and further down the supply chain, where the bulk of risk sits. When you consider executive changes, geographical risks, political risks, disaster planning, and stress testing, to name just a few factors, you begin to see supplier risk as an enormous subject.
To ensure that these various risks and threats do not disrupt, corrupt or fracture supply chains, managing Tail Spend is essential.
Whether related to ethical business practices, conflict minerals, environmental practices, data confidentiality or any number of burgeoning compliance requirements, the risk associated with seeking out and eliminating non-compliance is now a major topic for leading CPOs. Running a Tail Spend programme allows the procurement function to gain better control and supervision over their organisations’ suppliers.
Supplier reduction and diversification
By combining all the individual low value orders across an organisation, a Tail Spend programme is able to concentrate this area of buying with fewer suppliers. Achieving this provides additional pricing leverage of course, but increasingly organisations are more interested in the benefits arising from better supplier management. Reducing the number of suppliers reduces transaction and processing costs. In a typical Fortune 500 we estimate reduction from over 20,000 suppliers to as little as a few thousand, over the course of a three-to-five-year Tail Spend initiative.
At Xchanging, as within most global organisations, we create Category Cards – essentially an approved list of preferred suppliers. Implementing these category cards across an organisation also makes it much easier to implement community-sourcing strategies such as increasing buying from local companies, or SMEs – an increasingly important issue and a hot political topic these days. The use of Tail Spend to address CSR targets is becoming more commonplace – especially in public sector.
Tail Spend is estimated to be around 15-20% of an organisation’s total spend – often defined as most orders between £20k and £100k in value although we’re seeing this upper bound number increasing dramatically as the benefits of Tail Spend are better understood. The commercial benefit of implementing a Tail Spend programme is quickly realised, with typical savings being between 8-15%.
A way to improve procurement’s internal comms
The Xchanging 2015 Global Procurement Study revealed that 63% of procurement decision-makers identify “internal stakeholder engagement” as a challenge, with 14% claiming it is an extreme challenge.
All organisations have Tail Spend, and unlike strategic procurement which is typically controlled by a smaller group of procurement professionals, Tail Spend is consumed by everyone and anyone in the organisation – from marketing, finance, IT, legal, and in production environments, even more staff on the factory floor. Historically this widespread consumption has created the challenge for procurement in terms of how to maintain policies and controls; a well-managed Tail Spend programme addresses this.
To ensure adoption and success, businesses must ensure that first, there is a high degree of understanding around the Tail Spend management program and second, that all staff are comfortable using it.
Tail Spend management solutions are designed to be incredibly intuitive and user-friendly, and they actually speed up the overall processes around low-value spending. This is a key value-add for users: it streamlines the entire tactical buying process.
But most importantly, Tail Spend solutions improve supplier management, by better controlling the supply base and limiting the dangers resulting from working with unknown suppliers, which ultimately reduces supply chain risk.
For the same reason, it’s a great way to deliver real benefits across an organisation, which goes a long way towards building the profile of the procurement department.
About the Author
Gonzague de Thieulloy joined Xchanging in September 2007 as senior category manager within marketing. Since then he has held a range of positions including head of trading, sourcing & account director, general manager of CE operations and finally his current role of managing director global head of tail end spend services. Prior to his time at Xchanging Gonzague worked at Kraft Foods and Fournier Pharma.