Solving the "Tail Spend Management" Problem: Part 1

What is Tail Spend?

The term “Tail Spend” gets thrown around quite a bit in the Procurement space… I feel it’s become synonymous for “spend you don’t really know what to do with…” To illustrate, I came across a dozen different definitions while doing research for this article. No wonder it’s a difficult topic to master; the definition is a moving target! To be fair, the nature of Tail Spend makes it difficult to define precisely as the same categories of spend will be in the tail in one business but not in another. So let’s get some clarity, once and for all.

I define Tail Spend as the low value, high volume purchasing transactions that generally aren’t strategic to your business (e.g. one-time or infrequent purchases) and are fragmented across many different suppliers.

Why “generally”? Because non-compliant strategic purchases seep into the tail event though they shouldn’t be there.

Another way to illustrate the Tail Spend concept is to list what Tail Spend is NOT (or should not be). Let’s take the example of a manufacturing company. Everything that is strategic, repeat or direct spend related to core manufacturing activities or key support activities shouldn’t be in your tail spend.

In short, the company’s profile would ideally be broken down like so:

• Direct Spend → Raw materials, Production Supplies, etc. (goes into cost of goods sold)

• Strategic/Repeat Spend (Direct and Indirect) → Machines, Maintenance, Repair & Operations (MRO), Facilities, Contingent workforce, Fleet and logistics spend (cars, truck, vans, etc.), Information Technology, etc.

• Tail Spend → Charity, endorsement, certifications, one-time marketing costs for event, one-time commissioned study, emergencies, small one-time projects, miscellaneous fees, etc.

Tail Spend is all the “Knick Knacks” you need to run a business…

Why is it Called Tail Spend?

In most companies, if you create a bar graph with your suppliers on the X axis and the total spend attributed to each supplier for a given period on the Y axis, you’ll get something like this:

If you sort your suppliers in descending order by total spend, your chart’s shape will change to something that resembles the following

The “Tail” of your graph represents these low value, high volume fragmented transactions. Often, this will fall within the realm of a pareto distribution (80/20 rule). This is why if you google “tail spend definition”, you will often find it defined as the “20% of your low value, high volume spend with 80% of your vendors”. This is misleading as it can be very different from company to company or industry to industry. I’ve seen the value of spend attributed to the tail anywhere from 5-40% and the vendors anywhere from 40-90% of the total supply base… It all depends on your supplier fragmentation.

But why is this important?

Ah… Now we’re getting somewhere… The Tail Spend concept is only important because of the problem it is associated to.

What is the Tail Spend Management Problem?

You see, tail spend is complex to manage… Because of its nature (low value, high volume), the transactional cost of the purchasing process (e.g. creating and approving a requisition, cutting a purchase order, processing an invoice, etc.) often outweighs the value of the purchase. But, if you let users buy outside your processes, that brings its own lot of risks and issues:

• Purchases are at higher risk of being non-compliant with your Procurement policy

• All sorts of irregular invoice and payment requests arrive at Accounts Payable from all over the business, driving up payment transaction costs.

• Spend is directed towards a multitude of suppliers, even for categories where you have preferred suppliers and contracts at the corporate level

  • This erodes Procurement’s ability to achieve their objectives (realized savings, risk exposure, diversity targets, etc.)

  • This creates pressure on your Vendor Master Data team as they need to create vendors in your system and gather bank account information to get everyone paid

• Historical purchasing data for these transactions is horrific or non-existent, making it hard to analyze and improve

• Unexpected international purchases create headaches for your treasury and tax teams

To add further complexity, it’s also important to remind you that, as previously mentioned, strategic spend can also seep into Tail Spend. For example:

• Low value strategic purchases

  • e.g. low cost Software-as-a-Service application that contains sensitive data and must still be routed through IT for Privacy Impact Assessments (PIA).

• Fragmentation of supply base as a category strategy to mitigate risk

  • e.g. buying rare commodities

• Purchases that “lost their way”

  • e.g. Category specific buying channels and suppliers are in place but the requester did not know or did not care to use them and bought a “one-off” with an unvetted supplier

So, in a nutshell, the Tail Spend Management problem is: “How can we drive Tail Spend purchases to suitable, compliant, user friendly purchasing channels that minimize the cost per transaction while mitigating the risks and issues involved?”

Or, said another way: “How can we get our employees to respect our Procurement policies without dedicating unreasonable resources to enforcing business rules?”

Fortunately, this is not a new problem. Every business has this problem in some shape or form. Let’s explore the common solutions proposed by the market, their advantages and disadvantages and then my recommendation for how to tackle the problem.

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