Solving The Tail Spend Management Problem: Part 2

Last month, I explored how to best support Tail Spend in your Procure-to-Pay (P2P) processes. By putting an intermediary in place for low value, high volume transactions fragmented vendors, we could get a lot of benefits. Indirectly, this also addressed how to solve the Tail Spend management problem in the Supplier Relationship Management (SRM ) process because it eliminates the need to onboard all those long tail suppliers used for low volume purchasing.

You can re-read Part 1 here.

In this month’s article, I’m exploring how to increase your Tail Spend management benefits by going upstream in the Procurement Value Chain. You can squeeze much more value out of your Tail Spend by leveraging leading Request/Intake Management and Sourcing processes.

Table of Contents

1. How Organizations Typically Deal Tail Spend Sourcing

2. Technology for Tail Spend Intake Management and Sourcing

   1. Autonomous Sourcing

   2. Intake Management / Guided Buying

3. Pulling It All Together

4. Benefits of Managing Tail Spend

5. Conclusion

How Organizations Typically Deal Tail Spend Sourcing

In most organizations today, Tail Spend sourcing is dealt with at the Procurement policy level. Organizations analyze their spend and transaction profile to determine a spend threshold. Above this threshold, a buyer from the Procurement team must be involved to help source the requirement (for example, above $15K). Below this threshold, it is the requester who is responsible for ensuring they respect the requirements of the Procurement policy.

To determine the ideal theoretical threshold at which a buyer should be involved, you would calculate it as follows, adjusting the numbers according to your context:

• Yearly RFQs per buyer = 750

• Buyer Capacity = 240 working days * 8 hours (1920 hours)

• 1920 working hours / 750 average RFQs per year per buyer = 2.56 hours per RFQ (incl. idle time)

• Buyer cost by RFQ = 2.56 hours @ 38.98$/h (75K yearly salary with benefits) = 99.79$

• Typical savings when a buyer in involved = 3%

• To calculate the threshold, we use a rule of three: (100 x $99.79) / 3% = $3 326

In this scenario, it would make sense to involve a buyer to source a given transaction when the purchase is estimated at $3 326 or more (adjust the numbers according to your context). However, this is not typically the biggest constraint. Organizations can have a capacity limit… They only have a given number of buyers in the organization and no appetite for more because managing more buyers means more complexity and diminishing marginal returns. You may also simply not be able to find competent buyers in your area…

In a capacity limit scenario, the calculation would go as follows:

• Number of buyers: 5

• Average number of RFQs per buyer per year: 750

• Max number of RFQs per year = 750 x 5 = 3 750

• Remove the 3 750 highest value “spot” transactions from your previous year’s historical spend (unless you have a more accurate transactional forecast for the future)

  • Spot transactions are transactions that don’t already have an assigned source of supply (e.g. not on contract or catalog)

• Find the theoretical amount of your 3751st spot order → This is your theoretical buyer involvement threshold (e.g. $15K).

• You could calculate the impact of adding and addition buyer to your team to see how it helps close the threshold gap between these two methods (e.g. to support a hiring business case).

• For both the above methods, you could include overhead costs into the calculation to be more conservative

This theory is all well and good but what kinds of results does this give us? Well… Mitigated ones…

• RFQ results will be variable based on the competence level of your buyers.

• Estimated purchase values may be much lower than what is initially estimated by the user or they might not even know what something will cost before trying to purchase it. This makes it difficult to respect the policy.

• For purchases under the threshold, a large portion of your requesters won’t be bothered to respect a 3 or even 2 bid-and-a-buy requirement.

Don’t get me wrong, having a Procurement policy and the processes/systems in place to enforce it will definitely provide benefits. If you don’t have one, it’s a great place to start. However, success will largely depend on the monitoring and retroaction you do and culture of the company.

It is not optimal… And as you know from reading me, I’m all about optimal…

So, how can we bring technology into the fold to make Tail Spend sourcing better?

Subscribe to Premium to read the rest.