How to Tame the Tail Spend Beast

What Is Tail Spend?

The best way to illustrate tail spend is through the Pareto Principle, wherein 80% of an organization’s spend is strategically managed with 20% of the suppliers. This 80% spend typically includes the cost of goods, tooling, and other capital expenditures, insurance, occupancy, and utilities. Conversely, the other 20% of spend, or the “tail spend,” is with 80% of the suppliers. Included in this 20% segment are thousands of operating consumables SKU’s (MRO, PPE, packaging, shipping and warehouse supplies, janitorial and sanitation supplies, industrial gases), logistics by multiple modes, telecom circuits and services, and other services such as waste, uniforms and payroll processing. Consider, too, that the cost of processing and paying invoices for these purchases often exceeds the value of the goods or services received. This spend segment is not only challenging to manage effectively but also to realize industry-best pricing with suppliers that most closely align with your requirements.

Savings of 10-40% or more are typically available in certain expense categories. These potential savings are often overlooked, due to a low expectation of return, lack of visibility and internal resources, and benchmark data. Executives and procurement leaders must change the way they look at tail spend.

How to Get Started

Maybe your organization doesn’t have the time or resources available to address the potential impact of tail spend. Perhaps your executive leadership knows the areas that need to be addressed but just hasn’t made the first step in conducting a review. Gain a competitive advantage by ensuring your business has an adequate assessment of actionable tail spend opportunities. Why continue to leak cash that can either improve your bottom line or be redeployed to higher priority initiatives?

A recent manufacturing client example with $56M in spend revealed the following:

This $9.4M tail spend is comprised of MRO, packaging, insurance, information technology, logistics, telecom, uniform and waste services, office supplies, marketing, education, regulatory, etc.

Don't let the perceived cost of managing the process prevent your team from finding the savings in your tail spend.

Your spend can be evaluated by supplier or expense category. However, it’s a great rule of thumb to do both—as it provides a compelling profile and identifies potential opportunities for reduction. If an internal expense reduction initiative is contemplated, this must be the first step. Improvement cannot be measured without a starting point.

Valuable insights can be revealed to a CEO or CFO who is viewing their spend data for an historic accounting period in this format. Rather than typical line items such as raw materials, outside processing, labor, packaging, shop supplies, etc., this reporting model offers a much more in-depth snapshot of spend by expense category, as well as supplier makeup.

Drilling down further within a category can yield even greater understanding. Within the MRO (maintenance, repair, and operations) category, the spend data can be reported by product such as cutting tools, lubricants, fasteners, personal protective equipment, etc., and cross-tabulated against the suppliers.

As a result, your organization will be able to methodically shorten the tail, leverage your dissipated purchasing power, gain visibility to your expenses and create metrics to measure implemented future state objectives against the current state status quo.

For a deeper conversation on tail spend and how your company can get started reeling in your extra 20%, listen to our podcast with Paul Zaleski here.