Look at any organisation’s spending habits and you’ll typically find a large proportion of overall expenditure is spread out on small purchases across multiple suppliers. This tail spend often poses a challenge for procurement teams as it can be hard to pinpoint what’s contributing to it, and how that expenditure can be controlled.
This is especially so in the volatile world of IT, where everyday office items, such as printer cartridges or USB cables, are unlikely to warrant the same level of scrutiny as a big-ticket item such as a server. Collectively, however, these low-level purchases can swallow up a huge amount of expenditure. And given its disparate nature – with spending taking place across multiple locations – it’s much harder to maintain visibility.
This is often complicated by maverick spending. For example, this might include a member of staff replacing a Wi-Fi router by rushing out to a high street electronics store. This type of distress buying is likely to result in organisations paying much higher margins than is necessary. The problem can be further exacerbated if a record of that purchase is not coded into internal systems – making it impossible to conduct a spend analysis.
The risks posed by tail spend
Given how difficult it is to pull together a holistic and accurate picture of this expenditure, it’s commonly felt that tail spend is a problem that’s too hard to tackle. Left unchecked, however, and it can snowball and expose organisations to several risks. These include:
1. Accumulative cost
Suppliers know that organisations won’t carry out the level of scrutiny on smaller items, so they can often get away with charging a higher mark-up. These inflated margins can easily add up to significant amounts.
2. Administrative costs
Lots of smaller costs spread out across multiple suppliers can create a lot of admin work. This might involve setting a supplier up on a system (often for just one purchase), creating purchase orders and dealing with invoices.
3. Unchecked suppliers
When the purchase value is low, it’s unlikely that organisations will invest additional time to put contracts in place or take references. Although use of this supplier could grow over time, no checks will ever have been made to ensure they’re the right fit for the company.
Although the initial spend may be small, skipping the necessary processes could cause much bigger problems later down the line. Especially if, for example, software isn’t licensed, and it results in fines – or, hardware is incompatible with a network.
You can centralise procurement and manage risks via a modern marketplace, learn more here.
How to minimise the risks
Getting to grips with tail spend is vital, but it’s also important that in tackling this issue we don’t inadvertently make life harder for people to buy what they need. We could create inefficiency within the organisation if we created too many obstacles. Nobody wants to enforce procedures where people need to fill out several forms just to buy an order of cat cables, for example. There is a sensible middle ground, however. Steps that can be taken to increase control, while allowing buyers to make smarter purchases.
Classifying different types of tail spend will help gain a sense of order and enable better analysis. Usually, purchases will naturally fall into distinctive groups – hardware peripherals or stationery, for example.
Transactions within these categories usually have a pattern to them. For example, you might encounter a large product refresh every summer when taking on the latest cohort of graduates. Whether they reveal seasonal peaks or not, it’s important to understand these patterns before a purchasing strategy is put in place.
You also need to classify your suppliers. If you know what is being spent with whom, it will enable you to evaluate them and set up a preferred supplier list. You can then consolidate your expenditure by tendering out certain categories of spend – helping you to reduce the number of suppliers, and therefore invoices, order numbers, delivery charges and so on.
With preferred suppliers in place, you can then start to set up product catalogues. This will allow you to set parameters and pre-authorise certain types of purchases within that supplier’s system. You can then authorise users to buy products by providing them with purchase cards.
4. Effective systems
Putting systems in place will reduce unnecessary administration and eliminate those maverick purchases. A purchase-to-pay system, for instance, can automate workflow – ensuring purchase orders are raised, approved and recorded by accounts in one fell swoop.
Those four steps will help organisations get to grips with tail spend, especially when coupled with advancements in technology. For example, Gartner recently predicted that seventy-five percent of all B2B tail spend will be purchased in an online marketplace by 2022 as companies look to consolidate spend and provide employees with an easier way to purchase.
Not only will this facilitate better supplier management, but the increased automation will allow procurement teams to spend more time forging stronger relationships with suppliers and negotiating better contracts.
Ian Nethercot MCIPS, supply chain director at Probrand.
Register for a free marketplace account to get exclsuive discounts and member benefits.