Procurement is going through a fundamental change.
Traditionally seen as a transactional body of the corporation, Procurement has begun to align with the company vision, thus transforming it from transactional to strategic.
A key action to accomplishing this strategic alignment is providing the Chief Procurement Officer (CPO) with a seat on the corporate board. This appears to be a trend that is about to take hold according to a recent Benchmark Report on the Challenges faced by Procurement, as nearly 25% of 100 Procurement Executives interviewed stated that “high on the agenda is the CPO having a place on the board”.
Another 56% stated “Procurement moving towards making board level decisions” is “growing in importance”.
What else has to happen to make Procurement more strategic?
Well, it seems in that same benchmark report we have the answer. More than 3 out of 4, or 80%, of the Procurement Executives stated that the top metrics for measuring the value of Procurement is “achieving a higher percentage of managed spend as a percentage of total spend” (See the related infographic in the Report).
This is significant. Its strategic importance is tied to its value!
For Procurement’s value to increase, the amount of managed spend must increase. Which in turn means the un-managed spend must be reduced.
Another name often associated with un-managed spend is Tail Spend, which will be explained shortly.
What types of purchases make up Tail Spend?
Procurement’s corporate managed buying process has been developed to leverage the greatest cost savings and the most strategically negotiated contracts. Any spend outside this purview is considered the Tail end of the spend.
These purchases are typically comparatively small (below a lower-end cost threshold which is set differently for each company), considered discretionary spending or are specialty items that are infrequent and not included in catalog systems.
Examples are items like painting an office or ordering a one-of-a-kind test device for engineering.
How much Tail Spend does a company typically have?
An organization with a conservative Tail Spend problem would have approximately 75% of its spend strategically managed using just about 25% of its vendors via negotiated contracts.
The other 25% of spend that is un-managed would be spread throughout the remaining 75% of its vendors. The significantly larger number of non-strategically leveraged vendors, almost 3-to-1, forms this long horizontal tail, hence the name given as Tail Spend.
The minimum goal that all Procurement organizations should be aiming for is typically based on the 80-20 rule or Pareto Principle. As applied to Procurement, the 80% represents the percentage of spend that is strategically managed and the 20% represents the vendors that provide it.
A good graphic illustration can be found in the following Tail Spend informational video.
What are the consequences of Tail Spend?
- Lost savings from not taking advantage of company-leveraged discounts.
- Too many vendors to effectively manage, pulling procurement professionals away from more high-level projects.
- Compliance issues due to so many vendors and contracts and potential conflicts with existing corporate contracts.
- The one-off purchase that occurs because “I need it now” or “I’ve always done it this way” that adds up over the course of a year, especially at less-centralized company locations.
Why does Tail Spend tend to get out of control?
- Procurement professionals are already overburdened responding to the core needs of the business.
- They don’t have the time required to analyze the data or implement more effective processes.
- Procurement departments lack the necessary headcount to liaise with all business units to get the necessary data (benchmarks) and make changes in the current supply chain.
- Stakeholders are usually unwilling to give up buying power.
What are some of the signs that identify a Tail Spend problem?
If you do a quick review of all the suppliers used by your company, do you see a pattern, illustrated by these factors:
- Around two-thirds of your suppliers provide a very small fraction of your spend.
- More than 30% of orders are NOT negotiated by Procurement.
- Less than half of purchasing transactions take advantage of the efficiency of automation (by going through a catalog system).
What are the potential savings in taking control of the Tail?
There is significant waste in the spend that is not strategically managed and it only gets worse the longer it goes unaddressed.
Typical estimates are 15% to 25% in savings which could amount to millions of dollars.
How do you tackle Tail Spend and get it under control?
Tail Spend can never be completely eliminated but it can be reigned-in to an optimal percentage compared to the total spend.
Implementing a comprehensive Tail Spend Management Program over a phased approach that provides greater visibility and performs the following essential actions:
- Identify and categorize the un-managed spend.
- Redistribute some of the un-managed spend to the strategic vendors.
- Use of online catalog systems that have access to the best supplier sources.
- Expand the existing online catalog system to include more items that show a trend of being purchased.
- Use of analytics and tracking to determine patterns and take corrective measures.
The transformation of Procurement is underway. Changing from a purely transactional organization to a fully strategic corporate entity, requires several key shifts. One, as the trend suggests, is the Chief Procurement Officer getting a seat on the corporate board in order to align with the company’s strategic vision.
Then to increase its value by reducing the un-managed or Tail Spend through improved tracking and visibility into that spend. The other critical value-shift is to automate as many manual functions of the Procurement process as possible eliminating unwanted delays. Thereby creating a fast, responsive and forward-leaning steward of optimal strategically managed spend.