Tail spend is the cost of purchases that take most of the transactions of a company and yet not a lot of spend volume. In numeric terms, that usually means a proportion of 80% of transactions but only 20% of total spend volume.
What you include in that cost varies on the market and the needs of the corporation. The quantity of items that constitutes the category will also change based on the size of the operation. Usually, tail spend gathers a lot of transactions and product categories.
Because of that extensive number of transactions, it also needs a huge base of suppliers. Finally, those items usually aren’t a priority. So during the negotiations with suppliers they can be neglected. So, it’s important to focus on strategies that contemplate tail spend and the moment you order.
In this article we’ll talk more about tail spend and it’s relation with stock and a company’s procurement.
What is Tail Spend?
Procurement’s tail spend can also be called rogue spend or maverick spend. As established, they are small transactions made outside the contract and the general procurement strategy. Because they are conducted outside contractual negotiations, they may offer the risk of no compliance.
Therefore, to deal with those kinds of expenses, you need to extract data from the expenses of the whole operation and classify it. Then, run analysis to support the decision-making and planning for different scenarios of inventory and procurement.
Besides analyzing the spend data, you need to look at the suppliers to find what are the essential items and who provides them. With that information, it’s easier to divide the categories of orders and see the low value or low spend products.
A good strategy to increase profit is to find opportunities within the indirect spendings and find ways to maximize efficiency and reduce costs.
How to manage tail spend?
As managers often neglect tail spend, one of the hardest points of identifying possible strategies and planning is the lack of data. That happens because it is hard to keep track of negotiations happening outside contracts.
Also, the variety of negotiations and transactions happen in a single operation. And finally, the amount of suppliers and vendors for each specific product. So, decentralized inventory policies will face problems when dealing with records of minor spendings.
So, as established, it is important to identify as soon as possible those transactions to start effectively maintaining data about them. With historical information, you can see what’s working and not and plan to act upon it.
Reducing tail spend can free space on stock and reduce the necessity of frequent orders. That way you have less deliveries, which can lead to less problems in the process. It will increase profit while reducing problems you may confront on your inventory management.
The benefits of reducing tail spend
There are a lot of advantages when you reduce your tail spends and it’s something every company that needs warehouses should find ways to do. Using the right tools and introducing artificial intelligence and machine learning processes is a great way to reduce errors and speed up operations.
With digital solutions you can properly deal with the spends that although small, can have a high impact on your company’s finance. You can also have a smarter sourcing process, track your requisitions and orders and optimize your stock.
Among the main benefits of reducing tail spend are:
- Reduce of costs.
- More control over contracts and spending.
- Less risk on transactions.
- Greater quantity and quality of data.
- Compliance enforcement.
- More productivity.
Tail spend must not be overlooked by managers. Although it’s considered low priority items, it can have big impacts on finance and strategic problems of an operation or supply chain. Digital solutions can help you understand your process better and find ways to improve efficiency and profit.
Learn more about the procurement solution of Supply Brain!