The procurement team’s guide to tail spend management

Office supplies. Keyboards and mice. Printing costs for marketing materials. All of these are low-value, high-frequency purchases from a large pool of suppliers.

Tail spend refers to the multitude of low-value, high-frequency purchases made across an organization from a large and fragmented pool of suppliers. While each transaction is rather insignificant individually, their cumulative impact can be felt across a company's annual spend.

The 80/20 rule, or the Pareto Principle, is often used to observe tail spend scenarios, where 80% of transactions account for 20% of the total procurement expenditure. However, this 20% can represent millions of dollars in missed savings opportunities and operational inefficiencies.

Despite its financial weight, tail spend is frequently overlooked by procurement teams due to resource constraints and the perceived low impact of individually minor purchases. The sheer volume and complexity of managing so many suppliers for low-value transactions are enough to dissuade procurement leaders from tackling tail spend management.

Neglecting tail spend, however, can have significant consequences. Rogue spending, where employees bypass established procurement processes, can lead to cost leakages, compliance issues, and increased supplier risk exposure. The lack of consolidated purchasing power also prevents organizations from leveraging all their spend to negotiate better pricing and terms with suppliers.

By understanding the tail spend’s true business impact and implementing robust management strategies, procurement teams can unlock substantial cost savings, improve operational efficiency, and mitigate risks associated with a fragmented supply base.

Mastering tail spend management is a critical step toward achieving procurement excellence and maximizing value for the organization.

Top reasons tail spend management is such a challenge

• Lack of visibility and data: Decentralized purchasing channels makes it difficult to capture and analyze comprehensive data on these transactions.
• High transaction volume and low dollar value: Low-value purchases can easily slip under the radar and go overlooked by procurement teams focused on high-value contracts.
• Rogue, non-compliant spending: Employees bypass established processes and policies, leading to unauthorized purchases and rogue spending.
• Complex supplier landscape: Tail spend can involve numerous suppliers, making it challenging to consolidate and manage these relationships effectively.
• Limited resources and prioritization: Limited procurement resources mean businesses don’t always prioritize tail spend management, focusing instead on larger strategic initiatives.

Here are five immediate advantages of managing your procurement tail spend:

1. Cost savings and budget optimization

By consolidating purchases and negotiating with a streamlined supplier base, organizations can leverage their collective buying power to secure better pricing and terms. Automated processes and centralized sourcing strategies eliminate redundancies, reduce administrative overhead, and optimize budgets.

2. Increased visibility and control

Implementing robust tail spend management practices provides procurement teams with better visibility into their organization's spending patterns. This insight enables them to identify and curb maverick spending, rogue purchases that circumvent established processes, and uncover opportunities for cost savings.

3. Improved efficiency

Automating repetitive tasks, such as requisitioning, ordering, and invoicing, frees up valuable resources that can be reallocated toward more strategic procurement initiatives. Efficient workflows and centralized data repositories enhance collaboration, improve operational efficiency, and reduce duplication of effort.

4. Enhanced compliance

With a structured tail spend management program in place, organizations can ensure adherence to corporate procurement policies, regulatory requirements, and supplier diversity goals. Centralized controls and auditing capabilities mitigate the risk of non-compliance, protecting the company's reputation and avoiding potential penalties. Improved employee compliance also helps finance teams get one step closer to accounting automation.

5. Risk mitigation

By taking control of this previously overlooked area, procurement teams can position themselves as strategic enablers of business success, driving cost optimization, increasing operational agility, and reducing risk. However, before embarking on a tail spend management journey, it is crucial to first quantify the magnitude of the opportunity.

In the next section, we'll explore proven methodologies for calculating and measuring your organization's tail spend, laying the foundation for a data-driven approach to unlocking its full potential.

So how do you accurately calculate tail spend? There are two common methods for calculating tail spend:

• Spend threshold: This is where organizations define a specific dollar threshold, say $10,000 per transaction, below which all purchases are considered tail spend. This straightforward approach classifies any procurement activity under that pre-determined value as part of the tail spend category.
• Pareto Principle: Following the 80/20 rule, companies would analyze their cumulative spend data to identify the point at which 80% of their total procurement expenditure is reached. Any residual spend beyond that 80% threshold is then classified as tail spend.

Once your tail spend has been quantified, apply key metrics to measure progress and success:

• Total tail spend is the overall dollar value of all purchases classified as tail spend transactions, providing a baseline to monitor cost reduction efforts.
• Number of tail spend suppliers is the total tally of vendors leveraged for tail spend purchases, highlighting opportunities for supplier consolidation and negotiation leverage.
• Cost savings achieved is the quantifiable reduction in tail spend expenditure realized through streamlining initiatives, negotiated discounts, and procurement process flow improvements.
• Process efficiency improvements are metrics reflecting faster procurement cycle times, reduced manual workloads, or streamlined approval workflows resulting from tail spend management programs.

By establishing a clear methodology for calculating tail spend and closely monitoring relevant metrics, your procurement team can leverage data-driven insights to drive incremental improvement and shore up spend leakage.

The key to effectively managing tail spend is adopting a holistic, strategic approach rather than relying solely on reactive cost-cutting measures. Sustainable tail spend management requires centralized procurement, automated processes, strategic sourcing practices, supplier consolidation, and data-driven decision-making.

Centralized procurement

Centralized procurement allows businesses to consolidate their buying power and leverage economies of scale. When you channel your tail spend purchases through a centralized function, you’re in a great spot to negotiate deals with a set of preferred suppliers for your everyday goods and services. This consolidated approach delivers cost savings while ensuring consistent quality and adherence to company policies.

Automated processes

Automating routine procurement tasks like purchase order creation, approvals, and basic supplier communication will vastly improve your efficiency. Manual processes are not only time-consuming but also susceptible to errors and delays. Procurement automation frees up valuable resources, enabling procurement teams to focus on more strategic initiatives while ensuring tail spend management runs smoothly.

Strategic sourcing

Strategic sourcing methodologies, such as category management and should-cost modeling, can identify better value options from fewer suppliers, maximizing return on investment. Even low-dollar purchases can benefit from a thorough analysis of supplier options and optimized spend allocation.

Supplier consolidation

Supplier sprawl is all too common as an organization grows. Reducing the number of suppliers involved in tail spend transactions can simplify management processes, potentially secure bulk discounts, and foster stronger, more collaborative supplier relationships. Fewer suppliers also means reduced administrative overhead and improved supply chain visibility.

Data-driven decision-making

Leveraging data analytics and spend visibility solutions provides invaluable insights into tail spend patterns, enabling procurement teams to identify cost-saving opportunities, categorize spend effectively, and analyze supplier performance. Data-driven insights not only inform strategic decisions but also facilitate continuous monitoring and improvement of tail spend management initiatives.

The best procurement organizations effectively manage their tail spend by combining these essential elements, and many will lean on spend management software to help. See why you stand to unlock substantial cost savings, mitigate risks, and drive operational excellence across your procurement functions.

How do you know what’s simply “spend” and what’s considered tail spend? Some common tail spend examples are office supplies like printer cartridges, pens, and paper clips. It also depends on your industry and department:

• Manufacturing tail spend arises from maintenance, repair, and operations (MRO) purchases like light bulbs, cleaning supplies, and tools.
• Technology companies face tail spend from low-cost IT equipment such as external hard drives, cables, and adapters.
• Marketing departments incur such spend on low-volume printed materials like brochures and flyers.

Other tail spend categories across sectors include workplace services, facility maintenance, and shipping and freight costs.

While individually small, all of this fragmented spending can add up to millions of dollars annually.

To combat tail spend, you have to be proactive. Building out a robust tail spend management framework provides a structured approach to optimize procurement processes, reduce costs, and enhance operational efficiency. Here's how to develop a comprehensive framework to improve tail spend in four steps:

1. Define and categorize tail spend

You’ll want a clear understanding of the types of goods and services that fall under the tail spend umbrella. So the first step is to establish clear criteria for identifying and classifying tail spend within your organization.

Take into account factors like spend threshold, purchase frequency, and supplier type. For example, you might define tail spend as purchases below $10,000 or transactions with suppliers accounting for less than 5% of your overall spend. Data analytics tools can help efficiently categorize tail spend by analyzing purchase data and identifying patterns.

2. Identify and assess tail spend suppliers

Once you've categorized your tail spend, the next step is to identify all associated suppliers, including those outside formal procurement channels.

This may involve analyzing purchase orders, invoices, and expense reports to uncover rogue or ad-hoc spending. After identifying the suppliers, you’ll want to assess their performance, reliability, and potential risks. Factors to consider include on-time delivery, quality consistency, and financial stability. Leveraging supplier relationship management (SRM) software can expedite data collection and analysis and provide insights into supplier performance and risk profiles.

This assessment will help you develop targeted strategies for optimizing tail spend management.

3. Develop tail spend management strategies

With your categorization and supplier assessments complete, it’s time to develop tailored strategies for managing tail spend. Most approaches will vary due to the specific category and supplier relationships, but there are a few options to consider.

One approach is vendor consolidation, where you consolidate purchases with fewer suppliers to leverage greater buying power and enhance vendor management. Implementing corporate procurement cards with spending limits for specific categories can help control and track tail spend more effectively.

For high-performing suppliers, consider negotiating volume discounts or establishing blanket purchase agreements to secure better pricing and terms. Conversely, for underperforming or high-risk suppliers, you may want to explore alternative sourcing options or implement stricter controls.

Using self-service procurement portals can enhance efficiency by allowing employees to easily order pre-approved tail spend items from preferred suppliers, reducing out-of-policy spending, and increasing compliance.

4. Implement and monitor the framework

It’s now time to clearly communicate the framework and policies to all stakeholders, including employees, managers, and suppliers. It starts with training and resources to ensure consistent adoption and compliance.

And how do you know whether your tail spend strategies are working? Establish metrics and key performance indicators (KPIs) to monitor the effectiveness of your tail spend management framework. These may include cost savings, supplier performance, compliance rates, and process efficiency measures. Regular monitoring and analysis will help you identify areas for improvement and refine your strategies over time.

By following these four steps, you'll create a comprehensive tail spend management framework that optimizes your organization's procurement processes, reduces costs, and enhances operational efficiency to proactively improve tail spend.

“We’ve streamlined our management processes across the board. Our executive, sales, procurement, and finance teams have nothing but praise for Brex.”— Arlene Barbieri, Corporate Financial Controller, Medicinal Genomics

Effective tail spend management can unlock significant savings and efficiencies for organizations. By proactively defining, categorizing, and analyzing low-value, high-volume purchases, procurement teams can gain visibility and control over this often-overlooked area of spending.

Implementing a robust tail spend management framework will bring a structured approach to optimizing these purchases. From consolidating vendors and negotiating pricing to leveraging self-service procurement portals and procurement cards, organizations can streamline processes, reduce costs, and mitigate risks associated with unmanaged tail spend.

Don't let tail spend continue to drain your organization's resources. Take action today by exploring the strategies discussed or considering specialized tail spend management solutions. See how Brex's purchase cards with customizable spending limits can enhance your tail spend management efforts in a free demo.