Part 1 of this blog discussed how to identify if you have tail spend problems and what the scope of those problems may be. Dealing with it starts with looking at your vendor list.
Too many vendors means too many issues
Look at your vendor list. Are there too many falling under these low-value, non-recurring transactions? Could you consolidate these vendors to create a smaller list of preferred vendors? Doing so would not only reduce the number of vendors; it would also give you greater leverage since you would be able to offer a greater volume of purchases to the vendors chosen. There are a number of problems that follow with too many vendors:
- The possibility that many suppliers may not fall under the preferred list, meaning they may not meet company standards and KPIs.
- Too many transactions which translate to too many invoices and ultimately higher costs and too much time spent by employees approving and paying these invoices.
- When so much time is spent with so many suppliers for so many low-value purchases, your most important resources…your people…are strained and underutilized for more strategic tasks.
- Savings are lost when lower volume per vendor means less possibility for early pay discounts.
When do you have a tail spend problem?
- When two-thirds or more of your suppliers supply only 5 percent of spend
- If less than 70 percent of orders are negotiated by procurement
- If fewer than 50 percent of transactions are with preferred suppliers
Use teams and technology to gain control over your tail spend.
There are two issues that create the problem of tail spend to begin with. First, a low priority for indirect spend management within the business is the most commonly cited impediment to organizational management of that spend. This problem is closely followed by the organization lacking resources to effectively source indirect programs. And this stems from the fact that for still too many organizations, procurement is looked upon as a tactical, not a strategic, function. In order to gain control over tail spend, procurement must follow certain steps:
- Identify uncontrolled spend areas
- Create a plan to prioritize and address those areas
- Assemble a budget
- Appoint someone within procurement to oversee that budget
- Select suppliers that suit your corporate goals (and your customers)
- Negotiate contracts
- Process all procurement through a single, streamlined payment portal
A procurement team should be tasked with managing and controlling tail spend. But the ability to do that is hampered if you do not avail yourself of automation technology. Automation addresses an organization’s inability to capture and quantify the multitude of purchases that are made every day, both direct and indirect. Companies can waste hundreds of thousands to millions of dollars annually on uncontrolled tail spend; however, work stream-specific automation solutions can reduce noncompliant purchases by up to 90 percent.
Without automated, electronic indirect spend controls in place, purchases can’t be efficiently monitored. As a result, there is no means of quality control and measurement. Plus, due to the nature of the purchases, delivery is usually not captured in your ERP system and key data that could be used in forecasting and analytics isn’t generated. Technology will also help in negotiating supplier contracts as all parties will have visibility into contract terms and pricing. That will not only add accuracy, it will eliminate time-eating disputes over late payments and exceptions. An automated solution should also include an analytics function that will enable procurement to look directly into purchasing and deliver actionable intelligence on organizational deficiencies.
“I can save HOW MUCH?”
Visibility, accuracy, control: in the end, it all boils down to dollars and cents. And those dollar figures are impressive when you implement automated, paperless processes and well-negotiated contracts. The Hackett Group estimates that by managing tail spend better, companies can realize an average savings of 7.1 percent. Even a five percent savings on tail spend can be the equivalent of a 10 percent increase in net profit. It’s time to gain control over your tail spend. This is one tail that you don’t want wagging your company’s profits.