At companies of all sizes, a significant amount of money is spent on procuring non-strategic or unmanaged supplies spanning categories such as office, IT peripherals, maintenance, repair and operations, food service, janitorial, and more, every year. Often known as “tail spend,” this can be costly and time-consuming to manage, as it requires the oversight of hundreds, or even thousands, of suppliers. This piece will explore the tactics you can deploy to tackle tail spend, the advantages and disadvantages of each, and the role technology is playing in purchasing behavior.
The True Cost of Tail Spend
Tail spend often includes purchases not currently influenced by the procurement organization. Meaning, that any spend not strategically sourced or purchased within the parameters of an organization’s defined procurement policies is categorized as tail spend. But cost is not only measured in dollars spent. There are “soft” costs of tail spend. We’ve all heard that “time is money,” and in many cases employees waste precious time by spinning cycles finding, vetting, and purchasing the items they need.
Fortunately, tail spend can be managed. Many world-class procurement organizations have streamlined their internal processes, capitalized on existing savings opportunities, developed advanced strategic sourcing programs, and consolidated at least 80 percent of spend down to 20 percent of their suppliers.
Common Approaches to Curbing Tail Spend
For an organization to appropriately address tail spend challenges and have success managing compliance, they can deploy the following tactics, each of which have pros and cons:
- Tactical buying desks: This strategy routes tactical buys through a team of professional buyers to improve and consolidate the process, while still enforcing the required controls. However, despite the fact that many tactical buying desks are now outsourced, they are still expensive to maintain and manage and value add is limited. The key benefit here is control.
- E-Catalogs: Despite being information-forward, eCatalogs are a much bigger undertaking than most organizations realize, as well as being costly to maintain and update on a routine basis. A large number of eCatalogs also lead to a confusing user experience as each eCatalog has its own user interface such as navigation and search.
- Purchasing Cards: We’ve seen purchasing cards (or “P-cards”) leveraged more in the past few years as organizations look to reduce invoices, collect rebates and streamline transaction data. P-card success varies based on individual programs, the biggest drawback is often a lack of visibility into what is spent as the line item detail often does not reveal the actual item.
While these legacy tail spend tactics have been popular with procurement professionals, technology is continuing to evolve and introduce new mechanisms to further help manage tail spend.
Key Advantages of an Online Marketplace
Gartner predicts that by 2022, 75 percent of all B2B tail spend goods will be purchased via an online marketplace. But what, other than the ease of access and the intuitive nature of purchasing, has made the marketplace the preferred platform for procurement professionals?
Perhaps the most obvious of all marketplace benefits is the breadth and depth of selection available. This variety of choices is what attracts most organizations to online marketplaces to begin with, it allows organizations to reduce the number of suppliers they deal with.
One example of this is Vacasa, the largest, full-service, vacation rental company in U.S. With more than 10,000 properties under management, each with their own unique purchasing needs, Vacasa relies on an online marketplace to quickly fulfill orders and restock rental properties, allowing the company to provide top quality care for its customers’ homes.
"Our company is growing 60 percent year-over-year, which means the number of transactions and purchases we make are also growing exponentially. After implementing marketplace technology, we have been able to automate purchasing processes without losing the quality or speed that our customers deserve,” says Bob Milne, COO at Vacasa. “As we continue to grow, marketplace technology will enable us to better control our tail costs and improve our purchasing experience as a whole.”
Ideally, a marketplace has competition. Competition provides value to the customer not only by offering choices across a spectrum of categories and items, but also allows for multiple suppliers bidding on their business. Competition ensures that customers are getting the best products, at the best prices. The negotiation is happening automatically without costly resources involved, it is part of the marketplace concept.
With increased transparency into company spend, procurement professionals can make more informed choices about the products they buy and the suppliers they work with to better ensure organizational compliance and enforce purchasing policies.
Some of the marketplace features that assist with increased transparency include:
Analytics and spend data: Many marketplaces today offer analytics dashboards that depict employee spending across the organization, in charts and graphs. These analytics drill deep into detailed spend data, supplying the procurement professional with additional data to easily reconcile business purchases and provide more accuracy in expense reporting.
Machine Learning: Machine learning is a part of online marketplaces in order to provide a meaningful and streamlined experience for customers. For instance, machine learning may be used to help match previous customer selection with an alternative that offers a better price or functionality. This level of technology delivers an added layer of value in the marketplace experience.
Compliance: Business-specific features address baseline requirements, such as tax exemption, centrally-managed shipping options, and policy enforcement capabilities such as Guided Buying (for example defining company standards that get featured in the search results), and specific pain points such as credentialed supplier (for example minority or SMB businesses) filtering.
At most organizations, tail spend is an undermanaged and underserved purchasing category; but, it can end up costing the organization significant amounts of time and money. With an online marketplace, minimal investments are required, savings are generated through supplier reduction, procurement professionals gain visibility and establish controls around their organization’s tail spend and employees get access to the ease of ordering their used to from purchasing at home.
Tail spend is the last frontier in expanding procurement’s spend influence within an organization — and technology is leading the way.