How to stop tail spend
The more suppliers you have with small dollar spend amounts, the longer your tail spend.
Tail spend. It refers to lower value non-recurring purchases that are often made outside the scope of existing contracts, via p-cards or without purchase orders. It can cost your company a lot of money both from paying higher prices for goods and services and for time spent by your accounting staff to track and process this spend.
Want to figure out where tail spend is occurring in your organization? According to Spend Matters, you need to take last year’s spend by supplier and graph it on a histogram in decreasing order. Put the supplier with the most spend on the left and those spending the least amount of money descending to the right.
Hint: The more suppliers you have with small dollar spend amounts, the longer your tail spend. When you go through this exercise, you are likely to find that much of your tail spend is in the indirect spend category, which is rife with what has been termed “dark purchasing.” This is the shadowy area where items purchased cannot be easily justified by capital outlay or by material inventory.
Identifying tail spend is the first step to gaining control over it, but you may have to take some advice from the B2C market — specifically with what’s called “guided buying.” This involves connecting people to your virtual catalog of preferred suppliers that they can purchase products and services from. Part of the goal would be to reduce the number of suppliers that account for a small percentage of what is spent. In other words, what do you do about the 85% to 90% of suppliers that account for 5% to 10% of spend?
By guiding people to preferred providers that you have vetted and have set up purchasing agreements with, you will eliminate much of the maverick off-contract spend and still allow staff members to have some input over which suppliers they purchase from. The goal is to create a simple buying experience that still allows you to take advantage of volume discounts, favorable contract terms, and more attentive suppliers (since you will be concentrating your spend).
Grab hold of your tail spend now to make it stop wagging your organization.