4-way tail spend optimization

October 17, 2018

All decisions in life are tradeoffs. It could be as simple as going out to dinner with friends versus staying in to save money, to something as important as deciding whether to take a new position at work in a different country versus staying in your current role. To add to the complexity of any decision, there are usually dozens of factors to take into consideration when selecting an option. But to really make it interesting, there are typically several more factors that in-a-perfect-world should have been taken into consideration, but were never considered. The “net-net” of the above is even simple problems can be dissected in an exponential amount of ways. For most people, they prioritize the 3-4 main factors they want to impact the decision, and then act.

Why do I bring this up in a series on tail spend? Because tail spend by nature mandates that employees (procurement and non-procurement) make decisions on over 1,000-10,000+ purchases annually using the same method as you would evaluate “should we go out to dinner tonight.” A key difference is that people struggle with dinner plans even when they know their budget, their friends and the restaurant. Employees are being asked to make the best decision with little to no knowledge on what exactly they’re buying, who sells it and how much should it cost. And most of these purchases are between $500-$250,000 (not inconsequential).

We’ve worked with countless procurement leaders to boil down what tradeoffs and factors they take into consideration for tail spend purchases.

Here are the top 4:

  1. Employee effort needed = time.
  2. Following compliance and/or an internal policies.
  3. Management control & insight to de-risk procurement.
  4. Overall cost savings.

The most obvious tradeoff is time against all the other factors. It requires TIME to solicit additional competitive bids or strongly negotiate purchases for cost savings. It takes time to setup attack plans to ensure and report against compliance and policies, and it takes TIME to setup a repeatable model that collects data and easily identifies trends or risk.

At Fairmarkit, we’ve observed that optimizing 1,000s of purchases in real-time for all for the above factors is beyond human scale. When you start throwing more people to optimize factors 2-4 above, you then dramatically increase the effort needed for the optimal business output. Traditional methods of tail spend management drive you to make sacrifices. Whether it’s going through a time-consuming RFP, losing competition and cost savings with static catalogs or sacrificing compliance and control by just throwing the tail spend challenge over the fence to the business units and end users. All available strategies lack the ability to enable your organization to optimize tail spend.

Expert procurement and supply-chain tips sent straight to your inbox.