Why it’s Important to Address Tail Spend
Tail spend, which is generally defined as the 20% of spend that makes up 80% of a company’s transactions, has long been neglected by procurement. The average transaction value and the sheer amount of resources needed to attack this has made prioritizing tactical and tail spend procurement impossible for most procurement organizations. Instead they are choosing to focus on large, strategic purchases and suppliers. Over the last few years, however, an unstable supply chain, labor shortages and increased cost pressures have shown the risk in ignoring such a large percentage of an organization’s supply base and purchases. Today, global tail spend exceeds 1.8 trillion dollars and companies must develop the necessary tools to best mitigate risk and leverage economies of scale - at a time when resources, both human and capital, have become even more scarce
Most procurement teams are operating by making siloed purchases with significant manual intervention. This leads to issues like:
- Supplier proliferation
- Unmanaged spend
- Increased transaction costs
- Single/sole source awards uncontested
- Cost savings left on the floor
- And much more
All of this can be avoided with better controls on tail spend, and technology that can enable what people can’t do at scale. By addressing tail spend, procurement teams are addressing a multitude of possible procurement hazards like unvetted suppliers, shortages of key (but smaller) goods and services, and overspending. Technological advancements allow departments to maintain efficiency, grow rapidly, identify cost savings, and accurately predict future supply chain interruptions without sacrificing time, money, or quality.
Companies are now realizing that the key to addressing tail spend is implementing the right kind of procurement technology.
What Are Some Drivers of Change?
One of the leading drivers of change for procurement departments is the desire for better visibility and internal integration. Instead of reacting to challenges, companies need a way to proactively manage procurement.
Today, the most commonly used e-procurement tools are financial savings management, spend analysis, and contract management. However, these solutions only offer insights into part of the procurement process. Technology solutions allow procurement teams to obtain the visibility and internal unification necessary to succeed.
Here are some of the main reasons procurement teams are looking to technology to increase efficiency and save on costs:
When a company doesn’t update its legacy systems as it expands, growing pains will start to show. If you keep going to the same set of suppliers, there is a lack of resilience and the supply chain becomes brittle.
For example, it only took one ship stuck in the Suez Canal to create problems for the global economy. Technology gives companies better visibility and control of demand plans. This helps to forecast issues before they arise, so a business can better predict and prescribe outcomes.
As prices continue to rise and inflation trends up, procurement will be further pressed to cut and control costs.
New digital technologies equip purchasing teams with unprecedented ammunition to identify opportunities and deliver bottom-line impact. The more money teams are able to save, the greater value the department has to the overall business.
Up until recently, it was challenging for procurement to have any type of accurate visibility into total spend. The onset of automation, artificial intelligence, and machine learning make this a problem of the past.
Advanced analytical methodologies are leveraged to create a solid foundation of data. This, in turn, can be analyzed through complex algorithms to discover hidden opportunities across multiple levers. When procurement has all the info at their fingertips, they can better negotiate and have access to cost-cutting tasks.
Procurement technology is constantly evolving to accommodate new strategies. Rapid advancements are remodeling supply chains. They are poised to fundamentally change how the purchasing function delivers value.
Therefore, strategic sourcing is more predictive, supplier relationships are more proactive, and transactional procurement is more automated.
Existing procurement is clunky and cumbersome to deploy. It takes multiple teams from tech and different perspectives, but why?
As procurement technologies evolve, the competition gets stiffer. Procurement faces a wake-up as digital transformation changes everything. Legacy systems are not always sustainable due to obsolescence and retiring skill sets.
Best-of-breed systems are emerging that offer improvement over traditional business processes, with minimal disruption. A modern procurement department will need technologies like A.I., intelligent automation, data analytics, and optical character recognition to maintain a competitive edge.