Tags: Supply Chain
Companies of all sizes must carefully monitor spend to ensure they remain profitable.
Whether it is managing large spend with your critical suppliers that provide your production materials or monitoring smaller suppliers of incremental smaller purchases like office and janitorial supplies.
Organizations invest significant time and resources in the oversight and management of their primary suppliers. This strategic allocation of resources to their major suppliers, who constitute the bulk of their procurement expenditure, is a logical approach. These key suppliers often account for just 20% of the entire supplier network.
Regrettably, this leaves the remaining 80% unattended to. Companies are confronted with the challenge of determining where to concentrate their resources and efforts. The remaining suppliers, who are less frequently engaged and involve smaller financial commitments, collectively fall into a category known as "tail spend." Tail spend encompasses purchases with minimal monetary value, irregular recurrence, and an inability to be categorized into broader accounting groups.
The importance of managing tail spend effectively is coming to the forefront of modern business strategies. Failing to manage your company's tail spend appropriately could expose your business to some potential risks that might compromise ongoing success.
1. Price Risk
When there is no clear tail spend protocol in place, employees are often left to their own discretion when making smaller purchases. By reducing price risk through tail spend management, you could see a significant savings when balancing your corporate finances in the future.
Price is rarely a concern when an employee purchases on behalf of their employer, so you could be spending more money than necessary when you aren't monitoring tail spend. No matter how small or insignificant a purchase may seem, it is imperative that employees complete adequate research to identify the supplier offering the most affordable price. Better yet, if they follow an established spend policy with preapproved suppliers, they won’t need to waste time researching. This leads us to our next risk.
2. Time Risk
Time is a valuable asset in any organization. You want your employees to be as productive as possible while on the job and time management is a critical element in productivity.
Efficient tail spend management allows you to collect visible data that can be analyzed to identify low-cost items that are subject to price fluctuations. Tracking price internally can reduce the amount of time it takes for employees to source the most affordable products when making purchases in the future.
The lack of data that characterizes improper tail spend management can tack on additional minutes, hours, and even days to the amount of time that your company spends on procurement each year.
3. Operational Risk
Operational risk is a very real threat to the success of your organization. By not implementing a process for managing small purchases, you have no way of knowing whether or not your employees are vetting these purchases properly.
Your company could be exposed to procurement fraud, a cyber-attack or data breach, or the legal consequences of supplier exclusion. Companies doing business in both the public and private sector must exercise caution when partnering with suppliers.
Only give reputable suppliers access to corporate resources, and only use the products manufactured by reputable suppliers in a corporate setting. Requiring your employees to log and track tail spend can reduce operational risk in the future by ensuring that each supplier you work with is properly vetted and approved.
Fortunately, there are some effective strategies that you can use to help combat the risks associated with improper tail spend management. Implementing comprehensive inventory management, supplier rationalization, and supplier analyses can help you begin to take control of your company's tail spend.
Outsourcing Tail-Spend Management
Since implementing these strategies can be time and labor intensive, many companies opt to outsource their tail spend management to a third-party provider. These providers have expertise in setting up a tail spend tracking system, monitoring procurement activities, and analyzing data to help increase profitability over time.
If you are ready to take control of your company's tail spend, contact Group O, Inc. for help and we will customize a solution for your business.