For many procurement teams, keeping tail spend under control is a massive challenge with a lot of pressure tied to it. While tail spend is a natural byproduct of procurement teams focusing solely on strategic categories which often represent ~80% of the spend and are often “well-managed,” the remaining 20% “tail” is often poorly managed due to a lack of resources, outdated processes, and poor visibility into existing inventory levels and total value on hand.
Digital transformation has been a key initiative for many companies for quite some time but was significantly accelerated with the onset of the Covid-19 pandemic. As a result, several purpose-built solutions have become available and now provide valuable opportunities for organizations looking to address key areas, like MRO and indirect materials, contributing to the tail spend challenge. Boston Consulting Group has found that “firms that use digital to manage tail spend can cut their annual expenditures by 5% to 10%, on average—a significant amount, especially for global companies with total expenditures in the billions.”
However, areas of sourcing and operations like indirect materials and MRO are often ignored and unmanaged. This ultimately leads to costly one-off purchases and for high-volume, perceived low value purchases with a proliferation of suppliers. Overtime, organizations often end up sitting with millions of dollars in excess inventory with very little knowledge of what’s actually available and where. And the cycle continues.
Significantly reducing tail spend often requires a lot of manpower management that procurement teams simply don’t have. The issue is further compounded by data challenges brought on by years of M&A activity, disconnected systems of record, and siloed departments that all result in poor data quality. Historically, without the tools now readily available, it was difficult, if not impossible to tell what materials and spending activities are “duplicative” of one another and are causing the proliferation.
Traditional approaches to solving these challenges include master data cleanup activities that are only part-time fixes. It’s like cleaning your room and thinking that you’re done for the next year or that a one-time “process” will keep your room clean forever. In the end, very little, if any, improvement occurs. Organizations must now consider new opportunities for improvement and leave this archaic mindset behind.
Three Steps for Reducing Tail Spend
#1: Identify your sources of tail spend by reviewing your processes & system
This can seem daunting, but it doesn’t have to be done all at once. Nor should it. The best approach is to start small (one division at a time) and carry learnings to other divisions. Creating a sustainable process that can scale overtime is key to long-term success.
#2: Organize your data
SKU consolidation will go a long way here as it is often the main culprit for duplicate and excess materials. For example, “safety gloves, sfty gloves, sfty gl. and s. glv.” are all the same thing. You know that, and your team knows that, but your ERP doesn’t. As a result, we often hinder the procurement process with multiple SKUs for the same item.
Establish material taxonomy. By standardizing material categories or groups, you’re less likely to encounter rogue spending and an exhausting catalog of suppliers. Furthermore, this standardization will help with onboarding new team members and keep governance in place as existing members seek new opportunities or eventually retire.
Normalize your supplier base. Analyze and go after your biggest opportunities for consolidation of spend. Follow this up by monitoring predefined KPIs related to tail spend. In the end, your normalization should result in something like:
- Consolidate to 1-2 strategic suppliers per category
- Consolidate Materials categories that will help define form, fit, & function
- Reduce out of contract spend and instantiate conversation with existing/new suppliers
#3: Use new technology solutions to streamline, support, and scale the aforementioned processes
Thanks to modern solutions, cleaning your data is no longer required to get started. Advancements in AI and ML allow you analyze and glean insights from your data as it currently exists. Not only does this show you where the bulk of your tail spend occurs, it can also reveal hidden improvement opportunities for other areas of improvement like network spend aggregation and material sharing. So toss the spreadsheets and let the algorithms do the work. Not only will this expedite the SKU consolidation process, it will facilitate the other strategies listed above.
While benefits of reducing tail spend will continue to manifest themselves as you scale divisions, the most prominent ones will certainly include overall better spend management across the organization. As strategic supplier relationships are formed, standardization and governance will support long-term relationships that allow all parties to thrive.
From a day to day standpoint, simplified supplier management will improve speed and ease of receiving, putaway, management, and use for operations teams. Procurement teams will see improvements as well in areas such as sourcing, account payables, and supplier management. In the end, the entire organization benefits from better material management and a lighter balance sheet.
But none of this can be accomplished if you keep taking the same old approaches. Recent and future disruptions constantly remind us that change is constant, but new technology can help. Investing in purpose-built solutions to manage key areas of your supply chain has never been more important, yet many companies aren’t moving fast enough to adopt the capabilities they need to keep up. Until they do, tail spend and the excess MRO inventory will continue to plague businesses.
Learn more about how a purpose-built materials intelligence platform can differentiate your procurement and operations.