While Tail end spend Management has become one of the priorities for all big organizations across the world, in India, it is yet to be recognized as a tool for a cost-saving opportunity in procurement. Traditionally, Organizations Procurement division has been focusing on identification of cost saving opportunities & management of all A-class spend i.e. Top 80% of spend representing only 20% of the supplier base. In the process of managing A-class Suppliers, the companies have left the horde of C-class Suppliers forming the tail end of the spend unmanaged.
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It is difficult to find any company managing their full spend properly & strategically. Probably in last decade or so, due to increasing transparency & recognition of procurement as a hardcore strategic activity, the Companies have been able to manage their A-class procurement forming 70 to 80% of their total spend. Now, these companies have started planning to shift efforts on managing the remaining spend which is forming 20-30% of the total Spend, with the following objectives:
a. Increasing visibility/ Transparency of low value spend.
b. Elimination of transaction cost by reduction in many transactions.
c. Reduction of procurement team’s cost.
d. Process improvement & data quality improvement.
e. Safeguarding against business risk by increasing contract coverage.
f. Managing eccentric spends & preventing frauds.
Convolution of Tail End Spend Management
However, as companies are trying to manage the tail spend, they have realized that they can’t use the same traditional tactics as they were using for A-class spend.
Another complexity of tail spend is that there are much more suppliers involved than the suppliers involved in A-class spend. The spend is very diversified & there is a lot of individual buying happening involving end users from Accounts, HR and so on, who are not professional buyers. Until the total cost is less than the defined upper limit then these individual buyers can place orders with whom so ever & however they want.
Apart from the above-mentioned challenges, another challenge involved in managing tail spend is weak data quality, wherein either the name of suppliers is incorrect or item description is incorrect/incomplete or weak data capturing resulting in duplication of data, the presence of junk characters etc.
The risk involved in Tail End Spend
With unorganized tail end spend, nobody generally considers aspects like - who the supplier is, what price is he charging, the credentials of suppliers etc. exposing them to many risks. The following can be some of the risks of unplanned tail end spend:
a. Negative Impact on Company’s Reputation
Unorganized Spend might result in companies doing business with the suppliers that violate legal provisions and are not complying with CSR principles which will bring a negative impact on the company’s reputation.
b. Procurement of items at the higher rate.
Since most of the tail end spend is done by the end users, who are not professional buyers, there is a risk of them paying more for a material as usually they do not go into the details of pricing and are only concerned to ensure that the purchase price is less than the threshold price, as approved.
c. Best Practice Risk
When companies allow end users from distinct functions of the business to buy from whomever they want, there is a possibility that they will just buy from a personal connection, or from a supplier with whom they have a historic relationship. This might result in the company paying more for an item or breaching of fair practice regulations.
Companies who are failing to address these convolutions and risks involved are leaving a lot more on the table than they think.
good one
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