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Indirect tail spend matters in procurement strategies

Indirect tail spend represents around 20% of a company’s spending. Learn more about tail spend challenges and how to gain significant savings.

Indirect Spend

In this article, we will: 

Companies that efficiently monitor, control, standardise and optimise their indirect spend (or indirect procurement) can realise significant savings on products and services, often in the region of 10-25%, not least by reducing maverick spending on tail-end items. That’s according to a recent report from McKinsey, which noted that indirect spend has been growing by 7% a year since 2011. More importantly, businesses with a specific indirect spend management strategy that includes tail spend could gain a distinct competitive advantage. 

Chief procurement officers – and chief finance officers – tell us they are battling VUCA (Volatility, Uncertainty, Complexity and Ambiguity), particularly with inflation, supply chain disruption and more corporate social responsibility legislation. Understandably, they want to control procurement costs and process costs, particularly spending on critical supplies that directly affect the price of their products or services. Yet, it is all too easy to overlook tail spending on indirect supplies when the business doesn’t prioritise it. Now is the time to change that.   

Direct, indirect and tail spend - what’s the difference? 

Generally, indirect spend simply means the cost of materials and services used to run the day-to-day business. It includes high-value, procurement-managed expenditure on things like fleet vehicles, facilities management, machine hire and professional services. Direct spend, on the other hand, tends to be on things that a company incorporates in the products or services it sells – the goods that go out the door. 

Broadly speaking, supply chain expenditure follows the Pareto principle, in that 80% of spend (direct or indirect) goes on 20% of orders – the high-value strategic business inventory where procurement teams have the greatest responsibility. Tail spend covers all the remaining tactical items, sometimes called C parts, which also tend to be mainly indirect spend items. They are often infrequent, low-value purchases, although sometimes high-volume, made by non-procurement professionals scattered throughout the business. Although this tail spend only accounts for around 20% of total business spend, it invariably accounts for some 80% of business supplies, and the number of suppliers is correspondingly high. 

Unite graphic showing a general idea of division between strategic spend and tail spend
The Pareto principle or "80-20 rule" states that 80% of outcomes are due to 20% of causes

What constitutes direct and indirect tail spend can vary enormously between companies and industries. For example, according to Boston Consulting Group “a turbine manufacturer might have more than 130,000 such items, while a bank will probably have far fewer”. Indirect tail spend is a subset of both indirect and tail spend and can cover anything from pens and paper or toner cartridges for printers, to refreshments for meetings, office supplies, furniture for home workers, or speciality chemicals and machine tool parts.

Indirect tail spend often includes infrequent purchasing of basic commodities that many businesses need to operate but which procurement teams don’t have the resources to manage. That lack of central oversight is partly because controlling this indirect tail spend tends to run into diminishing returns. Essentially, for many businesses, the increased process costs associated with trying to manage these complex and fractured spending patterns quickly outweigh the amounts saved on the actual purchases.

Instead, responsibility for purchasing these everyday items often falls to departments and even individuals throughout the business. There are invariably no standardised contracts or approved catalogues, and no unified companywide procure-to-pay processes for this tail spend. That means there is little control over how much they spend on items (so long as it’s under pre-set spend thresholds), what they buy, and which suppliers they use. This tends to result in ad-hoc ‘maverick buying’, with employees simply buying what they need from local shops or whichever online site offers a convenient delivery option.

Managing indirect tail spend and maverick buying

Many procurement professionals regard this sort of maverick buying of indirect tail-end inventory as unavoidable, incredibly complex to manage – and, too often, not worth worrying about. Yet the costs, in financial and efficiency terms, as well as potentially to the company’s brand, can be high. Not least because failing to manage such spending can undermine compliance with company policies on everything from sustainability and competitive tendering to money laundering and modern slavery.

The fact that buyers invariably don’t use approved suppliers with pre-negotiated prices and defined catalogues for indirect tail spend causes significant management challenges. This fractured buying from largely anonymous sources results in a lack of structured data and visibility of an easily audited procurement trail. That makes it hard for procurement professionals to analyse indirect tail spend patterns and identify cost-saving opportunities through, for instance, bulk buying and internal distribution.

At the same time, businesses often incur much higher than necessary process costs for handling indirect tail spend. This can be because it generates non-standardised invoices from multiple suppliers or because someone has to manually cross-reference and enter data from company credit card bills to allocate the spending to appropriate cost centres. It becomes even more costly and complex when maverick buyers cover the costs on assorted payment cards, expense forms or even petty cash.

Business benefits and competitive advantages

The bigger your company and overall spend (direct and indirect), the greater the value of your remaining 20% of indirect tail spend. Companies that ignore this are essentially leaving money on the table. Yet by applying the latest technologies and optimising processes, procurement teams can often realise savings that directors might otherwise have to find through cutbacks to other parts of the business.

Example: If your total business spend is €1 billion, roughly €200 million will be tail spend. Assume potential savings of 10% on that tail spend. Failure to capture those savings is like ignoring €20 million.

Graphic showing business spend and tail spend
A generic example showing business spend

The practical benefits of indirect tail spend management include enforceable supplier contracts, reliable deliveries and returns policies, streamlined workflow, more control over negotiated prices, and greater consistency and compatibility of products across the business. Tighter, more reliable supply chains help ensure product availability and so reduce business interruptions and employee downtime as they search for replacement items. Process improvements also deliver procurement efficiencies, not least from fewer suppliers and fewer disputed invoices, while automation reduces mundane tasks and so improves job satisfaction.

At the same time, businesses can use an indirect tail spend strategy to maximise their return on investment (RoI) in new technologies. They can do this through better integration of management reporting tools with procurement platforms and contract management systems to produce more data rich insights and forecasting. They can also use the automation of repetitive tasks to reduce human error (particularly in data transcription) while freeing up valuable employees to perform more important roles.

Bottom line, customers and regulators increasingly expect businesses to meet higher environmental, social and governance (ESG) standards. That is particularly the case for big B2C brands. A fully-fledged indirect tail spend strategy can help ensure buyers comply with company policies in areas such as ethical sourcing, fraud prevention and legal responsibilities to prevent modern slavery and sanctions busting.

Like thousands of businesses and public sector organisations, we at Unite use the Mercateo Marketplace and Procurement Portal for our tail spend. It provides us with broad and depth assortment from a diverse network of suppliers to source from, helps us to streamline our procurement process and optimise our indirect spend strategy.

Graphic showing 7 steps to develop an indirect tail spend strategy
Workflow to help increase your spend visibility

Develop an indirect tail spend strategy in 7 steps

Advances in digital technologies now allow procurement teams to take more direct control of indirect tail spend. Integrated systems automate and simplify workflow to help increase spend visibility, and with greater transparency comes greater accountability across the business. At the same time, improved data analysis tools (increasingly powered by AI for deep insights) can help procurement professionals gain a better understanding of procurement patterns, potential efficiency gains and future needs.

1. Use data cleansing and data categorisation

Before you can implement your procurement strategy, you need to define what counts as indirect tail spend and maverick spending in your organisation. That requires good procurement data, which is why the first step is to clean the data you have so you can categorise your spend more accurately, including identifying unclassified and misclassified expenditure. This process will improve visibility and understanding so enabling better informed decisions.

2. Analyse spend by item, category, supplier, end user and purchase volume

The more accurate and detailed your indirect procurement data, the easier it becomes to analyse and identify potential cost savings and process improvements. Using this data to create graphic visualisations of spend by business unit or department can be an effective way to help stakeholders see the issues and opportunities. This can motivate them to control spending and the number of suppliers, particularly when they see direct benefits for their teams (such as freeing up resources for more important things).

3. Risk management analysis

This can cover various business risks, including business continuity and brand equity risks. For instance, you might want to identify financial and reputational risks associated with the sourcing of products, the handling of hazardous substances, or a product’s ‘carbon footprint’ (particularly if you are measuring and reporting on Scope 1, 2 and 3 emissions as part of your ESG standards). You can also use your buying data to identify potential supply-chain interruptions and opportunities for securing alternative sources.

4. Get SMART: Define KPIs

Once you start identifying opportunities in your data for better indirect tail spend, it’s important to consider how to get stakeholder alignment and buy-in. One obvious route (see point 6) is to involve people early in the process so they can help shape the strategy and see how it will benefit them. Another is to use accurate data to define SMART (Specific, Measurable, Achievable, Relevant and Timed) key performance indicators (KPIs) and broader shared objectives that can drive cultural and behavioural change.

5. Audit of detailed digital data trails

To develop a digital approach for managing indirect tail spend, you will need to conduct an audit of all your e-procurement related systems, including your use of digital catalogues, e-invoicing, and the whole procure-to-pay process. So you identify opportunities for automation and seamless data integration and can reduce costs by up to 30-40%. Consider using a marketplace that consolidates invoicing and payments for a single point of purchase, providing a digital data trail for easy expense reconciliation.

6. Work with stakeholders

As we’ve mentioned, stakeholder buy-in is essential, as taking control of tail spend, particularly maverick spending, often appears like reducing options and autonomy. A deep and broad online market for tail spend needs can leave people with the same degree of discretion while ensuring accountability and compliance. In return, they will benefit from improved supplier service levels, including on delivery windows and return options, and being confident in the quality of the products and how they buy. We all know that a satisfied (internal) customer is the best business strategy of all.

7. Monitor progress and iterate

Developing your strategy is just the start – the hardest part is your sustained implementation of it. There is no single switch you can throw to arrive at a best practice, instead it takes a continuous process of re-evaluation and iterative development to digitise, optimise and streamline internal procurement processes. One way to do this is to roll out your new approach to a single department or business unit first, learning from the process as you go. Once other business colleagues see it working, they will be more likely to embrace the change.

Key takeaways

Don’t ignore the 20% of tail spend because it is complicated. An effective indirect tail spend strategy can help you reduce costs, improve efficiency, and free up resources for other business initiatives. As with Boston Consulting Group’s research (see above), Unite’s own research for our Mercateo B2B procurement marketplace found that digitalising procurement processes can reduce purchase-to-pay costs by up to 42%.

At the same time, it can make your business more agile, so better able to respond to changing economic conditions. This partly comes from the opportunity to build stronger collaborative networks with innovative suppliers and gather accurate, data rich market insights. That data can also help your finance colleagues improve their business forecasts, cash flow management, and use of working capital.

Effectively, this sort of strategy development can enable procurement teams to reinforce their position as trusted advisers within their business. Discover more information and insights like this for procurement professionals on our website.

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