Tail spend is the term for minor expenditures that businesses incur outside of their primary direct materials and services spending. Although these purchases may appear small in isolation, they can amount to a significant proportion of the total procurement spend by companies. Control over tail spend is crucial in helping to reduce costs and improve financial management. The tail spend management system is a software program that gives visibility and control to businesses over such small purchases. The following are the main benefits of introducing a tail spend management system.
1. Increased Spend Visibility
One of the main problems that firms have in dealing with tail spend is poor visibility on where all the money goes. However, tail spend which refers to small dollar miscellaneous purchases is highly decentralized in nature. Employees make these purchases from different departments through various means such as corporate credit cards, purchase orders and expense reports. As purchases occur in many ways, it becomes almost impossible for the procurement and finance teams to have a full picture of all tail spend. They do not have a single point of view to see the entire tail spend activity.
This is the value of a tail spend management system. It is connected to many source systems such as ERP, expense reporting tools and payment gateways. This system then gathers and consolidates information regarding all tail spend purchases from these various sources. It then provides this consolidated data as an interactive dashboard. Procurement and finance teams get more visibility from this one dashboard. They can now easily identify which employees or departments are spending how much money on what items or categories.
2. Streamlined Approval Workflow
Tail spend approvals are usually done manually through email or other makeshift processes in the absence of a system. It causes time wastage, mistakes and inadequate supervision. Tail spend management solution automates the approval process. It sends purchase requests to the relevant approvers according to pre-defined rules. The approvers can also digitally access requests and either accept or reject them using a simple interface. This simplifies the process and adheres to company policies. It also gives an audit trail of who approved what so accountability is transparent.
3. Enhanced Spending Controls
One of the difficulties in dealing with tail spend is that, when purchases are decentralized, it can be difficult to ensure spending controls and limits. A tail spend management system enables you to set employee, departmental, supplier and category-specific spending limits and restrictions. For instance, you can limit some employees from making purchases over $500 without further approval. Or limit purchases to pre-approved vendors. The system will identify requests that do not comply with set controls for review before approval. This helps contain rogue and non-conforming expenditures.
4. Supplier Management
In the case of tail spend, businesses inevitably are left with a longtail comprising one-off suppliers. This complicates and time-consuming supplier management. A tail spend management solution has an approved supplier list. The system offers employees a choice of pre-agreed-upon suppliers. This relies on the company’s existing contracts and approved rates. It also streamlines the onboarding of new suppliers and maintaining supplier data in one single repository.
5. Reporting and Analytics
The analysis and reporting that can be acted upon are essential for understanding the tail spend behaviour and finding opportunities to improve them. A tail spend management system offers advanced reporting and analytics features. Managers can produce spend reports based on category, employee, department or supplier and other characteristics. The system also does advanced analytics such as spend benchmarking and trend analysis. It is this level of reporting visibility that allows to detect compliance issues, maverick spending and unnecessary suppliers as well as opportunities for cost savings through negotiation or consolidation.
6. Employee Self-Service
A tail spend management system provides a user-friendly and self-service portal for employees who need to make purchases. Employees can log in, browse the approved supplier catalogue, add items to their shopping cart and place purchase requests with required approvals – all from their desktop or mobile device. This simplifies the buying process and makes it more convenient for employees. It also makes sure that requests are filed correctly the first time to expedite processing.
7. Supplier Enablement
The system not only controls buying activities within the organization but also allows for supplier involvement. Suppliers can be given access to maintain their own catalogue and prices. They get e-purchase orders and can track the order status. Such levels of integration and automation enhance the experience for both buyers and suppliers. Other advantages for suppliers are an enhanced view of a company’s purchasing requirements and opportunities to provide more value-added services.
8. Spend Compliance
It is a challenge to ensure compliance with procurement policies and regulations, especially for tail spend which has been decentralized. However, a tail spend management solution imposes regulations and approval workflows to aid in compliance. For instance, it can limit purchases to approved suppliers who have the necessary certifications. The system also creates an audit record of all the purchasing activity for compliance auditing. Automating the process of routine compliance checks such as supplier master data validation also minimizes human effort. All in all, it contributes to the better governance of tail spend spending.
9. Cost Savings
Despite the value that comes from improved visibility, controls and efficiencies alone, a tail spend management system can also provide real dollar savings. Businesses can negotiate better prices by consolidating suppliers, taking advantage of existing agreements and contracts, and gaining insights that help to optimize spending. By reducing maverick spending on unnecessary items, costs are cut. Companies can typically cut 5-10% of their addressable tail spend through the implementation of a good solution for managing Tail Spend.
Final Thoughts
Despite the fact that tail spending may look insignificant alone, it can actually constitute a considerable part of procurement expenditure for numerous companies. A supplier performance management system offers the necessary controls, visibility and automation to help businesses bring this decentralized spending under control. With the help of these processes, compliance and insights that are actionable businesses can effectively manage costs, control risk as well as optimize their tail spend management. The strengths clearly show why such a system should be implemented as an investment in any procurement organization.
