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December 17, 2017
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Procurement Priorities

Now's the time to manage "tail spend"

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By managing their companies' smaller, low-dollar purchases, procurement leaders can better achieve their larger, strategic priorities.

Procurement teams that strategically source 80 to 85 percent of their companies' purchases are hitting a critical metric that measures their performance: spend under influence. Now, they're turning their attention to that remaining, and sometimes neglected, 20 percent of purchases known as "tail spend."

Is it worth devoting significant procurement resources to managing these often smaller, low-dollar purchases? According to the Hackett Group, the answer is yes. The consulting firm believes that managing tail spend will help procurement address its larger strategic goals. The Hackett Group's "2016 Key Procurement Issues Study" asked procurement leaders at 180 companies with $1 billion in annual sales worldwide to list their priorities for the coming year. The great majority—85 percent—of the procurement leaders who participated in the study said that reducing and avoiding costs was among their top priorities. Another 81 percent said elevating procurement's role to trusted advisor at their companies is important. Third on their list was that critical metric, increasing spend influence, with 76 percent saying it's a priority.

Managing tail spend should help procurement tackle all three of these priorities. The Hackett Group estimates that by managing tail spend, procurement leaders can help reduce costs by 3 percent or more. It also says that managing tail spend is a way for procurement to increase its influence on, or involvement in, the company's purchasing. And, perhaps more important, tail spend management can help to streamline processes and free up category managers to work on more strategic purchases. All of these benefits should help procurement elevate its role in the company.

Two approaches

Chris Sawchuk, a principal and global procurement advisory practice leader at The Hackett Group, says procurement leaders can approach tail spend in two ways: quantitatively or qualitatively. They can add to the 80 percent of spend they influence by taking on neglected spend categories, or they can look at categories they're already involved in managing and determine whether they are extracting all the value they can from their sourcing. For example, perhaps their sourcing decisions only lead to lower costs but they could also be adding value by collaborating with suppliers on such activities as simplifying the transaction process.

Both approaches, however, require procurement to segment the company's spend, and that takes resources. Unfortunately, procurement professionals, like those in other departments, often feel strapped for time.

The good news is that the "2016 Key Procurement Issues Study" also shows that procurement's operating budgets will rise 1.1 percent in 2016—not a significant amount, but still helpful. Moreover, managing tail spend may be well worth the resources required, since doing so helps the procurement function reduce cost, elevate its role, and increase its influence. And once procurement leaders have a system in place to manage tail spend, all it should need is some regular maintenance. With resources freed up, procurement leaders can get on with addressing other priorities they say are becoming more important: improving agility, managing continuity risk, and tapping supplier innovation.

Susan Avery is a business journalist with 30 years of experience covering the procurement profession.

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