Today’s procurement departments have many priorities to ensure they are contributing to the profitability of their enterprise. For the 100+ procurement leaders recently surveyed for a report published by Spend Matters, the top priority is to reduce tail spend.
Because tail spend happens outside of contract spending, it is much more difficult to control. It typically accounts for only 10 or 15 percent of an organization’s total spend, but involves about 90 to 95 percent of its suppliers. These spot buys are usually smaller purchases, but the combined spend can account for large portions of procurement budgets. When tail spend purchases add up, they can lead to a fragmented and inefficient procurement operation.
Identifying the sources of tail spend
As noted in the study, some of the main sources of tail spend include:
- One-time purchases for needs that aren’t met by existing preferred suppliers. These purchases often fall below thresholds for formal procurement processes, which are sometimes as high as six to seven figures, and the loss of negotiated savings on those amounts can be significant.
- Off-contract “maverick” spending. These purchases bypass the corporate contract process and add new suppliers to the mix. They can result in the loss of negotiated savings and the added expense and risk of managing additional suppliers.
- Purchases made on commercial cards (such as P-Cards or travel cards). These types of purchases are often reimbursed through employee expense reports with limited visibility.
- Invoices received without POs. The study showed that roughly 10 percent of total indirect spend comes from POs created after receiving invoices.
The report identified the use of online marketplaces such as Amazon Business as a promising strategy for addressing these challenges, particularly for the “long tail” or small-dollar off-contract purchases. Online marketplaces have the potential to increase process efficiency, user satisfaction, spend under management, and savings.
Combining consumer ease with business buying to manage tail spend
With the right technology, organizations can use a “guided buying” approach, which applies principles of “guided selling” from the B2C space to business procurement. Guided buying enables procurement professionals to understand what employees need and connect them to a virtual catalog of preferred sources for those goods or services. It provides a personalized environment that presents the most relevant items to a user based on past purchases, as well as on company preferences and restrictions. Guided buying is a two-way approach, providing channels of communication between buyer and decision makers, and centralizes data for effective spend visibility and analytics.
By offering a consumer-like guided buying experience, organizations can bring more spend under management without disruptive changes to how people work. At the same time, the solution needs to provide business-friendly features. Procurement leaders in the study identified several priorities that they consider “critical” or “very important” for an online B2B marketplace, including:
- Contract-specific pricing and terms
- Integration with procurement applications
- Rich reporting and analytics capabilities
- Access to approved suppliers and items
- The ability to qualify, certify and onboard suppliers
A marketplace must support capabilities like these for businesses to adopt them at scale. Organizations should consider their own specific priorities and evaluate marketplace solutions based on those needs.
The benefits of an online marketplace
A true marketplace-based approach doesn’t only differ in the user experience—it offers a unique set of benefits that are different from traditional procurement solutions. Companies should choose marketplaces that maximize the following traits:
- The broader the selection of products available to employees, the more you can consolidate spend, because they don’t have to go outside the system to get what they need. Organizations should look beyond standard tail categories such as office supplies and MRO to identify whether a marketplace provides access to all the items employees need. They also need to understand how they can guide employee purchases based on corporate preferences and rules.
- An open marketplace leverages competition to provide choice and drive down prices. The marketplace should make it simple for buyers to compare products and quickly make purchasing decisions.
- Effective marketplaces are transparent, giving buyers the ability to instantly evaluate suppliers, identify whether products are in stock, and see the true cost of an item. Organizations need easy access to data to drive continuous improvement through analytics.
Much of the challenge of managing tail spend is in giving people a solution they want to use—one that empowers them to find and get what they need quickly and easily.
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