Not the 30% to 40% of spend that it probably is (as this is the amount of tail spend in the average organization)!
The reason it’s so large is that, in most companies, there is strategically sourced spend and tail spend when, in fact, there should be (at least) three categories of spend: strategic, managed, and tail — and, if the managed spend is large enough, you can break out a 4th category of tactically procured spend. Each of these categories is defined as follows:
This is the spend that is high volume, high dollar, or strategic to your organization. While there will usually be a dollar minimum relative to your total spend (i.e. 5M to 50M depending on organizational size), if the part is critical to production of a primary product or service, if it can only be sourced from one supplier (hopefully split across multiple locations), and if its absence would bring an entire multi-million production line to a halt, then it would be include, even if it was only 1M annual spend).
More generally speaking, a product or service fits in this category if the return expected from a strategic sourcing exercise (which costs manpower and technology) will be considerable relative to the cost. (I.E. an ROI of 3X to 5X.)
This is where you put the categories or buckets of spend that are not quite big enough to undergo a strategic sourcing event (as the expected return is low relative to the effort of a manual strategic sourcing event) but where not managing the spend leads to a considerable loss when you look at an average of 15% or more overspend in tail spend.
For example, in a big multi-national, 1M is not large when there are 100M categories, but 15% overspend on 1M is 150K, that’s enough to pay the salary and overhead of another junior buyer.
This is where you do mini-events and/or take steps to make sure Procurement is efficient and cost-effective throughout the category.
Good examples are
- low-value non-electronic office supplies and MOR, where you can integrate the punch-outs of two or three leading, generally cost-efficient vendors, into a federated search catalog which forces the organizational buyers to procure the lowest cost item in stock that meets the requirement without supervisor oversight (and keeps costs close to market, vs. 15% above)
- recurring tech-support services, where you can integrate master rate cards from local vendors and just have the users select a vendor with an approved rate card to perform the service (and push all spend through the system)
- one-time event spend, where you bundle up as much of the spend as possible and push out a standardized RFI to an event organization firm who makes money by aggregating event-related spend across their clients, negotiating sizeable discounts from venues and services providers, and passing those savings on to their clients in exchange for management fees … while you won’t see the full 20% they negotiate once you deduct the management fee, you might still see 10% of it, and that’s savings to you
If a category of spend is large enough that an auction or (multi-round) RFI will save money, but not so large that the savings are enough to waste a buyer’s time on a strategic sourcing event or tactical procurement event, then you can push that spend to a platform with modern automation and assisted intelligence that can automate the RFI or auction for standardized goods and services.
If the goods and services are market standard, or you have fully defined specifications that have been vetted and manufactured multiple times without issue, if you have a set of pre-approved suppliers, if you have price history and market data, why not just automate the entire process with bounds and checks?
These are true small, one-off, purchases that can’t be combined into a managed (or tactically procured) category and are truly not big enough to waste the valuable time of even a junior buyer on.
This should be less than 10% of your spend at most, and, in reality, with the low-cost, low-effort of automated tactical procurement in newer platforms, as well as the guided buying features of modern federated catalog platforms, should be less than 5% of your spend. A modern organization should not be overspending by more than 0.5% of its total spend (which is an acceptable margin of spend error), not the 4.5% to 6% or more it is typically overspending on the tail when 30% to 40% of the organizational spend is unmanaged.