Tail Spend Consolidation: Benefits and Constraints

Sep 30, 2022 | Leadership diaries

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Sep 30, 20223 min read

Tail spend consolidation offers cost savings, improved efficiency, and reduced complexity. By consolidating tail spend into larger categories, organizations can negotiate better terms, streamline procurement processes, and establish a data-driven approach to managing this component of their spend. However, organizations should also consider potential risks and take a proactive approach to mitigate them.

Tail spend is a term used to describe the last 5-10% of an organization’s indirect spend. Although this small proportion of spend is often overlooked, it can represent a significant opportunity for savings and improved efficiency. Tail spend consolidation is a process used to better manage this component of an organization’s purchasing and can lead to substantial cost savings and operational improvements. 

Exploring the Financial Benefits of Tail Spend Consolidation 

Tail spend consolidation can result in significant cost savings. By consolidating tail spend into larger spend categories, organizations can benefit from economies of scale and increased purchasing power. This can lead to greater negotiation leverage with suppliers and improved pricing. 

Furthermore, tail spend consolidation can help organizations to identify and eliminate unnecessary spending via increased visibility into their spending patterns and identification of areas where they can reduce costs. This can help organizations to streamline their operations and ensure that they are getting the best value for their money. 

Reducing Complexity and Cost with Tail Spend Consolidation 

By consolidating tail spend into larger purchasing categories, organizations can reduce the complexity of their supply chain and procurement processes. This can lead to greater efficiency in purchasing, as well as fewer order delays and reduced touch points with suppliers. Additionally, organizations can benefit from improved cost visibility, as they are able to more easily track their purchases and identify potential savings opportunities. 

Tail spend consolidation also helps organizations to better manage their supplier relationships. By consolidating orders, organizations can negotiate better terms with suppliers and reduce the number of suppliers they need to manage. This can lead to improved supplier performance and better overall supplier relationships. 

Optimizing Savings Opportunities Through Tail Spend Consolidation 

In addition to cost savings, tail spend consolidation can also improve an organization’s purchasing power. By leveraging its purchasing power, organizations can gain greater negotiating leverage with suppliers and increase the likelihood of achieving better pricing. Additionally, organizations can improve their overall value proposition to suppliers by purchasing larger volumes of goods, leading to more favorable terms and conditions. 

Tail spend consolidation can also help organizations reduce the number of suppliers they work with, which can lead to improved supplier relationships and better communication. This can help organizations streamline their procurement processes and reduce the amount of time spent managing supplier relationships. Furthermore, tail spend consolidation can help organizations reduce the risk of fraud and other unethical practices, as fewer suppliers means fewer opportunities for unethical behavior. 

Establishing a Data-Driven Approach to Tail Spend Consolidation 

In order to take full advantage of the benefits of tail spend consolidation, organizations must establish a data-driven approach to managing this component of their procurement process. This includes collecting and analyzing data on supplier performance, analyzing spending patterns to identify cost savings opportunities, and leveraging technology to automate and streamline processes. By taking a data-driven approach to tail spend consolidation, organizations are able to ensure that they are getting the most out of their tail spend dollars. 

Potential Drawbacks to Consider and Hedge Against 

Organizations should also consider the potential risks associated with tail spend consolidation. For example, consolidating tail spend into larger purchasing categories can lead to increased supplier concentration, which can create a single point of failure if the supplier is unable to meet the organization's needs. Additionally, organizations should ensure that they are taking into account any potential regulatory or compliance issues that may arise from consolidating tail spend. By taking a proactive approach to managing the risks associated with tail spend consolidation, organizations can ensure that they are able to maximize the benefits of this powerful tool. 

FactWise S2P optimizes direct materials spend for global product manufacturing companies. It provides holistic supplier insights, improves efficiency via automation and unlocks savings potential to drive bottom-line impact across multiple categories of spend. We are committed to generating win-win outcomes for buyers and suppliers globally.  

About the Author

Stawan is the founder and CEO of FactWise. Before founding FactWise, Stawan was the NA TMT-Procurement Leader at McKinsey. Passionate about procurement, Stawan has 15 years’ experience in enabling clients of all sizes to achieve business impact via procurement.


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