CFOs are increasingly hands-on when it comes to the strategic vision of their companies. Procurement and finance are teaming up more often to align on future goals and the threats that impact long-term profitability. Tail spend, a longtime procurement focal point, has become a rising concern to the rest of the C-suite, particularly the CFO. How can your team better manage, or even fix, tail spend?
With rampant shortages and inflation impacting the economy, departments might be stockpiling small items covered in the tail spend category. In fact, overlooking those items might be disastrous if they’re needed to finish a product before release. Stockpiling and extra spending have become increasingly common. Adding more and more suppliers to ensure a steady stream of small parts and components has also become normal in many organizations and is a leading cause of compliance issues.
Small components and extra suppliers probably aren’t getting much scrutiny in terms of cost and compliance. They’re difficult to see, and therefore difficult to control. But fixing out-of-control tail spend can have a significant impact on cost savings and future proofing supply lines.
The question for strategic thinking CFOs is how.
Defining Tail Spend
Before going any further, let’s make sure we’re all on the same page on the definition of tail spend. Checking the Arkestro glossary (a handy reference tool for all procurement-related terms), here is the basic definition:
Tail spend is an aggregate of small purchases that are typically low value but add up to be a significant cost factor. These purchases are made outside of procurement in other departments, and the data is typically siloed and not easily identified. Tail spend can also be referred to as maverick spend or rogue spend.
Another way of thinking about tail spend is the 80% of transactions taking place for small items like $0.30 screws that cumulatively add up to just 20% of total spend volume. In extreme cases like the automotive industry, splits can be more like 90/10.
Individual Tail Spend Items Can Have an Oversized Impact
Those $0.30 screws could essentially be a rounding error in terms of a company’s total spend. As a result, the odds are high that buying screws doesn’t hit the spend radar. On the surface, it’s not a strategic transaction.
It’s unlikely that a procurement team that’s already stretched thin is going to subject the RFP process for the screws to the same degree of attention that big-ticket items receive.
The odds are that this is a regular transaction buried in a spreadsheet that no one is looking at in any detail, along with what might be thousands of similar tail spend items coming from thousands of suppliers.
However, what is increasingly keeping CFOs up at night is the realization that these tail spend items can have a very oversized impact. For example, what happens when a jet engine can’t be sold to the end customer because the manufacturer didn’t have a stockpile of those $0.30 screws, and the supplier shut down because of a COVID outbreak? Or maybe no one verified that the screws meet new standards. Suddenly, a tail spend item that had flown under the radar with minimal visibility (if any) is having an oversized impact—a costly impact.
This makes tail spend not just an issue for procurement but something the CFO needs to be on top of as well.
The Challenge: How to Fix Tail Spend
You can see how tail spend has the potential to spin out of control and become a nightmare, especially under current conditions. For many companies, tail spend simply isn’t subject to the same process that the rest of procurement adheres to because it’s a small portion of budget and difficult to track. With the potential for thousands of items involved and multiple teams that could be triggering a purchase, the tracking and management of tail spend is a massive challenge for CFOs.
Tracking tail spend manually is simply not possible at scale.
However, despite the difficulties, it’s a challenge they must meet. The question is, how? Resources are limited, information may be siloed, the procurement team is typically understaffed these days, and their focus tends to be on bigger-ticket items.
The Solution to Fixing Tail Spend: Arkestro
The answer to the challenge of managing tail spend and giving CFOs visibility into the process they need is Arkestro.
Using Arkestro to capture tail spend items saves everyone time through its advanced AI and machine learning-driven automation. The CPO and the procurement team don’t need to switch to a new procurement system or methodology. Adding Arkestro into their existing processes and tools will save them time. It will save money. It will help them to achieve their strategic goals. Running tail spend procurement through Arkestro gives the CFO the needed visibility and ensures compliance.
In addition, running tail spend through Arkestro allows the CFO to account for macro factors like supply chain disruption and preferred strategic suppliers in the bidding process. This predictive tail spend is a game-changer and an invaluable capability in today’s challenging business environment.
So, how will you get control of your 80/20 headache? Despite seeming like an uncontrollable low-priority issue, getting a handle on tail spend is worth your effort. Especially when you have Arkestro in your corner. Get a demo from our team to learn how you can tame tail spend.