Basic Principle of Tail Management :
The tail spend term basically comes from the Pareto principle which elaborates that 80% of the spending will be bought from 20% of the suppliers and also 80% of suppliers will account for the remaining 20% spend across the wide range of the categories.
Tail in terms of spending can be termed as 80% of the spending comes from the 20% materials and 80% materials constitute for 20% spending which is generally categorised as long extended tail.
(PROACTIS , 2012)
The nature of the spending and the percentage of the spending on the tail generally differ from organization to organization but will almost be similar. The basic characteristics that can be seen in tail in these organizations are
• Tail consists of large number of categories of materials which will exclude the direct or major materials.
• Disproportionate level of the spending.
• Suppliers that no one in procurement has worked with which will lead to maverick spend in tail.
• Non compliance of the spending is rampant.
• Many categories of the materials will be of low value in the tail but will generally have high transaction.
Tail spend in a company is the biggest source of the incremental savings that are readily available. If you stack up the individual spend on each supplier in the tail taken together the tail will be the biggest supplier. In an economic and business environment where the top management leave no stone unturned for the cost reduction the tail spend can definitely help to reach the savings desired. The companies can turn the tail spend into an operational advantage by managing the tail. Managing the tail properly will help in
• Cost of the procurement operations decreases considerably.
• The spend will be reviewed and mon...
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...s and to identify the strategies as there are wide categories of commodities that has to be managed.
This model is developed typically for the organizations initially starting with tail spend assessment project which spans around for 6 months where the main scope is to get the spending in tail and evaluating scope of opportunities and then prepare a business study comprising of savings, investments and operating models and also options for outsourcing in managing the tail spend. Effective tail spend management in this model requires 5 key steps or processes to be studied right from analysing to the pay cycle.
• Analyse- cleansing and classification of spend data
• Source – Category commodity Specific Sourcing
• Contract- Standardize all the existing contracts
• Procure- effective procure to pay process establishment
• Pay - Check on the spending.
(M.K.Deepa, 2013)
Cost management plays a major role when maintaining profit margins. Management must be able to find in which areas of a business costs must be reduced and the consequences that such reductions have in the overall company. In some situations management must change the way the work is being done in order to decrease costs while in other cases changing one supplier for another might be enough, in both situations a tradeoff will occur and the consequences will impact the company as a whole.
[5] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 17, Standard costing and variance analysis, p. 425-436
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