Strategic Sourcing by Managing Tail Spend, Maverick Spend, and Spot Buys
Procurement and purchasing activities and improved spend management have always been competitive factors for an enterprise. Managing key supplier relationships and costs contribute directly to bottom-line profits. Controlling indirect procurement spending can introduce various cost-saving opportunities and help organizations improve their operating costs.
Three areas in which companies try to curtail their procurement and purchasing costs are reduction in spot buys, controlling the maverick spend, and managing tail spend. Each one can be optimized to yield better results for organizations and having a better understanding of what contributes to each can help you recognize the importance of controlling indirect spend.
According to SCM Portal, “spot buying is the practice of buying to meet immediate requirements, rather than for stock or to meet future demand.” Every organization periodically needs to buy items that have not been planned for one reason or another. Spot buying implies that the purchase transaction is initiated only when the need arises.
Spot buys are often conducted by the end-user of the item and not a procurement department professional. Generally, this occurs when a user needs a one-time small order of some item and the terms are often on an immediate payment and delivery basis. An organization might not have negotiated pricing contracts for such recurring items with suppliers.
Xeeva specialists estimate that spot buying amounts to nearly 40% of all indirect procurement spend. It occurs when:
- The purchase is unplanned
- There is an emergency
- The item is inexpensive
- The item is used infrequently – therefore purchased in lower volumes.
- The item is a unique purchase
Capturing spot buy activity as it occurs in a procure-to-pay system ensures compliance with corporate procurement processes. For instance, Xeeva Spend Analytics surfaces the recurring items that were identified as spot buys and gives its customers proactive and actionable insights to bring these items under contract with negotiated pricing – resulting in savings.
Now that we know what spot buying is and how it occurs, let’s take a look at what maverick spend is.
Maverick spend is the purchase of goods and services from suppliers outside the pre-established procurement policies defined by a company.
In maverick spend, a company does not benefit from the negotiated preferred pricing contracts with suppliers, quality standards, negotiated volume discounts, and supplier credibility. These items usually have negotiated pricing contracts but due to lack of enforcement of controls or knowledge within the organization, users still procure items outside the contracts. Maverick spend has more to do with users not following a defined process than with the item or supplier.
Maverick spend occurs when:
- Procurement is decentralized
- Purchasing controls are lacking
- Purchasing processes are lengthy or there’s unfamiliarity with them
- There’s a lack of product standardization
- A purchase is made outside a preferred channel or supplier
- Purchases do not follow contract terms or negotiated pricing
- Purchases are considered too small to matter
When companies make purchases outside of the agreed contracts with suppliers, it often eats into the profits of the business as prices are not negotiated. Visibility into maverick spend through Xeeva’s Spend Analytics creates a vehicle for recognizing where it’s happening, understanding the root causes, and helping to drive better compliance and cost savings.
Infosys defines tail spend as “spend for any firm, which is not actively managed in all the spend categories and may have an impact on the firm’s financial performance due to its impact on SG&A and COGS.” These purchases are often not effectively managed by procurement as they are considered too small or non-strategic.
Tail spend occurs in the following cases:
- Low volume purchases
- One-off or infrequent purchases
- Low-value purchases
Tail spend is different for each organization, and therefore you should identify your organization’s tail spend so procurement can take necessary steps to optimize it.
Tail spend accounts for 80% of total transactions and makes up 20% of a company’s total spend volume. Using digital solutions to manage tail spend, companies can cut their annual expenditures by an average of 5-10%, which is a significant amount, especially for global companies with billions of dollars of total expenditures.
Oftentimes what is viewed as tail spend can be due to either part proliferation (i.e. many part numbers for the same part), causing the organization to not identify it as core-spend, or the parts should have been brought under contract for non-tail spend (i.e. core products) and weren’t. By providing visibility into tail spend, Xeeva Spend Analytics empowers organizations to gain control of the tail and manage their spend to the true tail.
Why it’s important to control all classes of spend.
Many issues are created within an organization by not controlling spot buying, maverick spend, and tail spend but some key issues include:
Loss of savings due to non-negotiated pricing
Companies are paying higher prices for items that can very likely be obtained much cheaper at negotiated pricing. Controlling spend by pre-negotiating prices often results in savings of 20-30% of total indirect spend by an organization.
Loss of product quality control
Not only is the company paying a higher price for items, but they could also be getting an item of inferior quality. This can negatively impact product quality and can harm the company’s reputation.
Potential compliance issues in regulated industries
Compliance risks are introduced when the quality and number of suppliers are unmanaged. It’s easy for contracts and payment terms to conflict, introducing compliance risks.
Loss of productivity
Both the buyer and requester’s time are wasted on unnecessary transactional buying activities that are not really adding value. Organizations can lose as much as 40% in buyer and requester productivity by chasing these purchases.
Supervising these classes of spend with the same rigor as core spend is important for organizations. Maverick spend, tail spend, and spot buys often go unnoticed by procurement and purchasing departments, and controlling them can introduce many cost-saving opportunities. Managing sourcing, regularly renegotiating with suppliers for better pricing, consolidating purchases with key suppliers, and watching spend on freight can lead to almost 15% savings in indirect spend. Having visibility into spend data is a great starting point for companies that are looking for indirect spend savings.
Xeeva’s digital spend management solutions provide greater visibility into different aspects of indirect spend, lead to strategic sourcing initiatives, and help manage end-to-end procurement. With valuable insights into indirect spend and tools to strengthen supplier relationships, you can gain immediate ROI and savings opportunities to directly impact profitability. To learn more about Xeeva’s spend management solutions, click here.