Updated: November 8, 2022 - 6 MIN. READ
An effective procurement system involves managing all aspects of purchasing and spend for a business, especially the building maintenance, repair, and operation industry. While high-value and mid-value purchases typically receive the most attention, managing tail spend is one of the most effective ways property managers, building owners, and contractors can reduce costs. But what is tail spend, and how do you manage it?
What is tail spend?
Tail spend is typically defined as all spend that is not strategically managed or the bottom 20% of a company’s spend. These can be thousands of SKUs used daily as well as infrequent, or immediate need purchases across disparate groups of categories where management has very little visibility into the various suppliers being used. For building maintenance, tail spend includes replacement parts, materials, supplies, uniforms, and tools that are traditionally below the procurement level threshold for scrutiny. However, the difficulties associated with aggregating this data and centralizing tail end purchasing make it challenging to maintain sourcing compliance and increase savings.
Companies maintaining buildings typically have limited resources to manage the purchasing of these items, so the costs tend to creep out of control. Most facility managers focus on direct procurement, which includes sourcing materials and components necessary for routine building maintenance. However, indirect procurement, such as purchasing equipment and parts needed for spontaneous repairs, is often left unmanaged, despite being an essential part of property managers’ and building owners’ annual expenses.
Think of unmanaged tail spend like this: Your technicians routinely buy safety equipment, tools and replacement parts as needs arise, but since suppliers have not been stipulated and contracted discounts have not been negotiated, where they buy is based entirely on individual preference and convenience. As a result, thousands of purchases are taking place annually at near retail prices.
Depending on the size of the operation, the purchases are also not exclusively low-value items for building managers. A tail spend purchase can also include higher-value equipment that doesn’t follow standard procurement policies due to time constraints, often greatly increasing the total amount of unmanaged, inefficient purchasing.
Why is tail spend unmanaged?
Companies typically don’t manage tail spend even though it’s a great place to save money. Why? We already mentioned convenience, but there are several more reasons tail spend goes unmanaged:
- Managing tail spend can be difficult and time-consuming. A ladder breaks, so the maintenance technician drives to his favorite supply house that always has perks. He’s not thinking about who has the cheapest ladders or even if he is, finding the cheapest price can be quite tedious. Further, asking why ladders aren’t being purchased from strategically sourced suppliers is not something anyone is talking about, leaving little accountability measures in place to drive procurement compliance.
- Employees aren’t aware of how much their purchases are costing the company. Employees are often uninformed about how much more their unplanned purchases are costing the company. It’s important to make sure your employees are educated about the benefits of a centralized procurement process so they will be more willing to participate in the future.
- Employees are stretched too thin. The typical procurement department spends most of its time measuring the 10-20% of suppliers that represent 60-80% of the spend. Put simply, the department is already maxed out managing these high-dollar and higher volume spend items. Many companies just don’t believe the ROI from managing the purchase of low-dollar items will be worth it, despite the plethora of evidence that proves that managing tail spend can significantly increase overall efficiency in companies’ procurement processes.
- It’s difficult to track purchases effectively. With most of the tail spend purchases on third-party websites or supply stores, it’s challenging for a facility manager to keep track of spending. The one-time or infrequent purchases don’t happen often enough for a building manager to include them in an optimized catalog.
- It doesn’t meet the spending threshold. When a facility manager has limited resources, they may set a threshold on an item’s value. If the purchase doesn’t meet the threshold, there are no internal procurement management rules or policies. However, the facility manager risks missing out on large savings by ignoring low-value purchases.
- Urgency limits options. What if it’s 100 degrees outside and an air conditioner goes out? You and your building engineer are hearing from irate tenants. If your technicians don’t have a fast way to digitally locate parts and pricing, they will go wherever, and pay whatever is required to get what they need.
If any of the reasons above ring true in your company, don’t worry. There is a simple solution for all of them: pre-negotiate prices.
How do you manage tail spend?
The bottom line is once you identify areas that aren’t being managed, they’ll continue to be mismanaged. Negotiating set special pricing agreements with suppliers and educating employees as to why these suppliers are the sole resources for specific items are critical steps building owners and property managers need to take in order to optimize their procurement processes.
Even though it is difficult to predict when you’ll need to make purchases from these suppliers, you can control how much it’ll cost you when the time comes. This brings stability to otherwise chaotic circumstances by providing an efficient purchasing protocol where pricing and service levels are negotiated and controlled in advance of unexpected service or maintenance requests.
Spend management tools help to solve the organizational problems associated with managing tail spend in the building maintenance, repair, and operation industry. Many managers don’t have the resources to manage procurement spending effectively on their own, but, with the help of business analytics and data, this optimization process can be outsourced to procurement management software.
Procurement platforms take the tedious organizational steps out of managing tail spend. A digital buying assistant will negotiate with suppliers for you and make spending adjustments. Adding this to your building maintenance processes can improve spend control and visibility across your procurement process. Once you have gathered spend data, the cloud-based supply chain management software will reveal optimizations that a facility manager can implement.
What are the benefits of managing tail spend?
When you focus on improving tail spend management, you can greatly increase savings and efficiency by streamlining the procurement process and increasing purchasing transparency, allowing for deeper analytics on spend data at all levels. By analyzing spend data, a facility manager can uncover recurring purchases that don’t contribute to the bottom line and even identify mistakes like duplicate purchases and missing shipments.
While the typical motivation for managing tail spend is cost savings, it will also boost efficiency and productivity. Effective tail spend management helps to optimize the supplier base, which reduces the number of contacts a facility manager must juggle. A facility manager can focus on contracts that add the most value by aggregating spend and centralizing supplier relationships.
Lastly, managing tail spend can reduce overall risk for facility managers. An efficient spend management process will offer transparent information on all purchases made, allowing you to track transactions and prevent unmonitored, inefficient spending.
The most efficient way to keep track of this information is by classifying spend data and emphasizing spend awareness. While classifying the spend data, a facility manager should standardize the purchase dates, currency, and supplier information. With standardized processes, building managers and property owners can make more informed decisions.
What are the challenges of tail spend management?
For many facility managers, managing tail spend seems like a daunting and expensive task. Procurement professionals typically dedicate the most resources towards optimizing high-value and critical purchases. However, when focusing on tail spend management, the procurement department needs to adopt new policies and procedures.
Depending on the organization's size, it can be difficult to introduce new policies. As a facility manager, property owner, or building owner, it’s your responsibility to educate employees and implement new policies, technology, and tools in order to prevent rogue spending, improve compliance, and prevent unapproved, inefficient purchases.
If you have a smaller organization, limited resources results in procurement departments only focusing on 80% of spending. Facility managers without a large procurement department can’t take the time to focus on the hundreds of SKUs associated with tail spend management. With limited staff, you need to utilize a procurement management platform to receive logistics optimization models.
If you don’t have the resources to dedicate to negotiating set prices with tail spend suppliers, consider a solution like Raiven.
Raiven Can Help
Raiven serves multifamily properties and property owners by providing the lowest prices on equipment, parts, and maintenance supplies as well as a purchasing platform that makes buying fast and efficient. Key benefits include:
- Pre-negotiated discounts of 7-25%+ from big name suppliers like Ferguson, HD Supply, Grainger, Graybar, Office Depot, and more.
- Supply chain alerts for price and product availability changes on the items that matter to you most.
- Private marketplace houses all your preferred suppliers in one location for easy access to your discounts. No more bouncing around websites comparing prices.
- AI-powered purchasing tools that find the lowest prices even when employees shop outside your network.
Raiven is your one stop to save time and money. Ask our clients Core Realty, Lyon Living, or Oaks Property Management what we’ve done for them. Visit Raiven to learn what we can do for you.
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