Tail spend management is challenging. Every Aerospace and Defense organization has some level of non-optimally managed tail spend. It’s nearly impossible to avoid. But while these costs are usually considered minor and insignificant, data says otherwise. Simply put, tail spend is a 1.8 trillion dollar opportunity in the United States – a number that’s quite significant, indeed.
Tail spend embodies the classic Pareto Principle, where 80% of your purchases are tail spend but only account for about 20% of the total dollar amount spent. The Institute for Supply Management estimates that about 17.2% of total revenue goes to indirect spending. For a $10 billion organization, this means that about $344 million is tail spend.
For too long, organizations have married to the idea that tail spend activity is too complex to track and manage. This has a lot to do with the nature of tail spend – high transactional, low value spend that is often loosely unaccounted for. VirtuTrax is making a business case that managing tail spend deserves a place at your management and control table, and our platform makes it easier than ever to make it a priority.
What Is Tail Spend Management?
For aerospace manufacturing companies, tail spend management is the proactive and strategic approach to managing an organization’s small parts and indirect consumables expenditures. In most organizations, tail spend represents a significant portion of the total procurement budget – often 10 to 20 percent or more.
Despite its size, much tail spend is often managed inefficiently or not at all. This can lead to higher costs, missed opportunities for savings, and increased risk. A comprehensive tail spend management program can help organizations realize significant savings and improve their overall procurement and supply chain performance.
Where Does Tail Spend Occur?
Common buys, such as packaging, office supplies, and facility maintenance products, can also be considered tail spend since these are purchased frequently. Many organizations don’t think to negotiate lower prices with vendors or bundle these commodity categories with single-source providers.
Organizations often overlook smaller value purchases made outside the company’s primary vendors. This can be costly, as tail spend can account for a significant portion of an organization’s total spending.
Why Tail Spend Management is So Challenging
There is too often a lack of visibility into tail spend activity. Trying to navigate scattered data from spreadsheets and email strings can make it hard to get a handle on where money is being spent and identify areas for improvement. Tail spend purchases are frequently made without sufficient data or planning. To meet tight deadlines, buyers rush to make quick decisions leading to waste and inefficient spend. There is little time to compare prices or assess quality before purchasing.
Finally, managing tail spend requires buy-in from multiple stakeholders across the organization. This is arguably the biggest challenge, as developing and implementing sticky processes to curb tail spend takes time, effort, and creativity.
How VirtuTrax Provides a Better Path to Tail Spend Management
There’s no doubt that aerospace companies can save money and valuable time by better managing their tail spend. There are many ways to do this, including centralizing procurement, negotiating contracts with suppliers, and outsourcing certain categories of services and product management.
VirtuTrax is helping to shift the narrative by making tail spend less intensive to manage. By centralizing supplier and spend data, A&D organizations are better positioned to track supplier performance metrics, avoid production line interruptions, and realize savings – all while reducing unnecessary burdens on procurement teams.
To see how to apply VirtuTrax to your tail spend management strategy, contact us today for a demo.