Spend analysis is key when it comes to reviewing and improving your business’ expenditure. While spend data is commonly generated into spreadsheets, the visualization of spend data is reflected in a spend analysis graph.
Understanding your business’ spend analysis graph can help you identify opportunities to decrease cost while managing your company’s spend in order to remain competitive.
Strategic Spend vs Tail-end Spend
The primary components of the spend analysis graph consist of strategic spend and tail-end spend. Strategic spend typically makes up 80% of total spend and has a smaller pool of core suppliers which make up 20% of a business’ total suppliers.
The rest of the spend analysis graph consists of the tail-end spend of a company. The tail-end spend makes up 20% of the total company’s expenditure. The tail-end portion also accounts for 80% of the total suppliers, which are non-core suppliers.
Tail-end spends can be further segmented into tactical spend and spot buy. Examples of those two segments are explained in this article.
Also in this article, we explore the segments of the spend analysis graph in detail and shed light on why businesses should focus their main efforts on the strategic spend portion of the spend analysis graph
Segments of the Procurement Spend Analysis Graph
1) Strategic spend
Strategic spend constitutes of expenditure on materials that are directly involved in a business’ operation. Strategic spend is typically long-term in nature and requires a high degree of systematic planning.
Elements that go into the planning of strategic spend include identifying the right supplier and negotiating the right price and quantity for an agreed period.
Thus, strategic spend has a more significant impact compared to the other components of spend. Any margin for error can have a large impact on the bottom line of any business.
Therefore, it’s imperative that procurement teams businesses prioritize and pay more personal attention to their strategic spend compared to the other segments in the spend analysis graph.
To put things into perspective, here’s an example:
A fashion company’s main output would be clothing. In order to produce clothes, the fashion company’s strategic spend would consist of expenditure on resources such as cloth, thread and dye.
2) Tail-end spend
Expenditures outside of strategic spend fall into the tail-end spend category. While tail-end spend should be managed, businesses should put their focus into their strategic spend.
Two types of expenditure constitute tail-end spend:
a) Tactical spend
Tactical spend differs from business to business. It’s important for businesses to first identify what’s apart of their strategic spend in order to distinguish their strategic spend from their tactical spend.
Compared to strategic spend, tactical spend is more reactive in nature. While strategic spend activities require more in-depth planning, tactical spend takes place as and when required. If a business requires any additional unplanned material to support their production, it will most likely be a tactical spend.
Let’s revisit the fashion company example who had cloth, dye and thread as part of their strategic spend expenditure. An example of the company’s tactical spend would be any items not listed under strategic spend. It could be clothing tags and hangers.
b) Spot buy
Spot buy refers to one-off purchases that take place immediately. In laymen terms, the definition of spot buy is pretty straightforward. It literally means buying on the spot.
The time-sensitive nature of spot buys is often a result of the urgency of the purchase. Compared to strategic spend, spot buys are unplanned, lower in complexity and are often emergency purchases.
If not monitored, spot buys can contribute to a large portion of a company’s spend. Hence, the procurement department should keep an eye and have parameters in place to avoid any potential overspending.
If the fashion company suddenly decides to have a fashion show, booking a venue and purchasing goodie bags for guests would be classified as a spot buy.
By understanding the segments of the spend analysis graph, businesses are able to gain visibility on their company’s spend and are able to gain insights on areas that need improved cost optimization, especially for their strategic spend expenditures.
Focusing on the strategic spend segment takes priority when it comes to understanding the spend analysis segments.
Businesses should devote most of their time towards improving and managing their strategic spend compared to the tail-end portion of tactical spend and spot buys.
The task of managing both strategic spend and tail-end spend can be a daunting exercise for procurement managers. Although there is recognition of the importance of placing more time towards managing strategic spend, procurement managers often find themselves spending too much time managing their tail-end spend due to numerous tasks involved such as product categories management, ad hoc vendor onboarding and others.
As a cloud-based procurement platform, Supplycart helps businesses manage and give visibility to their tail-end vendors by consolidating orders through a single platform. With Supplycart, businesses can put back time and effort into what matters the most, their strategic spend.