There's no shortage of writing on tail spend, on the compliance and risk case for visibility, and on the value procurement leaves untouched. We agree with all of it. This is a story about what happened when one organization finally got visibility into the spend it had written off, and found the opposite of what everyone expected.
The use case
A multinational company with more than 30 manufacturing locations across the globe, 20+ source systems (ERPs), and over 100,000 part numbers on direct spend alone had built its own four-level spend taxonomy. A few years back, it began allocating that taxonomy, by hand, across its key suppliers' products and services.
The outcome covered less than a third of suppliers and their associated spend. The procurement team had worked for over three years to maintain that scope and barely added anything significant, held back by time and resource constraints and, in the CPO's words, a "lack of energy and passion to do the endless number crunching."
The general feeling was that the rest was tail spend, not worth the time and effort. But leadership, looking at the sheer volume left unclassified, was convinced there was untapped potential, and went looking for help to explore it.
- 30+ manufacturing locations and 20+ source systems (ERPs)
- 100,000+ part numbers on direct spend alone
- A homegrown 4-level taxonomy, allocated manually
- Less than 1/3 of suppliers and spend ever covered
- The remainder dismissed as low-value tail spend
The mission
Our mission was to capture all spend in one place without introducing yet another IT project, and to help the team look at what they'd built through a different lens, so it could be refined and simplified. Last but not least: to create full visibility into the entire scope of spend, using the organization's own taxonomy.
How we did it, in three weeks
Using Mithra's drag-and-drop feature, the procurement team loaded every ERP extract into our cloud and generated a holistic spend view in a matter of days. From there, the raw data was parsed and cleansed automatically and reviewed only by exception, the step many teams avoid, and the one that makes trustworthy classification possible.
In parallel, reviewing and refining the current taxonomy was a must. We call this the taxonomy health check. Our machine-learning models handed the team a list of suggested imperfections in their homegrown tree, which spanned four levels and 434 unique branches, a complex structure even on the direct side. Once the team reviewed the flagged items and applied the suggestions, the improved taxonomy was locked as the scope.
Finally, a series of hundreds of machine-learning models was designed and assigned to classify all in-scope spend, at an overall confidence level of 98%. Each category team reviewed the proposed classifications by exception and applied business rules where needed.
The result
For the first time, the procurement team had access to an untapped ocean of classified spend, without doing the heavy lifting, in less than a month. But the outcome was nothing close to the initial expectation: spend with truly transactional suppliers was actually quite low.
of suppliers inside the uncategorized spend were strategic or critical segments, and they represented over 80% of the total uncategorized spend.
This was completely unexpected, and came as a shock to the procurement team. Across categories, the concentration was striking: in almost every one, the top 20% of suppliers accounted for 80% or more of spend, and the uncategorized bucket behaved exactly like the strategic categories, not like a long, harmless tail.
The team's first set of actions was to go back to those suppliers and review terms and contracts. A good portion of the additional spend was either services that had never been part of the original taxonomy, things the company didn't realize it was buying, or new business handed to existing suppliers without ever being categorized.
The category team now has over $300 million in additional opportunities in its pipeline, and an engine that keeps the spend pipeline maintained.
That makes this group heroes, especially in today's market dynamics, and they know they have a reliable engine handling the maintenance of their spend pipeline. They're now fully focused on working cross-functionally to realize that value, on both the top and bottom line.
Takeaways
You can't value what you can't see
You'll never know what value is under the hood of your tail spend until you have visibility into it. Volume alone is a poor proxy for importance.
Taxonomy is the foundation
Taxonomy development and maintenance is key, otherwise you'll be shooting in the dark, and every downstream decision inherits the uncertainty.
Let technology do the crunching
Let the right technology work for you instead of pushing tedious work onto your teams and disengaging them from the purpose. Empower people to focus on high-value activities.
Last but not least, have a chat with us, and let us inspire you.