Reducing the Hidden Costs of Tail Spend in Hotel Procurement
For those not directly involved in purchasing decisions or analysis, the concept of ‘tail spend’ may be a foreign or seldom discussed term. For hotel procurement officers, it’s often the bane of their existence. That’s why we’re keenly interested in platforms and systems like Amazon Business that can help hotel teams mitigate the challenges of tail spend that purchasing managers contend with each and every day.
The underlying concept that can make tail spend such a nuisance is the 80/20 rule, also known as the Pareto principle. Where it applies here is in saying that 80% of a procurement team’s headaches can come from 20% of expenses.
Past articles in this campaign have explored what hotels can do to save more and ramp up efficiencies in the ‘strategic spend’ domain which often amounts to 80% of total dollar costs allocated to a handful of preferred suppliers who can deliver wholesale prices on the basis of bulk and regularly scheduled purchase orders. Think commonly consumed or perishable items with high throughput like toilet paper or popular food ingredients.
These will always be the priority to manage because they are absolutely necessary for normal hotel operations and because their expense volume is highest. Plus, by way of the Pareto principle, more prudent controls in strategic spend will result in reduced costs with that 80% basket, thereby representing huge bang for your buck in savings.
But with modern systems in place to automate recurrent orders and analyze the supply chain for incremental gains, strategic spend can be reined in to the point where these costs reach an efficient equilibrium. Tail spend, on the other hand, can become a massive time sink for hotel managers outside of the procurement department who are responsible for authorizing infrequent or one-off purchases, as well as for people on the purchasing or accounting teams who then have to reconcile all the bills or centralize the data for analysis.
And that’s really where the opacity comes into play. It’s far easier to see on a P&L how to line up revenues from rooms or ancillaries with their operational expenses – namely, COGS, waged labor and administrative costs kept each associated department. It’s significantly harder to evaluate all the undistributed, small-dollar costs from a time management perspective.
Whether these are office supplies, marketing spend, insurance, team travel, equipment rentals, temporary labor, new software installations, unanticipated repairs or other innocuous expense spend, the 80/20 rule dictates that these will comprise 80% of the total time devoted to purchasing-related tasks for only 20% of the total expenses.
Hence, any form of business process automation will really help to smooth out the intangibles that come along with major time sinks like those associated with the itemization of all that tail spend. Notably, tail spend management amounts to busywork that distracts from the deep work that will advance organizational goals. As an example, if a procurement officer has to devote erratic or intermittent time intervals to reviewing tail spend, they won’t have as much free time to block off for the focused examination of strategic spend accounts that may lead to substantial cost savings. Missing the forest for the trees, as they say.
Hence, establishing parameters for bulk buying within specific areas of tactical or marketplace spend, having more empowerment or flexible policies around departmental purchases under a certain threshold and centralizing purchases under one platform for greater transparency are all worthwhile objectives to help rein in the time that various team members must devote to managing tail spend. And as for the 80/20 rule, this principle applies to many other facets of a hotel’s operations, so give it some more thought when or if you have the time.
