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In-house Tail Spend Management Outsourcing Using AI Tools

by Ddivya Kumar , Senior Research Analyst, GBS- Procurement and Finance

23 June 2019

Abstract

In the era of outsourcing tactical procurement activities, performing tactical tasks in-house/in shared service centers (SSC) using advanced systems and achieving equivalent results can showcase the efficiency of the organization's procurement process. A stand-alone tactical team that can handle all transactional and operational procurement tasks in a global in-house/in-SSC setup is vital to clearly differentiate and define the roles and responsibilities of each full time employee (FTE) in the team. However, this team does not necessarily work under the strategic team. Strategic and tactical teams should be viewed like two sides of the same coin, working together to achieve the company's goals.

This article throws light on two key aspects: What does a best-in-class in-house tactical team look like? And how can organizations with an in-house tactical team compete with other organizations that outsource tactical procurement, ensuring equivalent performance and results using automation and artificial intelligence (AI) systems and tools?

Key Highlights

In best-in-class companies, in-house tactical sourcing is carried out for spend values of $6,000–$30,000. It is the sourcing process for standardized requirements and low-value items, and the major focus here is on the commercial details.
The cycle time of tactical sourcing is a maximum of 20 working days.
Metrics to assess the effective management of tail spend is a critical part of the program. This helps to observe the results and benefits gained, which were not measured previously.

How Do Companies Manage Their Tail Spend?

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Organizations are identifying solutions that can bring back undermanaged spend within a centralized view by adopting purchasing cards (58 percent), which can help in consolidating buying by departments.
Another common method is through eCatalogs, which has been implemented by half of the procurement groups (49 percent) to manage buying requests that might otherwise be executed without consulting the procurement department at all.
Twenty five percent of procurement groups are looking at outsourcing providers to help manage their non-contracted goods purchase, utilizing external technology and expertise to control wasteful and hard-to-track expenditures.

Tactical Operations: In-house/SSC vs Outsourced

Most companies with global operations in the CPG, pharma, and manufacturing industries have their tactical buying workload managed centrally by a central tactical sourcing team or shared service center, separated from the strategic sourcing team.

Description	Adoption level of best-in-class companies across industries: Medium to high	Adoption level of best-in-class companies across industries: High
	Model 1	Model 2
	Centralized in-house team / shared service center	Outsourcing Company
Activities performed	Centralized tactical sourcing team to handle all non-core, niche, and one-time category purchases and catalog management	Non-judgment-intensive, less strategic, and non-core categories, along with transactional and repetitive activities that consume time, resources, and effort are delegated to a third party
Pros	Allows the strategic sourcing team to focus on core activities Increase of 30–40 percent in efficiency through standardization of tactical buying procedures and procurement systems/tools Ability to handle huge volumes of requests and support users across regions Access to improved pricing by bundling demand from multiple business users across regions Remains within the Procurement Organization’s control Cost effective setup: Ideal for the long term	Ensures huge savings in terms of cost, time, and process improvements Leverage high expertise from a best-practice perspective
Cons/Challenges	The effort required to actively manage it in-house is a roadblock	Perceived loss of control Not a cost-effective solution for the long term: outsourcing companies’ FTE costs are high
When to consider?	When tail spend is below $10 million When the company’s tight budget restricts it from outsourcing tactical sourcing activities When the company is seeking a long-term solution to manage tactical sourcing activities	When tail spend is above $10 million When the in-house procurement team lacks sufficient resources to handle tactical tasks When there is no shared service team

The In-house Tactical Team’s Structure and Governance

Key direct and indirect categories have their own sourcing strategies and teams, which ensures higher cost savings. For cost savings of 7–12 percent in the tail spend as well, it is vital to alter the organization structure.

Best-in-class companies that manage tail spend in-house build a global or regional team depending on their tail spend and the size of their supply base across regions.

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The operational work (shared service center) and market Intelligence (center of excellence) are placed at a central location for better standardization and sharing of best practices.

Note: The tactical souring team could be in-house or operating from the company’s near-shore/off-shore shared service center.

Roles and Responsibilities of the Tactical Team

A small dedicated team with one tactical sourcing manager, two–three tactical buyers, and one procurement executive is found in many companies.

Location	Designation	Roles
Global	Tactical Sourcing Manager	Formulate strategies to increase catalog coverage Standardize catalog management processes Prepare monthly performance dashboards
Global	Tactical Buyer	In charge of updating items in the catalog system Invite suppliers to finalize and fix the prices on rate cards Benchmark vendors and prices against competitors Negotiate rates with suppliers Review catalog updates Ensure maintenance of tools (eCatalogs, database, etc.) Lead the eSourcing process Interact with suppliers and act as the point of contact
	Procurement Executive	Follow up to update supplier information in case of changes Update the catalog periodically Archive contracts Resolve technical issues

How Can Advanced P2P Systems with Robotic Process Automation and AI Capability Support In-house/SSC Teams?

Procurement Process	Robotic Process Automation (RPA)/AI	How do RPA/AI Technologies Add Value to Companies?
Catalog/Content management	Both	Allows only negotiated and curated content to appear on the eCatalog platform Real-time and continuous supplier classification Virtual assistance to help in procurement decisions, sourcing vs. spot buy Directs users instantly directed towards preferred suppliers, channels, and right commodities Directs users towards policy compliance, suggesting approval for exceptions in advance, when needed Machine learning from PO rejections improves the quality of future proposals
Purchase order preparation and management	RPA	Offers an Interface to transfer and process XML data between the two systems Real-time processing of purchase orders, which provides flexibility for modification Automates the entire purchase order management process, starting from purchase order preparation to automatic routing of PO for approval
Invoice, payments, and claims management	RPA	Automation of the invoicing process as per business and user rules Automated extraction of data from scanned invoices Automated matching of data in purchase orders and invoices Automated routing of invoices to assigned internal stakeholders for payment
Supplier performance management	AI	Big data analysis of structured and unstructured signals from external data source for supplier performance assessment Information from various sources displayed on the dashboard, which guides users in rating suppliers on various parameters

Conclusion

There is a perception that the cost of carrying out procurement services in-house is high and its efficiency is lower than that obtained by outsourcing the services. This is correct to an extent. However, the benefits of deploying AI and RPA-powered P2P tools will eventually offset the high costs of maintaining an in-house tactical team.

Organizations that lack sufficient resources, skills, and budget to carry out tactical activities completely in-house can opt for a tailored outsourcing model, where few services are offered by service providers while others are carried out in-house, with considerable integration of the two approaches. For example, Xchanging will operate on a co-sourcing basis alongside L’Oréal’s purchasing team to streamline its purchasing processes and improve overall quality and cost.