Saddling Maverick Spending.

The word "convenient" can be a double-edged sword when it relates to purchasing maintenance, repair and operating (MRO) supplies. The positive side translates into quick access to the materials you need to effectively manage a property. The negative side translates into paying higher off-contract prices that can send your budget out of control.

The latter is often called "maverick" spending, which can reduce a company's ability to effectively control its expenditures and maximize a budget. To successfully maintain control over your financial condition, saddling maverick spending must become a mission of every employee.

The Perils of Maverick Spending

Maverick spending is detrimental to an organization because of the impact it causes on a number of fronts. Reportedly, off-contract purchasing accounts for nearly 30 percent of all MRO expenditures. This translates into needless spending for "convenience."

One of the most noticeable impacts of off-contract spending is the per unit price of the part. For most properties, national accounts have been arranged with negotiated pricing and service arrangements. These accounts are typically based on anticipated volume or "bulk" and prices are established accordingly. By going away from contracted pricing in lieu of convenience, properties don't reap the rewards of the contracted price and end up paying more for a part than they may have originally budgeted. Over time, this practice can eat up a budget and divert funds from other property needs.

A second impact of maverick purchasing is the leverage lost in future negotiations with national account suppliers. Since bulk pricing is based on anticipated need and the ordering history of a company, a supplier can determine how much business a customer actually gave them over a certain period. Because of maverick purchases, the orders through a specific national account may not have met the anticipated need, thus causing a price increase for the next contract year.

In addition to pricing issues caused by the convenience of maverick purchases, another cost related issue is the efficiency of the management staff. In a normal case, when a part is needed, a service technician reviews a catalog, issues a purchase order, and waits for the part to arrive. The actual cost of ordering that part is typically small since it took the service technician a short time to order it. However, when a service technician goes to the store for a part, the bottom-line cost of the part dramatically increases since the service technician's hourly rate is now added on. It is not uncommon for maverick purchases to actually double or triple the costs of a part when all factors are considered.

With maverick purchasing in a corporate culture, it typically means that a budget is out of control due to higher costs associated with per-unit pricing and procurement expenses. In some cases, you may not even know that a budget is being exceeded. Often with maverick buys, invoices may not come for a few months, where as national accounts provide a monthly report. Therefore, property owners may not know if someone spent an extra $3 for an item since they didn't purchase from the company with negotiated pricing.

In times of emergency, it may be more convenient and timely for a service technician to run to a local hardware store for a part than it is to go through the process of issuing a purchase order and waiting for the part to come in the mail.

Corralling Maverick Purchases

Reducing the amount of maverick purchasing takes discipline and a game plan for every employee to follow. To accomplish this mission, here are some guidelines:

* develop purchasing policies;

* use the Internet for procurement and tracking; and

* implement procedures for better inventory control.

Policies and Procedures 

The first step in curbing spot buys is educating those responsible for ordering parts and services for your property. The property owner must set policies regarding how purchases are made, where items can be purchased, what exceptions can be made, and what penalties may be incurred if the policy is not followed. A clear mission statement must be introduced for all to follow.

The property owner must educate the property manager about the pitfalls of going off contract for MRO supplies. Monthly staff meetings addressing the year-to-date budget will further instill that mission. To guide the property manager, a policy manual outlining the do's and don'ts of purchasing should be provided as a reference tool. Additionally, the property manager should be held accountable for fiscal responsibility and rewarded for positive outcomes.

Internet Procurement

Today's technological advances have brought the multifamily housing industry plenty of e-commerce capabilities. From these business-to-business virtual marketplaces, property managers can order MRO supplies with greater buying power.

Saving money is the most obvious benefit of Internet procurement. E-commerce sites offer new vendors. Rather than shopping through one vendor for pricing, virtual marketplaces allow several suppliers to compete and bid for specific products and services. It also provides the ability to place orders and bids while maintaining existing relationships with current suppliers.

Another advantage of most Internet procurement sites is the service and delivery of the purchased supplies. Most vendors in the virtual marketplace offer next-day delivery and some have same-day delivery service. This convenience factor should reduce maverick purchasing by eliminating the impulse to buy off contract.

One unique tactic that some e-commerce sites provide is the ability to have greater budget control through a system of checks and balances. Some sites allow you to set purchase limits in terms of the item, supplier or amount spent. When a manager has exceeded his/her limit, the electronic purchase order is sent via the Internet to an executive at a higher level for approval. Since the routing is done electronically, approvals are granted faster than the traditional method of filling out requests, placing it in someone's in-box, waiting for approval, and having it sent back the same way it originally came. With faster approvals, the impulse to buy off contract is diminished.

Through the delivery service and electronic approval aspects associated with Internet procurement, ordering online shortens the purchase and fulfillment cycle.

Additionally, e-commerce sites help the property manager monitor and track the entire purchase cycle. Information such as location, buyer, item, supplier, date and amount spent are typically captured. With the Internet, electronic record keeping and reporting are almost instantaneous.

MRO Inventory Tracking

Keeping an exact count on an MRO inventory is crucial to keeping a budget in line and avoiding maverick purchases. By implementing a tracking system of MRO supplies, purchasing managers can determine the quantities of each supply and plan accordingly once a volume has crossed a certain threshold. Here are some ideas that should be implemented to track an MRO inventory:

Separate MRO supplies by category. Keep the office supplies with the office supplies and the cleaning supplies with the cleaning supplies. Categorization will help isolate a shrinking inventory and make it easier to spot a low volume supply.

Assign stock numbers and develop stock reports. A number pertaining to that category should identify each MRO supply. As supplies are taken out of inventory, the corresponding stock number is checked off or logged in the stock report. A property manager can quickly look on an updated stock report and pinpoint areas of need. Reports can be as simple as sheets on a clipboard or as a database in a computer. There are also Palm Pilot bar code programs on the market which can trigger reorders when inventory drops to a preset volume.

Determine future needs. Property managers must be able to determine or predict when a particular MRO supply needs to be reordered. This can be accomplished through statistical data such as occupancy rates, seasonal factors, and historical facts. By knowing certain factors in advance, supplies can be ordered before a low volume threshold is crossed.

Reducing the amount of maverick spending can dramatically impact the financial condition of a multi-family organization. By eliminating the impulse to buy off contract through tactics that provide a convenient solution, organizations can see real dollar savings. Implementing business tactics such as purchasing policies, Internet procurement and inventory tracking can help position your company for long-term success.

John Lie-Nielsen, a 30-year veteran of the multifamily housing industry, is Chief Executive Officer of HandySource.com, a business-to-business bid and purchase virtual marketplace.