The Perils Of Maverick Spending
Maverick spending is detrimental to an organization because of the impact it causes on a number of fronts. Some reports claim that off-contract purchasing accounts for nearly 30 percent of all MRO expenditures. This translates into hundreds of thousands, maybe even millions, of dollars being needlessly spend for convenience. One of the most noticeable impacts of off contract spending is the per unit price of the part. For most multi-family businesses, 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, multi-family businesses don’t reap the rewards of the contracted price and end up paying more for a part than originally budgeted for. 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 both 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 maintenance manager reviews a catalog (or catalogs), issues a purchase order, and waits for the part to arrive. The actual cost of ordering that part is typically small since the manager required little time to order it. However, when a manager to the store for a part, the bottom-line cost of the part dramatically increases when the manager's hourly rate is added into the equation. 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, executives may not know if someone spent an extra $3 for an item because they didn't purchase from the company with negotiated pricing.

While maverick spending typically casts a dark shadow on a budget, in certain circumstances, it may be a necessary evil. In times of emergency, it may be more convenient and timely for a manager 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. But all too often, maverick purchasing becomes.

Corralling Maverick Purchases
Reducing the amount of maverick purchasing takes discipline and a game plan for every employee to follow. To accomplish this mission, three tasks should be incorporated into the corporate culture:

• 1) development of purchasing policies;
• 2) using the Internet for procurement and tracking;
• 3) implementing 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 multi-housing units. The executive level must set policies and procedures regarding how purchases are made, where items can be purchased (national accounts), 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 executive level must educate the purchasing manager about the pitfalls of going off contract for MRO supplies. Monthly staff meetings addressing the year-to-date budget will further instill the mission. To guide the manager, a policy manual outlining the dos and don’ts of purchasing should be provided as a reference tool. Additionally, the manager should be held accountable for fiscal responsibility and rewarded for positive outcomes.

Internet Procurement
Today’s technological advances have brought the multi-family industry e-commerce capabilities. From these business-to-business virtual marketplaces, property managers can order MRO supplies with greater buying power and ease.

Cost savings the same economies of scale offered by consumer buying clubs is the most obvious benefit of Internet procurement. E-commerce sites offer an entirely new stream of vendors to work with. Instead of shopping through one vendor for pricing, virtual marketplaces allow several suppliers to compete and bid for specific products and services. It also gives the ability to place orders and bids while maintaining existing relationships with current suppliers. Thus you get the best price possible.

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 is 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.

Conclusion
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.

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John Lie-Nielsen, a 30-year veteran of the multi-housing industry, is Chief Executive Officer of HandySource.com, a business-to-business bid and purchase virtual marketplace. For more information on HandySource, call toll free 1-800-665-9994 or visit their Web site at www.handysource.com.