Is Your MRO Procurement Program Costing You 50% More Than It Should?
In most multifamily and commercial properties, procurement spend is thought of as a necessary evil—and then often not thought about much at all. After all, most of the legacy systems in place are quite effective when looking at the “big costs.” But since maintenance, repair, and operation (MRO) parts and materials are usually not a large portion of the overall budget, the smaller costs are often overlooked. While building owners would love to reduce that spending as well, their procurement departments are usually already stretched to the limit.
But here’s the thing—the common procurement programs in use at most properties miss at least 50%—and often far more—of expenses and costs. Why? While they save on the big costs, they fail to address things like tail spend, spend that isn’t under contract, and vendor/contractor purchases at full retail prices. While these misses might not seem huge, it’s important to remember that any MRO savings come right off the bottom line, increasing the value of your property.
You can see why it might be time to evaluate how your business handles procurement. These programs can typically be broken down into four “levels” or groupings. A better understanding of the advantages and disadvantages of each level will help you identify how efficiently your business is currently operating. It will also help you understand whether your current program is giving up 50% or more of your savings.
Here are all four levels of procurement purchasing programs, ranked from least to most sophisticated:
1. Tactical Purchasing
This level of procurement, also known as retail purchasing, is the simplest but least effective level of procurement. At this level, you simply purchase what you need with minimal or no preparation [i.e., no contracting, no identifying suppliers, no requests for proposals (RFPs), etc.]. With tactical purchasing, you save less than with other procurement levels because you put in less work. Time is the only real savings provided by tactical purchasing; however, this level does offer a convenience factor, which in the case of an urgent purchase, might outweigh the lack of savings. Some disadvantages of tactical purchasing are, of course, higher costs, as well as lost opportunities for strategy and supplier loyalty. In addition, there’s a cost and relationship disadvantage when your business is buying from a distributor rather than a manufacturer, and there’s often a lack of familiarity with warranties or service levels. This level also has the highest amount of maverick spend (aka spend not under contract).
2. Strategic Contracting and Purchasing
Also known as contract purchasing, this level of procurement is all about anticipating needs. For strategic contracting and purchasing, you’ll need to write the specifications, design the RFPs, and lay out the service requirements ahead of time. In other words, you write a contract. While you might think the supplier would be enthusiastic about having a contract that lays out the terms of agreement, that’s not completely valid. A contract builds more of a relationship with suppliers but they still have to spend time and energy worrying about inventory, sales, and projections. Additionally, levels of contract purchasing can vary quite a bit.
There are several advantages to this level of procurement, like being able to negotiate a lower price than with tactical purchasing and having a somewhat better understanding of things like service levels and warranties. The disadvantages, however, include pricing that, while lower, is not optimal because there isn’t enough volume. Strategic contracting and purchasing also requires a procurement department of some sort, which means more resources are needed for RFPs, supplier sourcing, negotiations, and maintaining supplier relationships. Finally, reporting is often inadequate at this level, and there is no insight into contractor purchases.
3. Association Purchasing
Association purchasing often operates much like the way Angie’s List works for consumers. This level of procurement is better than tactical purchasing because the association does some of the work, but it comes with a lot of legal constraints. The trade association can't deliver optimized value to the manufacturer or supplier because it cannot speak for the organization and does not serve as a proxy representative. Additionally, there will likely be a cost to join the association, but you typically receive a discount in return.
The advantages of this level of procurement are pre-screened suppliers and some degree of discounts. The disadvantages are that you may have to pay for membership, adhere to legal constraints, and receive non-optimized pricing because, while you may know you have the volume, suppliers have no guarantee they’ll receive a certain amount of business. Also, while your company may receive discounts on certain items from certain suppliers, you’ll still need to have an internal procurement department and screen your suppliers yourself.
A Group Purchasing Organization (GPO) provides far better value savings than other procurement levels. That’s because a GPO is a collective organization that aggregates purchasing volume to negotiate discounts from vendors. This shifts the burden of negotiations, sourcing, and maintenance of supplier relationships off a member organization. It also frees up resources, allowing each company to invest those savings back into their own business. GPOs offer another advantage because procurement departments in individual companies often have no say over business growth, but collective purchasing organizations can always add new members to obtain greater volume. This leads to lower prices and better terms as suppliers are assured a certain amount of business. As a GPO matures, it often expands to cover new areas that provide value for members like warranties, service levels, and even potential loans or credit for members. The many advantages of GPOs include reporting that provides insight into both enterprise and contractor purchasing, costs optimized by volume pricing, scalability, negotiations, supplier sourcing, and acting as a company proxy in terms of procurement.
However, there is one potential disadvantage. As in any other industry, there can be unethical practitioners. Your GPO will be acting as a proxy for your company, so it’s especially important to select a GPO that you are confident understands your business needs and will work on your behalf. You should perform the same kind of due diligence when screening your GPO as you would your suppliers.
If you don’t feel that your company is at the right level of procurement and you’re curious whether you’re making other mistakes, download our viewpoint document, The Five Most Common and Costly Mistakes You Could Be Making in Procurement.