Procurement 101 For Residential Real Estate Property Managers
7 MIN. READ
The goal of residential real estate property managers is to maximize net operating income (NOI). In this highly competitive market with inflation pushing rents up in many sectors of the country, you are probably well focused on maximizing revenues. Revenues are relatively transparent – rent rolls are rent rolls.
But the focus tends to lean more on revenues and not enough on procurement.
Why residential real estate property managers need to understand procurement
NOI is not just revenues. It is derived by taking the sum of all revenues from the property and subtracting all reasonable operating expenses.
Operating expenses are not so easy to determine and analyze. They are buried in your general ledger under categories like repairs, maintenance and installations as well as under hundreds, even thousands, of accounts payable vendor names.
Left unchecked, costs tend to grow over time. As a result, they present an opportunity for substantial operating cost reductions and a corresponding increase in NOI. For property managers, a dollar saved is worth as much as a dollar in rental income!
Thus, residential real estate property managers need to be proactive and get out in front of their costs. The lack of transparency requires a dedicated effort to flush out cost savings and requires structure and effective strategies. To succeed, you will need to establish a formal procurement function.
Read on for some simple best practices to do so effectively.
Your first step is to pick a procurement leader and team. Your procurement team needs to have the credibility of the rest of your staff since they will be influencing the work that others do. If they are not seen as competent, they will fail.
Thus, the ideal candidates will have:
- Financial skills.
- A solid understanding of residential real estate property management.
- Strong knowledge of your accounting systems.
- Excellent analytical skills.
- A keen commercial sense and understanding of contracts.
- Great communication skills.
- Solid integrity.
- A desire to make a positive impact.
Scale the size of your team based on the size of your spending. At first, stay small and focused. You want to avoid the perception of empire-building.
Separate spend into defined categories, and assign categories to each team member, based on the size of your spend. This will allow team members to master a particular category in depth, again building credibility.
In addition, other staff members will know who the go-to person is for questions and concerns in a particular category. Thus, you will instill accountability in each team leader for the function they are responsible for.
Give the team the authority to run procurement activities for your company. Specify and communicate their scope of operations and authority.
Furthermore, explain upfront that their goal is to get the best value, not just a lower price. There should be clarity from the start to avoid resistance and confusion.
There are two important tasks that residential real estate property managers need to complete for their team in this area:
- Provide a central repository for spend and procurement data.
- Provide tools for centralized analytics.
Everything your team will do depends on accurate, timely data from one centralized place. The decisions they make must be built on demonstrated facts. Bad data or data from multiple sources will lead to bad decisions, and your team will quickly lose credibility. Failure will follow.
Your team also needs robust tools to analyze procurement data to support decisions. In order to provide consistent results, they should use the same analytical tools.
Your finance team will be more supportive if there are solid analytics and accurate data behind the recommendations of your team.
Armed with the right tools and resources, your team can begin to make real change in your procurement processes.
First, determine how much you spend, on which products and with which suppliers. Concentrate on the suppliers that comprise 80% of your spending, beginning at the top. That way, you will focus on the biggest cost targets first and not waste time on small spends.
Your team should also isolate categories with significant, erratic spend patterns – illogical highs or lows over time. This is a great indication that the particular category is not well managed. After identifying problem areas, you can focus on understanding them more in depth in order to fix them.
Finally, look for categories that have a relatively high or unusually low number of suppliers. This can indicate either a fragmented or an over-concentrated supply base ripe for consolidation or competition, respectively. This means that the category is not getting enough attention.
Categories fitting the descriptions above are the best opportunities for procurement savings. They should be your team's first targets for procurement initiatives.
Consolidating your supply base can reduce your product and service costs as well as cut the administrative costs and time of managing invoices from a multitude of suppliers.
Work with your legal team to develop standard contracts. You will need one for products and one for services. Why?
Product contracts are generally based on specifications for the product - a part number or detailed description of the product, required quality and quantity, price per unit, and delivery requirements. Contracts for services require defining the scope of work that explains what the contractor must do, where, when, how, and at what price.
Additionally, you want to be able to manage your suppliers effectively based on facts, not opinions. So, build performance metrics into your contracts. Some examples that residential real estate property managers should utilize are:
- The number of deliveries on time versus total deliveries (Delivery in full, on time, or DFOT).
- Percentage of parts out of specification.
- Percentage of orders with incorrect quantities.
While you are at it, have your legal team review your first RFPs/RFQs before you send them:
- Consult with your facilities team to clearly understand the specifications of parts and supplies and the scope of work required for services.
- Go to market. Leverage your volume for purchasing power using requests for quote (RFQ) for parts and supplies with distinct specifications and requests for proposal (RFP). You can find RFQ and RFP templates online.
- Analyze the responses and select the right suppliers based on the required quality, best price and delivery. Be sure to get input from your operations team.
- Monitor suppliers over time by using performance metrics. Focus on and reward continuous improvement over a current baseline.
If you can do this correctly, the net benefits will be:
- Better contracts.
- Lower product and service costs.
- Lower procurement costs.
- Better quality of products and services.
- A reduction in rogue spend.
- A competitive advantage over other property managers.
- Improved NOI.
6. How Raiven can help residential real estate property managers
Although these strategies are best practices to adopt, your team can still struggle without technology that provides accurate, centralized data and analytics and a platform that provides easy one-stop e-procurement shopping.
Without the right technology, your team will be swamped with data gathering, analysis and database management, all at the expense of finding and realizing savings. Additionally, rogue spending will be impossible to control and will quickly eat away at any savings your team has achieved.
Furthermore, without accurate, centralized data, your procurement team will be unable to track the performance of suppliers over time and will be blind to performance improvement opportunities. They will lack credibility with your finance and operations teams.
Raiven Marketplace has all the features your team needs to optimize and stay on track with procurement.
Raiven uses advanced technology to notify you while online shopping. It finds an exact or similar item of better value from one of your preferred suppliers, thus ensuring that you get the best value for your money, as well as avoid rogue purchasing.
Marketplace also tracks cost savings for compliance, which is crucial to proving the value of your procurement function. Plus, Marketplace stores all of your procurement data in one central location and provides robust analytics for your team to calculate savings and evaluate supplier performance
All of this enables accurate, real-time analysis and compliance management of procurement.
Do you want to save all the effort of sending out RFQs for supplies and parts but still capture the savings? Through our alliance with Avendra, you can access pre-qualified, pre-negotiated contracts at discounts of between 7% and 25%! Turn to Raiven to maximize NOI with an effective procurement function.
Contact us today for more information on how we can help residential real estate property managers like you.