Whatever role you play in the purchasing process of your properties, everyone has the same goal—do more, spend less. Managing the overall spend of multiple properties can be daunting, but when done strategically, you can rest easy knowing you got the best bang for your buck.
We know there’s a lot of pressure to manage your properties’ complex spend cube, reduce risk and cut down on cost, all with limited resources. If this sounds like your everyday life and you are looking to increase savings, improve efficiencies in supply chain and manage supplier risk, a group purchasing organization (GPO) can guide you through the processes to accomplish all of these goals and more.
One major issue that keeps multifamily housing properties from keeping costs down is rogue spend and making purchases that aren't necessarily the best price or value due to convenience.
Keep reading to learn how to manage your organizations indirect spend purchases in a cost savvy manor.
Spend Management
In order to fully understand indirect spend and how it impacts your organization's efficiency and bottom line, you first need to understand what all factors into it. Indirect spend is the costs associated with purchasing goods or services that in the end don’t factor into the solution or service your organization provides. These are items such as office supplies, travel expenses for staff, fulfillment orders, food and beverage, etc.
One major buzz word in purchasing is indirect spend. What exactly does that mean for a multifamily housing organization like yourself? Traditionally, indirect spend encompasses purchases made to operate your organization but the products or solutions don’t technically contribute to your core function. Within this bucket we typically see rogue/maverick spend as well as tail spend. These types of spend are typically high frequency, low-cost purchases that go undermanaged.
Before we look at the ways a group purchasing strategy can help you do this, let’s take a closer look at tail and maverick spend.
Tail Spend
Tail spend refers to the amount a company spends on purchases that make up about 80% of transactions but cover only 20% of total spend. It typically gets ignored and goes unmanaged. The other 80% includes strategic and mid-tier spend where major cost reductions can be found but the tail is made up of mostly high-volume/low-value purchases with several suppliers. Purchases are usually non-core, but still essential to the smooth operation and the financial success of a business.
What tail spend includes varies depending on the structure of the organization, but it generally includes:
- Maverick or “rogue” purchases outside contracts
- Purchasing card buys
- E-catalog spend
- Minor local and petty cash items
- Spot or one-off purchases
- Any other low-value purchases that bypass purchasing standards
Maverick/Rogue Spend
Maverick spend, also called rogue spend, can mostly be found under the tail spend umbrella in the high frequency/low-cost purchases. It involves the items purchased from suppliers outside of your approved procurement policy and can be simply minor leakage from negotiated contracts or grow into a larger problem of uncontrolled spending.
First, consider the lost cost savings. When purchasing outside of a contract, your organization loses volume discounts, rebates and might not achieve minimum order targets. This is where a GPO can come into play and regulate all purchases through a pre-negotiated contract.
Group Purchasing Strategy
The reality here is that although these costs may seem small, they can make a huge impact on your company’s bottom line. With the current supply chain disruptions and other inflationary costs, it’s important to work towards decreasing and monitoring these costs as well as maverick and rogue spending.
This is where a group purchasing organization’s expertise comes into play. Having a group purchasing organization in your strategy ensures you have access to industry leading suppliers, mitigated risk, and overall time and cost savings for your organization. All in all, there are many benefits of working with a GPO to manage unnecessary indirect spend. From subject matter experts to supplier relationships, a GPO is a unified front, which eases supplier communication and provides organizations with more time to focus on other areas of business.
Simplified Supplier Sourcing
In the early stages, a GPO should act as an advisor and enable in-depth conversations with suppliers that your organization is considering. Here are the questions to ask of suppliers in the running:
- Can they provide insightful data?
- How is their company performing?
- Who is an ideal customer?
After you have selected your suppliers, set program goals and objectives and determine the best way to measure progress moving forward. The more insight you give them into your organization, the better the onboarding and implementation will go.
Once you have a program in place, it’s time to announce the program and gain adoption from your whole team. This is a critical time for companies in a more decentralized environment because multiple people are purchasing so they need to be made aware of the contract being put in place.
So, Why Should I Use a GPO to Battle Indirect Spend?
Working with a GPO is a proven way to reduce indirect spend, and more importantly, working with the right GPO is the best way to ensure category management is expertly handled from sourcing to performance and beyond.
A GPO that manages negotiations on everything from materials to pricing with suppliers on your behalf ensures compliance through the life of the contract. This will also centralize and automate the purchasing process giving your organization a holistic picture of overall spend so you can stop leaving money on the table.
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