Providing efficiency, purchasing power and budget insight, electronic procurement systems make purchasing maintenance products a stress-free process.
Before Colonial Properties Trust selected a supply procurement solution in 2005, the purchasing process resulted in some heated discussions. When Ray Thornton, Colonial’s Vice President of IT Applications and Support, joined the company soon after it selected the purchasing software, he asked, “What was it like before we solved the problem?” A colleague joked, “You mean before, when we all yelled at each other?”
The problem, Thornton says, is that Colonial’s senior management staff could not track purchasing because the entire process took place onsite. Community staff members would complete purchase orders and expense approvals and send requests for payment by overnight mail to the central office. Postage costs were high, there were many duplicate payments and Colonial’s communities were not taking advantage of bulk-pricing discounts through a national supplier.
Like a growing number of apartment management firms, Colonial addressed these problems by going to an electronic payables and procurement solution. These electronic platforms can cover all of a company’s purchasing, including commodities and services, and replace paper purchase orders, invoices and checks with electronic versions.
Electronic procurement software can provide greater insight into how and where money is spent and can create efficiencies by significantly reducing paper documents and data entry tasks, reducing overhead. It also allows companies to leverage the collective spending of all of their communities to achieve more competitive pricing. With occupancies running low and concessions still running high, apartment operations executives say it’s vital to have a purchasing technology in place that improves the bottom line by reducing expenses.
Getting the Order Right
Making a purchase through an electronic platform is straightforward. An onsite staff member in charge of purchasing—perhaps the property manager or maintenance manager—uses software to browse an online catalog for necessary items. Using a system that functions in much the same way as an online retailer such as Amazon.com, the manager builds a purchase order.
Before submitting the order, the software determines if the order is within budget parameters. The manager can be approved for purchases up to an amount predetermined by management, or for purchases within the budget limit for each general ledger line item (e.g. up to $500 for lighting). If the purchase is over budget, it is automatically sent to upper-level management for approval. If it meets the parameters, it is sent electronically to the vendor.
The vendor fulfills the order and sends it to the community, where the manager checks it off the purchase list to make sure everything that is ordered is received. Then the vendor submits an invoice electronically through the management company’s accounting software. The software records the expense, prepares an electronic payment and sends it to the vendor with management’s approval. The entire process may not involve a single piece of paper, but management can track the purchasing process and the budget in real time.
Real-Time Transparency
Such real-time transparency in spending is a big shift from the traditional paper-based purchasing process at Marietta, Ga.-based ECI Group, which owns or manages 8,000 apartments. Before the company implemented an electronic procurement platform, purchasing approvals were normally completed after the purchase had already been made. It wasn’t company policy, but the slow sign-off process made these delayed approvals a reality, says ECI Chairman David Hirsch. Today, the software forces prior approval for purchases. “We hope the software will help us spend dollars where they should be spent,” Hirsch says.
Upper-level management’s ability to better manage and control spending is one of the primary benefits of an electronic procurement system, apartment operations executives agree. Colonial, a Birmingham-based REIT that owns and manages 31,000 apartments, operates on an accrual accounting system, meaning that the company records expenses in the month they were incurred, rather than when they are paid. In the past, community managers who had not made their income and expense targets for a month would hide their bills in a drawer until the next month so that their bottom-line performance looked better.
Today, the company’s procurement platform records expenses when purchase orders are made, so that the software can produce highly accurate property-by-property budgets that are up-to-date every day.
That information is important because it allows the company to react to over-budget expenses more quickly, Thornton says. “We now see expense busts coming and can react accordingly, whereas before we could not react until after we closed the books and it was too late,” he says. If budgets are particularly tight (as they were this past year), senior management can adjust the threshold at which purchases are automatically approved so that spending even a penny requires a vice president’s approval.
Because expenses are recorded in the proper month, spending is also more consistent, Thornton says. “We can truly read trends on where our spending is going to spike based on actual expenses, so we can forecast and budget better,” he says.
Hirsch says another advantage of an electronic procurement system is, simply, efficiency. Instead of spending time producing checks and correcting mistakes made by a community manager or vendor, the accounts payable department’s staff can spend more time analyzing payment data for possible savings. Community managers can spend time managing the community instead of managing data. Whether or not spending is reduced, Hirsch says, “If my people are focused on managing my community and leasing units, then we won.”
The improved efficiency also can lead to lower overhead. Soon after implementing an electronic procurement system, Colonial undertook a large acquisition that essentially doubled the size of its portfolio. Because of the software in place, the company did not need to double its accounting staff—each accountant can now handle 25 communities, instead of 12.
Bargaining Power
Some procurement systems help management companies achieve the best price for products or services by taking part in national purchasing agreements. That feature is particularly important for small apartment management companies that don’t typically spend enough to warrant a special deal from vendors.
Sherman Residential, a Chicago-based real estate firm that owns 15 communities with 5,000 apartments in five states, doesn’t have a dedicated purchasing department to negotiate deals. The company’s CFO, Mark Gluskin, has negotiated contracts with building supply and paint vendors in the past, but is too busy to rebid all of the contracts each year. The procurement system he uses, however, pools all of its users and negotiates agreements on their behalf, securing pricing discounts of 12 percent to 25 percent.
“As good as we feel we are in negotiating, with 5,000 apartments, we can’t compare to the purchasing power of a pool of many-thousand apartments,” Gluskin says.
He adds that the company has seen the most savings in supplies such as lighting, carpet and tile. “We can specify which product will be purchased at the community, and that not only saves money, but standardizes our purchases across the communities,” he says.
For companies such as Colonial that have national accounts in place, electronic procurement systems can ensure those agreements are being utilized. Before it implemented its procurement software, Colonial did not have rules requiring staff to use vendors with which the company had pricing agreements.
Instead, community managers would typically use local suppliers with whom they had a relationship, so the company could never leverage its full corporate spending to drive down prices. Onsite staff reacted negatively to the software implementation at first, worried about a loss of control and autonomy.
It took a mandate from Colonial’s senior management to get staff fully on board. But once staff saw that the technology would not affect service levels and would save money, their perception changed, Thornton says. “Now no one would ever dream of doing without it.”
Using the procurement software, Colonial completes 58 percent of its transactions with online vendors, with savings averaging about 10 percent to 12 percent. The software ensures that managers place orders through those accounts where available and do not use what Thornton calls “maverick purchasing” through other vendors.
One of the remaining obstacles is getting vendors on board. Finding national or large regional providers for services such as pest control or landscaping is challenging, which is the reason that Colonial doesn’t make more than 58 percent of its purchases from its online network. Suppliers may face upfront fees to take part in a procurement system’s online catalog, so it may not be cost-effective for some local vendors.
Nevertheless, while Colonial only had five online vendors for the first few years it participated in the program, that number shot up to 101 when the company realized the potential savings from moving transactions online. Thornton says he wants to continue to increase the number of purchases made online. With the greater efficiency and competitive pricing available, no one will be shouting in disagreement.
Jeffrey Lee is NAA’s Staff Writer. He can be reached at jeffreylee@naahq.org or 703/797-0647.