You have just revised your annual budget for the third time and are looking for opportunities to further reduce expenses. From purchasing replacement bulbs to landscape maintenance, a large portion of your operating budget is likely tied up in purchasing products and services. Rethinking how you approach procurement in 2017 could have a profound impact on your budget performance.
In supporting national REITs, institutional investors, and private real estate portfolios, we have seen great diversity in how organizations approach procurement. From negotiating national vendor contracts to managing relationships with local vendors, there is no single approach that ensures competitive pricing. However, we have identified a few common procurement strategies that can be applied at both the property and portfolio levels to significantly reduce expenses.
Have you negotiated a good deal?
Many real estate companies leverage their purchasing power to negotiate contracts with regional or national vendors, who typically provide a percentage reduction from list prices and/or your current product pricing. The value proposition is quite compelling; availability of most everything you need, automated financial tracking, next day shipping. . . How do you know if you are getting a good deal?
- First, understand your baseline. Are you currently purchasing products in volume? How much are you paying for convenience? What do you believe your competition is paying? Are the vendor list prices inflated?
- Second, benchmark your costs. Identify the most commonly purchased products at your property or portfolio and compare your pricing with the open market. Start with a simple web search. If you are buying 1,000 or 20,000 air filters annually and are paying the same price as a-la-carte purchases at most online retailers, there is likely room for improvement.
It is a buyer’s market and vendors need your business. Take what you have learned and see if there is an opportunity to renegotiate. Even small pricing reductions on your most commonly purchased products can have a profound impact on your operating budget.
For volume or recurring purchases, pick up the phone
When reviewing your annual budget, identify volume and recurring purchases. Whether you need 200 LED bulbs for an upcoming retrofit or plan to replace a 100 R-22 HVAC units in 2017, pick up the phone and call your local or national vendor. Ask for more competitive pricing based on your anticipated volumes. And you do not need to move into the warehousing business. While discounts on single purchase volumes are typical, vendors will often extend discounts for anticipated purchases so they can retain your business.
RFPs provide value for large and SMALL projects
Request for Proposals/Pricing (RFPs) send the message that you are seeking competitive pricing and others are bidding. They help ensure an apples-to-apples comparison of products and services, prevent scope creep, and can save you time and money in the long run. Although RFPs are typically reserved for large capital projects, they can provide significant value for smaller projects where vendor pricing is most volatile. In our experience, RFPs typically reduce project costs by 10-30%.
The business case
Whether building the value of long term holds or positioning properties for purchase, increasing NOI is a game of inches. Developing a strategic procurement plan and taking action can have a profound impact on budget performance and asset value. Picking up the phone, negotiating with your vendors, and embracing the RFP process are proven strategies that can help improve your financial performance in 2017. You don't get what you don't ask for.