Bottom Up

By Keat Foong, Executive Editor

Who makes the product and services procurement decisions at apartment companies? A panel at the recent National Apartment Association (NAA) annual educational conference addressed this subject. The audience, which was largely composed of suppliers, was told that in many cases, vendors should not necessarily approach top corporate executives to sell their products.
Indeed, many companies today prefer to take, as Joe Greenblatt, CPM, president and CEO of Sunrise Management and 2013 president elect of the Institute of Real Estate Management, describes it, a “bottom up” approach to selecting suppliers and service providers. At Sunrise Management’s properties, onsite personnel have the power to specify new vendors.
Dan J. Flamini, CPM, director of maintenance at Pennrose, says there is a very important reason that site-level staff should be able to select vendors. “[Procurement] always starts at the community level first because the site team has direct knowledge of what works and what does not—who provides good customer service and who does not,” he says.
That does not mean that onsite personnel are free to engage all products and services. Input from the community levels can also be combined with a pre-existing approval system to control spending.
At properties managed by Sunrise Management, onsite personnel consult first with an approved list of vendors to order supplies, explains Greenblatt. If the product or service is not available, they can seek a vendor, with the approval of the regional manager. Greenblatt emphasizes that the potential new service provider also first be vetted by the company’s risk management department to make sure it is licensed and insured.
“We do not jump on a bandwagon until we have checked references, and have ensured that they are who they say they are.
It is important to be pragmatic in these types of decisions, if you do not want to be shifting from vendor to vendor and facing renegade spending.”
The structure of the organization may also have a lot to do with who in a company has the authority to decide on the brands or vendors. During the NAA conference, Susan E. Weston, principal of Susan Weston Co., outlined the various ownership structures that could affect the product procurement processes of the apartment company: Owner/managers, who are investor-owners; REITs, who are third-party managers; LLPs and corporations, who have institutional clients; or private owners, who are involved in joint ventures.
According to Weston, at the typically small- to mid-sized owner/manager companies, onsite managers are often the ones to order the provisions. There are usually spending approval limits, but compared to those in fee management companies, these cost ceilings may be higher.
Fee management companies, because their fees may be based on net operating income, may impose tighter restrictions on the expenses, says Weston. And if their clients are institutional owners, they may have to obtain approvals from an additional layer of management—the asset managers or portfolio managers of these institutional clients. (These relationships between the fee and asset managers may be adversarial.)
LLPs and LLCs are smaller owners that may eschew the levels of approvals needed in larger organizations. They may be relatively more agile, and have greater latitude to test products and services, adds Weston. The general partner or sponsor may make the buying decisions, but the entities’ spending capacities and geographic footprint may not be as large as some of the larger organizational types.
REITs are a type of owner-manager that is required to meet NOI targets on a quarterly basis. Nevertheless, REITs may be the entities with the biggest pockets. One reason is that their capacity to retain income is limited by REIT laws. And they may be able to make decisions relatively easily because they do not have to consult with an asset manager or owner.
Organizational structures aside, the criteria for selecting vendors may differ among apartment companies. Lowest price may not be the only and most important consideration. Procurement decisions by Pennrose “are driven by convenience, delivery, price and service,” says Flamini. A prime consideration is the vendor’s familiarity with the product. “We only deal with vendors who know their products well, stand by them, and know how to perform preventive maintenance on them. These types of vendors are our best partners,” says Flamini.
At Pennrose, community managers interact with mid-level management regarding any products and services decisions they have made. They make sure the executive team received the same information so everyone is on the same page.
For Sunrise Management, the most important criteria in vendor selection, whether for a product or service, lies in the quality of service, says Greenblatt. For example, “how responsive is the vendor in getting back to us with price quotes, and meeting delivery deadlines?” he says. Value is an important consideration. “A great price and crummy service is not a rational way to obtain service. One can always chase one’s tail in circles finding better pricing. There is always a vendor offering one cent less. You have to balance price with service.”
In pursuing value, the benefits of involving the site-level personnel is apparent as they are the ones that are closest to the product and service. Sunrise Management runs a proprietary online rating system on which community-level staff can rate vendors. These reports are also delivered to the vendors every month. “This is a rating system we have designed that gives voice to who site personnel like and do not like and why,” says Greenblatt.
In the end, determining who makes those product procurement decisions should be done with end goals in mind. Flamini says, “We also have learned that choosing the right product or service reduces our labor costs to operate and maintain these items and other building systems.”
Online Procurement: Plus or Minus?
Online procurement is “very beneficial and the wave of the future,” says Dan J. Flamini, CPM, director of maintenance at Pennrose.
An instant history of prior orders, assistance with budgeting, and access from anywhere in the world are the benefits of the system, in Flamini’s opinion. Also, “online purchasing is usually less expensive because there is no big-box retailer overhead built into the cost of the product,” he says.
Being able to easily compare prices between suppliers is one of the foremost advantages of transferring products and services procurement to the Internet, in addition to reduced administrative time and costs, agrees Joe Greenblatt, CPM, president and CEO of Sunrise Management.
However, there are also drawbacks to ordering supplies online. You have to have the resources to train employees and provide support for the technology, says Greenblatt.
Another disadvantage to ordering supplies online is that “you cannot touch and feel the product online and see all the inner workings of the product—for example, gas furnaces or airconditioning condensers, says Flamini. “Some products cannot be ordered online and must be purchased after a thorough examination is made or field-tested first.”
The drawbacks notwithstanding, Flamini believes that eventually almost all multifamily product purchases will be secured this way.