By: Abhishek Nannore -- COE Lead
25 March, 2014
In the recent challenging times, where the demands are fluctuating and margins are getting thinner, the procurement organizations are formulating strategies to mitigate the risk of fluctuating supplies and price hikes. The procurement function, as a critical cost down opportunity, has reached to the apex priority for the strategists and the decision makers in the organization. In this case, maverick buying can obstruct the organization from reaching its cost saving goals.
The purpose of the whitepaper is to study the maverick buying and its causes. The paper captures the various aspects of maverick buying pertaining to MRO (Maintenance, Repair, and Overhaul). It percolates the factors advocating and demerits of maverick buying. In addition, it highlights the human tendencies and organization’s pitfalls behind the maverick buying.
The paper emphasize the spend analysis process and percolates the various techniques to identify the maverick purchase. At the end, the paper recommends the solutions to deal with the ‘Maverick Buying’ such as company policies and training, process standardization and adherence to compliance guidelines, spend consolidation and supplier rationalizations, implementation of e-procurement system and purchasing cards, and center-led organization covering all the business units.
Definition: Maverick Buying is unplanned-uncontrolled procurement done without consultation with purchase department. It is independent in behavior or thought and does not compliance with organization’s standard purchase practices nor includes any price comparison, framework agreement, or negotiation.
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Depending upon industry, indirect procurement accounts for 60% to 80% of total purchase requisition, which is up to 40% of total purchase value. For a large manufacturing company, MRO (Maintenance, Repair, and Overhaul) represents approximately 70-80% of total purchase requisition, which is 15-20% of total purchase value. In MRO, only 5% items are frequently used and less than 3% of items make up 80% of annual purchase value, thus it is difficult to predict future demand accurately for most of the MRO items. MRO items receive a low attention to the procurement managers due to its trivial contribution to the total purchase value. Hence, most of the MRO items is procured in unplanned, uncontrolled, or off-contract agreements without any negotiation, and is predominantly categorized as ‘Maverick Buying’. Consequently, the capital gets block in excess, duplicate, unwanted, and obsolete items; such items typically constitute 20-30% of total annual purchase value. For a large manufacturing company, maverick buying accounts for 30-45% of all indirect purchase value, whereas for a comparative smaller sized company it may accounts for more than 80-90% of indirect purchase value. Nevertheless, an organization can save 20-30% of unrealized cost of MRO purchase while carrying off the maverick buying.
Why understanding maverick buying is so important in MRO category?
Compare to procurement of ORM (Operation Recourse Management) categories, the MRO category deals with larger number of orders, in which quantity per orders varies from a single unit to thousands of units. The criticality of MRO items varies from low to very high depending up on nature of operations and failure losses, whereas the criticality of ORM items are generally low. Moreover, controlled inventory with a constant track is required for the items. The MRO buyers have to deal with larger number of global and national suppliers and have to ensure that the framework agreements and suppliers’ SLAs (Service-Level Agreements) are in-line with company’s procurement guidelines. These procurement complexities in MRO category lead to higher possibilities of maverick buying and need to addressee carefully to achieve the cost savings. Figure below outlines the key difference between the ORM and MRO procurements.
The other side of maverick buying put into greater flexibilities and shorter procurement time. Sometimes, the special offers induce buyers to avail certain benefits of it; however, in many cases the byers do not evaluate the other options and land up in obsolete bought or lose potential saving.
One of the most detriments of maverick buying, which can thwart organization’s procurement plan, is expensive bought due to low or no negotiation due to as which completely ignores the total cost of purchase and involves decentralized smaller buying quantities. Moreover, it does not involve price comparison and leads to handle larger number of suppliers and corresponding indirect costs for acquisitions. It does not involve any framework agreements, which may lead to several issues such as quality, warranty or guaranty, or and other legal issues, thus corresponding cost implications to the organization. Off-contract purchasing increases the chances of corruptions through bribe from unofficial suppliers, which further increases perplexity during the auditing process.
There are several factor can cause the maverick buying, which can vary from individual behavior to organization level. The deviant behavior behind the ‘Maverick Buying’ can be ignorance/bypass of existing procurement process and framework agreements, renunciation of pre-purchase analysis or spend management techniques, focusing on fundraising rather than purchase cost, due to unawareness/avoidance of frame agreements, to get better terms and condition, or to maintain previous supplier relationship etc. Moreover, the organization’s incapability can also lead to the maverick buying such as inability to enforce a process, inadequate training and know, unplanned and uncontrolled budget, failing in articulating the accountability, etc.
Identifying the maverick buying is not an easy task. It requires a systematic disciplined approach to analyze the existing spend data. Below figures shows the typical process to analyze spend. Once the existing spend is analyzed the deliberated actions are required to tamed down the maverick buying.
Maverick buying can be identified through following analysis –
< >Purchase on demand vs. critical purchase: The matrix can be prepared between purchase on demand items and its criticality. Higher purchase on demand for low critical items shows the higher possibility of maverick buying.
Number of communications between organization and suppliers: Higher number of communications between organization and supplier indicates uncontrolled purchase in the organizations, thus the possibilities of spend consolidation is high.
Focusing on total cost: Buyer must evaluate all the available offerings thoroughly and must understand the indirect cost associate with it. The focus must be on total cost rather than just cost.
Core suppliers are part of strategic value/vision for the organization: Low number of suppliers participating in the strategic value creation for the organization indicates further possibilities of consolidation of supplies and spend.
Average number of transaction per supplier: Greater number invoice processed per supplier is a very good indication of higher amount of maverick buying.
Contract vs. non-contract agreements: An organization can also compare its number of contract and non-contract agreements.
Number of contract renewed vs. total contract for the period: Analyzing the total number of contracts renewed for the year compare to total contracts, and the contract renewed in current year compared to previous year provides the indication of maverick buying.
Corralling the maverick buying is one of paramount functions of a successful procurement manager. Responsible managers understand the risk of maverick buying and spend more than 5% of their time probing for information about extemporaneous and uncontrolled purchase. Corralling the maverick buying takes discipline and a procedure set up for each buyer to follow. To overcome the problem of maverick buying, solutions at both, at an individual and an organization levels, ought to incorporate into the company.
Table 1: Corralling the Maverick Buying
At Organization Level
At Individual Level
Source: Beroe Inc.
Taming down the maverick buying is one of the consequential functions of a purchase manager. Through implementing practices such as standardization of purchase policies and procedure, promoting the e-procurement, and establishing the inventory tracking systems are among the most opted solutions for reducing the maverick buying.
The primary step in checking unplanned/uncontrolled purchases is to educate those buyers who are responsible for raising purchasing request for parts and services in organization. The management must educate them about the drawbacks of unplanned, uncontrolled, and off-contract purchases. The management must set purchasing guidelines, including exemptions permissible and penalties for off-contract purchase.
Implementation of procurement policies and procedures is not a single day task, however, the collaborative approach from management along with production, finance, and purchase department ought to consider for building a successful procurement strategy. For that, a reasonable process must be standardize and acquainted for all to follow. Periodic trainings and reference manual can additional instill the purpose. Moreover, the management must define the accountability of individual for any financial loss, likewise, stipendiary for positive results.
Technological advancements, such as e-procurement capabilities, have multiplied the ability of buyers. Through the e-procurement options, buyers can have access to multiple vendors and can evaluate the offerings with ease thus having higher bargain power. On other side, vendors are inviting buyers to contend and bid for their products and services. It additionally offers buyers to put orders and bids while maintaining existing relationships with incumbent suppliers, hence, buyers can get the most value attainable. This ought to reduce chances of maverick buying by eliminating the impulse to purchase for off contract. Additionally, On-line ordering shortens the acquisition and fulfillment cycle, also the delivery time. Through online ordering, buyers can manage larger budget with a system of checks and balances. It can also set the limits and cap on purchase. This new way of electronic record keeping and reporting integration tamed the chances of maverick buying in greater way.
Introducing a system for tracking an MRO inventory is crucial step to keep spend in line with budget can reduce the maverick purchases on large extent. Tracking system verifies the quantities of purchase for every new order and keeps the quantity under the preset threshold limit. Tracking system can implemented with the help of MRO integrators or internally by coding the MRO items, categorizing and grouping it, developing and reviewing the stock report periodically. The system triggers the order once the inventory reaches to minimum level, similarly alerts for the duplicate or excess orders. This also helps buyers to determine the future demands thus inputs for the budget plans.
Taming down the maverick buying can dramatically increase cost savings for the organization. It not only adds quick values but also helps in formulating organization’s procurement strategies in long run. Organization ought to eliminate the impulse to buy off-contract purchase through implementing reasonable procurement procedures and techniques. Promoting e-procurement and introducing inventory tracking systems in organization will further help to reduce the quantity of maverick buying. However, identifying maverick buying is not a straightforward process, though use of spend analysis and procurement tools aid organization to evade from maverick buying.
<> Gartner, The MRD E-Procurement Civil War: Blue vs White, Dan Miklovic & Carl Lenz, February 2000Challenges of Purchasing Centralization – Empirical Evidence from Public Procurement, 2009 – Katri KarJalainenBeroe Analysis