Maverick Buying: The Savings in the Details

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By: Abhishek Nannore -- COE Lead

25 March, 2014

Maverick Buying: The Savings in the Details
WHITEPAPER

Introduction:

In the recent challenging times, where the demands are fluctuating and margins are getting thinner, 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 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.

Purpose:

The purpose of the whitepaper is to study 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 maverick buying.

Solution:

The paper emphasizes the spend analysis process and percolates the various techniques to identify the maverick purchase. In 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.

What is Maverick Buying?

Before venturing into details, it is crucial to understand what maverick buying is. Maverick buying is an unplanned, uncontrolled procurement done without consultation with the purchase department. It is independent in behavior or thought and does not comply with the organization’s standard purchase practices nor includes any price comparison, framework agreement, or negotiation. Maverick buying is also called maverick spend and maverick purchasing. Maverick spend analysis is crucial for the survival of any business regardless of its size and operations.

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Depending on the industry, indirect procurement accounts for 60-80% of total purchase requisition, which is up to 40% of total purchase value. For a large manufacturing company, MRO represents approximately 70-80% of total purchase requisition, which is 15-20% of total purchase value. In MRO, only 5% of items are frequently used and less than 3% of items make up 80% of the annual purchase value. As such, it is difficult to predict the future demand accurately for most of the MRO items. 

MRO items receive low attention from the procurement managers due to their trivial contribution to the total purchase value. Hence, most of the MRO items are procured in unplanned, uncontrolled, or off-contract agreements without any negotiation, and are predominantly categorized as ‘Maverick Buying’. Consequently, the capital gets blocked in excess, duplicate, unwanted, and obsolete items. 

Such items typically constitute 20-30% of the total annual purchase value. For a large manufacturing company, maverick buying accounts for 30-45% of all indirect purchase value, whereas for a comparatively smaller-sized company it may account for more than 80-90% of indirect purchase value. Nevertheless, an organization can save 20-30% of the unrealized cost of MRO purchase while carrying off the maverick buying.

Why is understanding maverick buying so important in the MRO category?

Compared to the procurement of ORM (Operation Resource Management) categories, the MRO category deals with a larger number of orders, in which quantity per order varies from a single unit to thousands of units. The criticality of MRO items varies from low to very high depending on the nature of operations and failure losses, whereas the criticality of ORM items is generally low. Moreover, controlled inventory with a constant track is required for the items.

The MRO buyers have to deal with a 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 the company's procurement guidelines. These procurement complexities in the MRO category lead to higher possibilities of maverick buying and need to be addressed carefully to achieve cost savings. The figure below outlines the key difference between the ORM and MRO procurements.

Factors Advocating Maverick Buying

The other side of maverick buying is greater flexibility and shorter procurement time. Sometimes, the special offers induce buyers to avail certain benefits of it. However, in many cases the buyers do not evaluate the other options and land up in obsolete purchases or lose potential savings.

Determinants of Maverick Buying

One of the biggest determinants of maverick buying, which can thwart an organization's procurement plan, is expensive buying owing to low or no negotiation which completely ignores the total cost of purchase and involves decentralized smaller buying quantities. Moreover, it does not involve price comparison and allows handling a 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 guarantee, or and other legal issues, thus corresponding cost implications to the organization. Off-contract purchasing increases the chances of corruption through bribes from unofficial suppliers, which further increases perplexity during the auditing process.

Maverick buying can create rifts between in-house employees which can adversely affect the departments and the organization as a whole. Many times contracts have minimum orders that need to be fulfilled. However, if employees are making purchases elsewhere through maverick spending, the minimum orders are not met with the supplier thus severing the relationship with the suppliers. 

In the worst case, the contract can end and this can strain future relationships with the suppliers. Maverick spending affects the profits as the negotiated contract has lower prices. But if maverick buying is done, then a business is paying more for the same thereby affecting the bottom line substantially.

When negotiations are done with suppliers, it can mean higher cost savings for the company. For example, a business can get a discount on bulk purchase of certain items because they need it for the production of a particular product. However, when an employee participates in a maverick buy then it can mean higher costs to the company because the employee is choosing a supplier with whom the company hasn’t negotiated with. The negotiation will be a waste because it is not being utilized as other suppliers are being sought, leading to savings leakage. An increase in processing cost is also possible in the case of maverick spending because paying newer suppliers can take time.

Causes of Maverick Buying

Numerous factors can lead to maverick buying, varying from individual behavior to organization level. The deviant behavior behind the ‘Maverick Buying’ can be ignorance/bypass of the existing procurement process and framework agreements, renunciation of the 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, and so on. 

Moreover, the organization’s incapability can also lead to maverick buying such as inability to enforce a process, inadequate training and knowledge, unplanned and uncontrolled budget, and failure in articulating the accountability. Here are some key reasons for maverick spending explained.

Decentralization

Maverick buy can be due to decentralization where each branch of the business works independently and makes purchasing decisions separately. When this happens, it can lead to an increase in maverick spending that is often difficult to nip in the bud. This means there might be different suppliers and contracts in place which can lead to an increase in maverick spending. This is because all suppliers might not be useful to all branches of the same business. A lack of collaboration amongst the different branches can be a reason too. 

Lack of Training

Lack of proper training can lead to maverick spending. For example, if a company is using e-Procurement which isn’t user-friendly, things will go south as it can lead to an increase in maverick buying. If the company is using a robust system, training the employees is crucial so they can understand the usage and are more inclined to use it. Maverick spending can be caused due to the inability to understand the various policies and processes which can be easily eliminated when a proper system is put in place.

Lack of Communication

Lack of communication can be detrimental for businesses and is often a cause of maverick spending even if it happens indirectly. The reason companies often suffer from maverick cost is due to a lack of focus on mending relationships with employees or spending time in communicating effectively with employees. Maybe employees have a problem with procurement which is why they prefer maverick spending or perhaps they are unable to comprehend the policies set in place. 

Indirect Spend

Even though this is not applicable to all businesses, indirect spending can lead to maverick spending as it is not as controlled as the direct spend of a business. Indirect spend can trigger cases where spending is done on low-value items but are required in high volume. It is also common with MRO products. Remember that this is more common in only certain types of businesses than others and so isn’t the cause for many businesses. However, it can still have a lasting impact on a business’s bottom line.

Identifying Maverick Buying

Identifying the maverick buying is not an easy task. It requires a systematic and disciplined approach to analyze the existing spend data. The below figures show the typical process to analyze the spend. Once the existing spend is analyzed, deliberate actions are required to tame down the maverick buying.

Maverick buying can be identified through the following maverick spend analysis –

  • Purchase on-demand vs. critical purchase: The matrix can be prepared between purchase on demand items and their 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 an uncontrolled purchase in the organizations and supplier indicates an uncontrolled purchase in the organizations, thus the possibilities of spend consolidation are high.

  • Focusing on total cost: Buyer must evaluate all the available offerings thoroughly and must understand the indirect cost associated with it. The focus must be on total cost rather than just cost.

  • Core suppliers are part of strategic value/vision for the organization: A 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 transactions per supplier: Greater number invoices processed per supplier is a very good indication of a 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 contracts renewed vs. total contract for the period: Analyzing the total number of contracts renewed for the year compared to total contracts, and the contract renewed in current year compared to previous year provides the indication of maverick buying.

Corralling the Maverick Buying

Corralling the maverick buying is one of the 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 the 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 both at an individual and an organization levels must be incorporated into the company.

Table 1: Corralling the Maverick Buying

At Organization Level

At Individual Level


  • Process standardization

  • Prohibition / preventing it

  • Company policies and training

  • Set up penalties

  • Spend consolidation and supplier rationalizations Budget review and allocation and hold them accountable

  • Automation of procurement management

  • Implementation of e-procurement system

  • Introducing purchasing cards

  • Center-led organization with collaborate across the business units


  • Adherence to compliance and guidelines

  • Thorough understanding of purchasing cycle

  • Take part in training

  • Use procurement reference manual

  • Use of purchasing cards

  • Generate supplier list

  • Go through approval

  • Pursue checks & balance

  • Total cost analysis and comparison

  • Evaluate each purchase

  • Engage in firm agreements

Source: Beroe Inc.

 

Recommendations to Evade Maverick Buying

Maverick purchasing doesn’t offer any benefit to a forward-thinking company. It cuts into your revenue pool and exposes your business to operational threats. As such, if you are trying to keep the risks at bay or even minimize them, balance your regular business operations, and drive up your profit margins, you need to tackle maverick spending decisively. Here are some ways that can help you reduce your maverick spend.

1. Implement Procurement Policies and Standard Procedures

The primary step in checking unplanned/uncontrolled purchases is to educate those buyers who are responsible for raising purchasing requests for parts and services in the 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 the production, finance, and purchase department must be considered for building a successful procurement strategy. 

For that, a reasonable process must be standardized and acquainted for all to follow. Periodic training and reference manuals can additionally instill the purpose. Moreover, the management must define the accountability of individuals for any financial loss, likewise, stipendiary for positive results.

2. Perform a Holistic Spend Assessment

Before taking off to curb your maverick spend, you need to first form a holistic split-up of how much you’re spending outside the present contracts. For this, you have to split up your spending to the grassroots to see where your resources are going.

Moving ahead, you need to recognize the stakeholders and vendors on your team who’re the key drivers of maverick buying. After that, the next step is to calculate the short- and long-term expenses of your maverick buying, that is, how much maverick purchasing is costing vs. how much you’d have spent had you remained within the contracts.

3. Preference to E-Procurement

Tech advancements, such as e-procurement capabilities, have multiplied the ability of buyers. Through the e-procurement options, buyers can access multiple vendors and evaluate the offerings with ease thus having higher bargain power. 

On the other side, vendors are inviting buyers to contend and bid for their products and services. It additionally offers buyers to place orders and bids while maintaining existing relationships with incumbent suppliers, as such, buyers can get the most value attainable. This will help reduce the chances of maverick buying by eliminating the impulse to purchase for off-contract. 

Additionally, online ordering shortens the acquisition and fulfillment cycle as well as the delivery time. Through online ordering, buyers can manage a 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

4. Introduce Inventory Tracking Systems

Introducing a system for tracking MRO inventory is a crucial step to keep spending in line with the budget - it can reduce maverick purchase to a large extent. The tracking system verifies the quantities of purchase for every new order and keeps the quantity under the preset threshold limit. 

Tracking systems can be implemented with the help of MRO integrators or internally by coding the MRO items, categorizing it, developing and reviewing the stock report periodically. The system triggers the order once the inventory reaches a minimum level, similarly alerts for the duplicate or excess orders. This also helps buyers to determine the future demands and thus inputs for the budget plans.

5. Educate and Train your Team

Once you have chosen the right technology for the e-procurement and inventory tracking system, you need to focus on employee training. Without proper training, employees cannot follow procedures to curb maverick spending or to keep track of it every day. 

The training should outline all the procedures being implemented and it should thoroughly explain how bad maverick spend can be for the business. Constant training is required whenever processes have evolved and employees should be made part of the decision-making process so they can clearly understand maverick purchasing and explore ways to reduce it effectively.

6. Communicate

If organizations want to gain complete control of their purchasing, they must communicate clearly at all times. Communication with suppliers and employees is critical to ensure decreasing maverick spending. The procedure to purchase efficiently must be well-communicated with every employee who is expected to participate in the process. This applies to whether the maverick cost to the organization is huge or not so much. If different P2P processes are being used for the different purchase requirements, this must be communicated clearly with the employees too. All this makes sense when the roles and responsibilities are clearly outlined.

7. Build a Process for Special Purchase Needs

No matter how well you organize your procurement processes and systems, there’ll always be some cases now and then where there’s a need to be fulfilled without an existing vendor to take care of it. Or maybe there’s a dire need that your existing vendor can’t fulfill in a reasonable timeframe.

To prevent such situations from resulting in uncontrolled maverick purchasing, it’s better to make a straightforward process to guide escalation or emergencies, detailing the steps to take when the existing vendors cannot fulfill a required supply.

Conclusion

In a nutshell, it’s evident that maverick spending occurs at scale when organizations utilize complex or seriously limited tools and techniques that mix up the procurement process and compel stakeholders to look for alternatives.

Taming down the maverick buying can dramatically increase cost savings for the organization. It not only adds quick values but also helps in formulating an organization’s procurement strategies in the long run. Organizations ought to eliminate the impulse to buy off-contract purchases by implementing reasonable procurement procedures and techniques. 

Promoting e-procurement and introducing inventory tracking systems in organizations will further help to reduce the quantity of maverick buying. However, identifying maverick buying is not a straightforward process, although the use of spend analysis and procurement tools aid organizations to evade maverick buying.




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