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Pick a card. Any card?

Replacing purchase orders with the right procurement card can save your company a bundle in the long run. Is it time to shuffle the deck at your organization?

Most companies today are looking closely at improving and streamlining the procurement process. Our quest began two years ago at the North Carolina-based headquarters of Lord Corp., a privately held technology-based company with $340 million in sales. It was summer 1994 when we first attended a seminar on procurement cards and realized that the future was indeed in the cards.

Still, it took more than a year for Lord Corp. to investigate the benefits, select a vendor and pilot a program for company-wide use of a purchasing card. The process we went through and the lessons we learned can help other companies in choosing a card. Here are the steps we took to attack our purchasing problems; the criteria we used to select a vendor; and how our procurement card system is working today.

STEP BY STEP

The procurement process is more than just issuing an order. It involves several different steps: identifying a need; requisitioning the product; ordering; receiving the product; and paying the supplier. Lord put together a cross-functional, cross-divisional team to study the process and identify objectives. The team included end users as well as representatives from management information systems, finance and purchasing.

We made a flow chart of the actual process, from the point of requisition through purchasing, ordering, receipts and accounts payable. Believe it or not, we found 19 steps in handling data for a single purchase order cycle. We costed these steps, and then we did a reality check: We benchmarked our figures against data compiled by Arthur Andersen. Frankly, our costs were way out of line.

With a procurement card, we believed we could cut our steps in half and eliminate a lot of the nonvalue-added activities we were going through, particularly for small, incidental purchases under $500. Our team did an analysis of all the purchase orders issued by the corporation. We fell into the 80/20 rule - meaning 80 percent of the paperwork was generated by purchase orders that made up only 20 percent of the total dollar value.

We wanted to focus our purchasing attention on that 20 percent of the orders making up 80 percent to 90 percent of our dollars. We also wanted to maintain control of the cards we were issuing and where they could be used, so that no one could just go out and buy a whole lot of materials or use the card for personal items. Cost control without micromanagement was our goal.

We also believed the card could reduce our supplier base. Instead of buying everything from everyone, it would help us close the loop on preferred suppliers. On the opposite end of the spectrum, it could also help us with odd, one-of-a-kind purchases. We might buy from a supplier only once a year, so we don't need to put that supplier into a purchase order database or provide it with credit information on our company. A procurement card could better handle those purchases.

The procurement card could also cut the number of purchase orders we issue where the vendor doesn't need to be sourced or the price doesn't have to be negotiated. These purchases are more of a mechanical process; there's little value added by the purchasing department.

We were looking hard at the overall cost of buying an item, not just the cost of the item itself. We wanted to lower the total cost of procurement - to reduce the number of steps involved in ordering. For example, maybe you can buy a bearing somewhere for $190, vs. the $200 you might pay to a supplier who uses your card. But to save that $10 you may spend $50 to $100 worth of time and labor. So you're really losing money.

Although we were anxious to move on the program, we ran into an initial problem getting card issuers in to talk to us. Many issuers want to focus attention only on companies that can give them immediate high cash flow - with about $1 million in volume as an entry floor. They were focused on large, Fortune 500 companies.

We were fortunate that we got in when we did, as the vendor we ended up using was interested in partnering with companies like us - organizations that it already had a relationship with in some other capacity. Ultimately we did manage to meet and compare four vendors. We compared them on nearly 40 different areas, ranging from the length of their implementation periods, to who their customers were, to whether they limited the number of transactions per day or per cycle.

We developed an in-depth matrix (see chart on page 17 for a condensed snapshot) in order to compare the issuers. It took a lot of time and effort. But it's very important for companies to understand how the various issuers are structured and operate. Some offer one-stop shopping, where there's no third party or bank involved - they themselves are the bank. With such an issuer, there are only two parties involved: the customer, such as Lord Corp., and the supplier we're buying the product from.

Other issuers work through different banks. Under that scenario, you might be dealing with several banks if you have national or international locations, because there's a good possibility that whatever bank is closest to the transaction is the bank being used. You really have to scope out the structure of the issuer's organization - who's doing what for them.

For example, the banks working for issuers may also have a third party supporting their software. Then it's not just the bank, but another party, a fourth party, that you're dealing with. Or the issuer might also subcontract out such things as the supplier sign-up, or other support functions. Being able to deal directly - to go with a one-stop issuer - became critical to us as we investigated the process.

Focusing on the structure of the issuer's resources brought many questions to mind: Did they have representatives across the United States? Were they regionalized? Did their service representatives come out of the home office even if they were responsible for regional locations? We wanted the issuer to have people located in strategic points, where we felt they would be more readily available to us.

WORTH THE WAIT

The matrix in which we laid out all of our criteria took well over a year to develop. That might seem like an abnormally long time to some companies. But we were going companywide, we had a large team, and consequently we had to work through a lot of people with many different perceptions, ideas and needs.

The process was slow, but we thought it worthwhile. The matrix helped us clearly delineate differences from one vendor to another. We went so far as to mail the matrix to each of the vendors with every other issuer's information on it, so they could respond to the information we wanted.

We felt better as we went through the process because we knew we were making an informed decision. We were understanding the procurement card's complete procedure transaction process, and opening our eyes to such details as: What happens to the data? Is it keyed or swiped into the machine? This can make a difference in the quality and quantity of information collected.

Visiting and benchmarking companies where procurement cards were already installed was also very beneficial. Most of these users were willing to share information freely and were very candid about the strengths and weaknesses of the various cards. In these benchmarking visits, we were also trying to find out if there was something in our business process that's different from another company's business process, because that factor might affect the decision.

For example, one factor we considered from the outset was how well the issuer could handle all the various account numbers being charged by different people. Our accounting structure works so that each department gets its own expenses - things aren't charged into a general fund. So, do we give one particular maintenance department eight different cards, each with a budget center and account number to charge to, or do we give them one card with the capability of charging multiple departments at the point of sale?

Now if we charged one department at the point of sale - or had the card default to one department - then when we received the monthly bill we'd have to reconcile all the charges and break them out. That's putting steps back into the process. Our purpose was to take steps out, to save people time. So we wanted a card with the capability to do this right on the front end, and to interface electronically with our accounts payable system. We didn't want a manual interface.

To make the right purchasing decision, each company has to identify its own major thrust in using the card. If it's ease of use, you might go with one particular issuer. If it's more complex data retrieval and maintenance, or controlling how and when the cards are used, then you might go with another vendor. It depends upon your underlying purpose.

Key elements in our decision were ease of use, control and information flow. A big issue was the tax reporting information that issuers could provide. We needed an issuer with highly intelligent, point-of-sale tax reporting software - software that actually knew if the item being purchased was taxable or nontaxable, and what the current rate for that state and region was. Then, even if a vendor put in the wrong tax rate, the software would recalculate it and make the transaction at the appropriate rate.

Our tax manager sleeps very well at night, because the information he now gets through the procurement card is better than what our normal purchasing systems provide. It's also very important to find out how much reporting is included in an issuer's standard reporting package, compared to special reports that you might have to pay extra for.

DATA DELUGE

We found that our matrix was a real advantage because basically it exposed the hype vs. reality of procurement cards. We kept a level playing field between all of the vendors, because sharing the matrix with them generated a significant amount of interaction and information updates. The vendors helped us pose questions to each other in ways we wouldn't have thought of ourselves.

In fact, we had so many updates to the matrix that our own team members got tired of the process. But we knew you need accurate data to make informed decisions. We wanted people on the team to be aware of any changes or additional information that we had. So we passed updates along to everyone.

In hindsight, we believe our internal team was too large, with too many different agendas. But we wanted to go corporate-wide with one card, instead of having one part of the company go one way and other divisions use something else. So there was a need for a lot of internal discussion as to what critical features were important to us and which card issuer offered the most value.

Part of our decision-making process was receiving senior management approval. To that end, we put together a policies and procedures manual. It's an accumulation of the knowledge we gathered, with some good basic business practices thrown in as well. That manual helped us talk very comfortably about the process, to answer most questions and to make people feel good about using the card.

For our end-users, it also helped prevent any "blind-leading-the-blind" situation. We discussed pitfalls and how to handle them. And we stressed that we would be available to help if they had questions; run periodic meetings after issuing the card; and communicate with them via e-mail about each month's billing results. This way they'd know if there were errors, such as transactions where the account number was kicked out. Our advice is to keep a continuous dialogue going as you expand your user base, so you can keep on getting feedback.

We also had a lot of communications with our supplier community, to find out if and how they accepted procurement card purchases. Having vendors accept one card vs. another could be an important criteria for some companies. In our case, we chose to look at what might be instead of what was. We felt that we could probably have enough clout with suppliers to get them to sign up with the vendor of our choice, and that has been the case.

GETTING READY FOR THE KICK-OFF

A key to the kick-off of our pilot was the sign-up of suppliers for our vendor. With our issuer, we held a meeting with about two dozen of the suppliers we considered critical to the success of our pilot program. Most of our suppliers were already aware that we were looking at a procurement card, because of the input we solicited from them throughout the year.

Suppliers' concerns tend to center on what the program is going to cost them. But a lot of them conclude that a 2-percent to 2.5-percent discount rate is well worth the program. They can get their money in 72 hours and cut out a lot of their own processing steps, such as issuing invoices, paying for postage and chasing down payments. It's important for companies to cut out steps on the suppliers' end. When you reduce the suppliers' costs, you reduce your own costs, too.

At the suppliers' meeting we presented our vision of how we could reduce our 19 procurement steps to nine. We had one supplier, who was already accepting procurement cards, give a speech about his experiences, so the others could hear "one of their own" talk about the benefits. We also videotaped the presentations and our question-and-answer session, to mail to other vendors who weren't at the meeting. Things went very well even before the pilot began.

Pilots can take a long time because procurement is a "soup-to-nuts" transaction. If you do a transaction in the first week of the month, you won't know the results of that transaction until the end of the month. That's when the transaction data comes from the procurement card issuer and merges with your accounting system. If you make a mistake in the first cycle, it's another 30 days until you find out what happened in the second cycle. Hence our pilot took longer than expected.

We've been using the card for more than six months now, with more than 50 cards in use. Account overrides, project numbers, capital numbers, maintenance purchases, interdivisional transfers - we're trying to test them all, to see where we have problems before we do a mass issue of the cards.

TESTING, TESTING

Our advice is test to the hilt. Make sure you have the bugs worked out before you ramp up. We started a pre-pilot even before the pilot - with one of us and an associate from our maintenance department using the card. Both of us were experienced in placing orders. And we found that using a procurement card is really no different, except that instead of using a purchase order you give the supplier your card number and include certain information for accounting and shipping.

We went for the "snowball" effect. Our pilot started in two Pennsylvania manufacturing plants and a corporate facility. Then we expanded to a few other key areas within the plants, asking people to use the card to buy perishable toolings and incidental operating supplies. After a few months' experience, we added another plant. And we kept going, identifying the bugs and correcting them before things got too large.

Lord has plants across the United States and worldwide, but we purposely started off with users who were physically close to headquarters - units we could get our arms around and help. As we had successes, we expanded. The key is to start with "friendly users," people who want to use the card and who don't have to be sold on the process. They'll be motivated to make the process work.

And motivation is key. Initially, there was some feeling that the procurement card was only going to benefit the purchasing group, which could finally stop diverting energy and focus its attention on larger, critical orders. But soon everyone realized there were benefits throughout the corporation. For example, the only manual labor is a packing slip. And accounting doesn't have to spend time matching up vouchers in our system for $100 purchases - things like that.

We're saving money across the board. We were accurate in estimating we could reduce our 19 procurement steps to nine steps. We're realizing the savings from this reduction every time we use the card. And there was little out-of-pocket expense to get the program running. The cost was mainly the time in doing things right up front, and then testing the card to its depths. We've seen companies get a few cards in, use them on a limited basis and then sit by while the program fizzles out. They're not taking advantage of the possibilities.

We discovered that you can achieve full benefits if you select the right card; get it into the hands of responsible people who have a use for it; make them fully aware of which national and local suppliers accept the card; and keep the lines of communication open. That's how you cut down on the number of purchases made through purchase orders and how you get real value from a procurement card.

RELATED ARTICLE: A FEW GOOD QUESTIONS

Here are some of the many questions Lord Corp. asked card-issuing companies when it began searching for a procurement card vendor.

* Of the top 100 companies in the United States, how many are your customers?

* How many people are in the purchasing card division?

* How many cards have you issued?

* What's your software interfacibility with your company and our suppliers? Will we have to upgraded our software or use yours? What's the cost?

* How do we pay you?

* What information do you provide? Sales and use tax information? Reporting information?

* What types of restrictions can you place on the card for employees?

* What's the payment cycle?

* Are there dollar limits on the card?

* Do the limits apply on a daily basis and/or a cycle basis?

* Do you limits the number of transactions per day or per cycle?

* Can the card be limited to special suppliers?

* Can we establish a limit for our budget centers?

* Since we have many divisions, can we use one card for several account numbers?

* What's your process for signing up vendors?

* What kind of documentation do you provide, such as statements, central bills and so on? How do you provide it - paper, disk, online? Is there a charge for online access?

* How long does it take to fully implement the program?

* What's our liability to you if one of our employees misuses the card?

* Who conducts the training for employees on how to use the card?

* Do our suppliers need special equipment to process the transactions.

* Does the issuer have a separate division for corporate accounts.

* When you install new software, do you have to go through a debugging period? How will that affect us?

* How do you plan to enhance your product in the near future? Will the enhancements raise our costs?

* Are there third parties involved, or is your organization both the card company and the issuer?

Mr. Barnes is manager, corporate accounting, at Lord Corp. in Erie, Pa. Mr. Glotzbecker is a senior buyer in the mechanical products division of the company. They can be reached at (814) 868-0924, extension 3242 or extension 2325, respectively.
COPYRIGHT 1996 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Management Strategy; procurement cards
Author:Glotzbecker, Gary H.
Publication:Financial Executive
Article Type:Cover Story
Date:Jul 1, 1996
Words:3294
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