Best Practices Approach To Implementing A Purchasing Card Process
Cheryl A. Harris, C.P.M.
Cheryl A. Harris, C.P.M., Manager Purchasing, American Express Financial Advisors Inc., Minneapolis, MN 55440, 612/671-3509
Sandra Cook, Purchasing Card Administrator American Express Financial Advisors Inc., Minneapolis, MN 55440, 612/671-8056
81st Annual International Conference Proceedings - 1996 - Chicago, IL
The Situation. A need exists within corporations today to reduce operating expenses and increase profitability. The procurement profession is evolving to become a strategic business solution resource. On an average, 80 percent of the transactions that purchasing processes accounts for only 20 percent of the dollars they spend, indicating they may be allocating too much time to low-dollar, non-strategic purchases. Opportunity exists within the Purchasing Card product to move purchasing functions away from that of "heads-down" tasks, reduce transaction costs, and allow examination of supplier bases in a more meaningful way. This article will illustrate the methodology and steps to take to implement a Purchasing Card program using a best practices concept. Executive sponsorship is essential and will be discussed later on. The first rule of thumb, which you may want to write on a sheet of paper and post in your work area as a reminder if helpful, is to believe in and practice the concept "Nothing will cross my desk that I don't consider doing a different way."
The Methodology. The decision to implement a Purchasing Card program is a decision to re-engineer an existing process. To most effectively manage this change, utilize a team approach. A properly assembled team is able to lead, create shared goals, shape vision, mobilize commitment, secure sustenance, and monitor progress of the change initiative. Input from team members assists in identifying the impact on various groups and avoid pitfalls down the road that could lead to time-consuming re-work or, in the worst scenario, failure of the program entirely. The Purchasing Card program impacts areas across the company that aren't always evident at first glance. Involve impacted constituencies early and often. Key participants of the team include the following:
- corporate audit
- corporate tax
- information systems
The project itself can be lead by either purchasing or accounting; both are recipients of the greatest direct impact of the program.
Involvement of audit ensures compliance with corporate policies. Traditionally, Purchasing is granted the authority to commit expenditures on behalf of the company. You are about to provide numerous other employees this same authority. Make sure early on that your procedures and controls for this process do not violate corporate policies and that they do provide adequate audit trails.
Corporate tax is your resource and approval for compliance with tax laws. Use this area to ensure the processes you are putting in place provide adequate documentation of taxes paid or not paid. Companies that self-assess transactions and accrue tax due must work with their suppliers to avoid paying taxes on transactions twice.
Requisitioners: Keep their workload and responsibilities in mind. Employees who previously wrote up requisition documents will now be card holders. They will be expected to review a statement of their charges monthly to ensure accuracy. Make the program work for them, and they will make it work for you. In most cases, the more commodities available for them to purchase using their card, the easier the ordering process will be for them, but the more laborious the tracking and reconciliation process may become. Teach them early on during implementation to keep a log of their transactions so this process becomes second nature to them and they discover for themselves their individual "best practices" method of tracking expenditures. Their method of tracking should not be the focus, but rather accurate reconciliation. To make this product work the best for them and make them want to use it, allow them latitude in their methods for tracking so long as they accomplish the desired end.
Information systems will build the system to automatically upload Purchasing Card transactions into your general ledger, or they will assist in implementing Purchasing Card accounting software available from some credit card companies. Either way, they are the ones responsible for the hardware and software in your company and they are impacted by any new system inherent to this product.
Shape Your Vision. Your team must create a shared need to reduce transaction costs, paper hand-offs and processing, and cycle times. Determine at a high level what types of transactions you will focus on during initial implementation. Repetitive, non-strategic purchases should be a target as these are commonly the types of expenditures where purchasing and accounting have limited opportunity to add value. Know how your strategy fits in with the overall company vision and identify tactics to put the program into place.
Executive Commitment. Sell your idea to senior leaders. The higher in the company you go, the better your chances for program success. Senior leaders are able to effect change throughout the company, ensure decisions are implemented, secure resources, and provide empowerment. Direction from senior leaders is direction that will be communicated company-wide and elicit cooperative support.
Process Change. Understand your current processes from start to finish. This will allow you to determine where you engage in non-value-added activities and therefore where to target the Purchasing Card for implementation. Know what the steps are and who is involved in each. Consider the following example.
Requisitioners use a day planning system sold by a specific company. Purchasing has negotiated a corporate discount with this company. Purchasing receives a requisition approved by the charge unit manager; enters the order into their system to generate a purchase order; telephones and/or faxes the order in and files their paperwork; the receiving dock receives and enters the order on their system, files their paperwork, and forwards the item to the end user; accounting enters and pays the order on their system and files their paperwork. Ask yourself how many of these tasks add little or no value to this transaction. Perform a time/motion study to see how much time and how many paper hand-offs are required to complete this transaction.
Compare this to the Purchasing Card process. You set up your account with the day planner company so credit card transactions are acceptable, sales tax issues are addressed, and your discount is ensured through use of your account number. You communicate this account number to card holders and provide them with ordering directions. The card holder places the order via phone or fax, logs the transaction, receiving routes the material to the end user when it comes in, the payment is automatically allocated to the charge unit through the monthly upload into the general ledger, the card holder checks their monthly statement against their transaction log. The card holder experiences decreased cycle time due to the reduced number of paper hand-offs.
Any commodity or service that looks like the above example is a good fit for Purchasing Card use. Do not overlook accounting when you consider what would be a good Purchasing Card transaction. They will be able to identify disbursements they make outside of the purchase order system where they add little value. Temporary services is an example. End users and accounting process thousands of invoices annually for this type of service. Take a step back, see the process as a blank sheet of paper, and ask yourself if those invoices are really necessary. Ask yourself what part of the invoice process, involving information in most cases, you wish to retain and determine how that can be adapted to the Purchasing Card process. Calculate the transaction costs that can be eliminated by making this procurement of this service a part of the Purchasing Card program.
Use this product as a supplier management tool. Utilize data from purchasing, accounting, and end users to select the right supply base with which to use the Purchasing Card. Look for suppliers where there are a high number of transactions with low dollar expenditures as this is where you will see the greatest savings in transaction costs. Identify MRO purchases. Determine how you want this product to work within the framework of your company and what you want to accomplish by implementing the product. Expand the program by commodity type, consolidating your supplier base. Then look for other ways the product may work to reduce costs.
Implementation Planning. Commit yourself and your team to this project. Determine your roll out plan. This is where and when you decide the scope of your implementation. A phased approach provides checks and balances and opportunities for learning. Tailor the approach to meet the needs of your company culture. Determine the breadth of suppliers and card holders. Several approaches follow:
- Engage only a few suppliers, but issue cards company-wide. This approach allows for improvement through learnings with the least disruption of daily business activities before expanding the program to other suppliers.
- Allow purchases with few or many suppliers, but with less card holders. This approach may be applicable to a multi-plant site to ensure integrity of processes and availability of resources before program expansion. Different sites may also have unique procurement needs that should be addressed individually. Success at one site will also encourage cooperation at others.
- Allow card holders to make purchases wherever they feel they need to get their supplies. This approach is mentioned only because it does exist today. This approach accomplishes little in the way of controlling expenditures, consolidating supplier base, or utilizing preferred suppliers. It does reduce transaction costs and may be implemented when a company currently does not nor wishes to in the future control where their dollars are spent or their goods procured.
No matter which approach you use, you will need to determine accountability of card holders. Decide if employees who currently write up requisitions will be the card holders and whether they will be responsible individually for those cards, or whether cards will be issued on a department basis, with accountability resting with the person responsible for that department or unit budget. Keep in mind that this is a complete re-engineering of a current process and any person allowed to use this tool should be trained in procedures. Individual accountability promotes proper use of the product. A mix of individual cards with a few department cards for unique circumstances is feasible.
The team must clearly state their timeline, milestones, and objectives for implementation. Identify up front what will be measured, at what intervals the measurements will be taken, and who will be responsible for taking the measurements. Using these measures as a baseline allows for assessment of the program's success and comparison to stated milestones. Items targeted should correspond to the highest priority business objectives and be easily measured. Don't track every item possible; choose only a few significant measures to keep it meaningful and manageable. Look at your goals for the program, and then identify the measures that will tell whether you reached those goals. Some goals and measurements include the following:
- reduced costs; number of transactions on the Purchasing Card, assignment of processing cost of purchase order/invoice type transaction vs. Purchasing Card transaction
- reduced cycle time; look at the elimination of steps and time spent in the former process vs. the Purchasing Card process
- employee satisfaction; a questionnaire containing pertinent inquiries will tell you what is and what isn't working for the card holders, valid suggestions for improvement should be considered and implemented if warranted
- supplier satisfaction; don't forget about the suppliers, they can be a valuable resource for process improvement and limitations of which you may not be aware
- improved spending controls; are card holders using the product where you want them to?
- improved supplier management; look for a decrease in the number of suppliers and savings generated from discounts resulting from a decreased supplier base
- improved productivity; number of non-value-added transaction activities in which purchasing and/or accounting is no longer required to engage, number of contracts and cost analyses performed monthly, i.e. instead of processing transactions, purchasing professionals are active in contract negotiations and performance of money-saving analyses.
Tasks. Your implementation plan is mostly a strategic approach to what you want to get done. The means to that desired end must also be clearly identified, defined, and assigned. Do not underestimate the resources required to implement and sustain a Purchasing Card program. Each of the following should be included in your task list:
- develop your communication plan for implementation
- identify a program administrator, i.e. one who will be responsible for distribution of the cards and coordination of administrative changes required by card holders; determine if this is the same person who will define and implement ongoing strategic direction keeping in mind that the speed with which you expand your program is directly influenced by the ability to allocate resources
- select card holders, i.e. criteria for selection and method of enrollment
- define usage policy
- design and develop a Users Manual for distribution to each cardholder, the manual should contain guidelines for the program and Card usage and be easily expandable for future addition of ordering procedures. This is a good time to consider any options for putting updates on an on-line system where users can access them electronically. Communication of changes in the program can be cumbersome and effort put into long-term solutions early on will pay back greatly in time savings later
- design and execute training to each card holder
- engage supplier participation
- design and implement accounting structure for automated upload into general ledger
- design and execute procedure for auditing expenditures; a best practice with the greatest elimination of paperwork is to have each card holder responsible for reconciliation of their monthly statement with periodic audits of card holders performed by accounting to ensure reconciliation
- design supplier pricing audit procedures; how will audits of pricing paid on Purchasing Card transactions be performed? Keep in mind these are orders that were previously placed in most cases by purchasing, where pricing was audited up front. Look to your suppliers and the card issuing company for creative solutions to this business need. Automated pricing audit is available through software provided by some card companies; in other cases you may have to look to card holders or suppliers for verification of pricing paid. This function may be performed in conjunction with card holder audits through analysis of their statements and reporting provided by the card company
- develop method for combating by-pass spending, i.e. who will identify orders being placed via methods other than the Purchasing Card when that commodity or service is approved for Purchasing card use and how will those orders be handled to ensure they are placed using a Purchasing Card going forward?
- design tool for ongoing, efficient means of communicating with card holders
Summary. Think out of the box. The Purchasing Card is a tool that will save your company money and reduce time spent on non-value-added tasks. Enlist management support, identify and allocate resources to not only roll out but to also sustain and expand the program. Expand the program on a commodity basis in a phased approach to reach long-term goals. Look at ways of eliminating disbursements from petty cash funds. Don't stop expansion until you can't think of a single commodity or service that couldn't be ordered or paid for using this product. Then, tomorrow, another one will cross your desk, and you will expand the program further. While the Purchasing Card isn't the be-all and end-all of transaction processing or invoice paying, it is an effective tool with far-reaching capabilities. Look to the card company you choose for creative solutions and support. The card company should be flexible and responsive to your needs and committed to the product themselves to facilitate continual development and improvement to the product to best benefit you as their client.