Beyond the Procurement Card - The Next Steps
Robert A. Gallant
Robert A. Gallant, Chief of Supply Management, CN, Montreal, Canada H3B 2M9 514/399-7709
81st Annual International Conference Proceedings - 1996 - Chicago, IL
Canadian National Railways began using a procurement card in the late eighties. The initial objectives were to simplify the acquisition of goods in the field and to improve controls over such transactions. These goals have been achieved - now it is time to move on with continuous improvement! Additional objectives of reducing paperwork processing and the associated overheads now need to be addressed. Technology advances, such as the "smart" card, can provide significant benefits to industrial procurement card users.
SITUATION IN THE LATE 80'S.
Canadian National Railways provides transportation services across Canada and some U.S. states; in the 80's revenues were in the $ 4 billion range and employment level was approximately 50,000. Total annual purchases were slightly under $ 1 billion.
Like many companies, CN employed various methods of acquiring goods and services. These included conventional purchase and blanket orders, a variety of open orders, as well as local purchase orders, and cash when everything else failed.
Given the wide dispersal of field maintenance forces, it was frequently a challenge for field personnel to easily acquire the non-predictable and emergent items they required. Open orders had been set up by the purchasing organization; however, these were generally restricted to MRO-type items. Additionally, these open orders were only available where some potential volume had been identified, and were therefore accessible only in larger towns and cities.
A local purchase order process had been established in the seventies in an attempt to facilitate the field forces' acquisition needs. The process involved having the employee requiring an item calling the local purchasing officer, identifying himself and his requirement, and requesting a local purchase order number. The purchasing officer would then log this request, and verbally issue an LPO number from his pre-numbered form set. The field employee would then go to the local merchant, identify himself and his need, provide the LPO number, and pick up the materials, not forgetting to get the appropriate invoice, coded with the LPO number and CN account distribution. This documentation would then be sent to the purchasing officer who had issued the LPO number; this purchasing employee would then match the invoice with the pre-numbered form, type in the specifics, clear the log, and send everything off to the local accounting office for payment.
It is not difficult to imagine the potential problems and control gaps involved in this time consuming and documentation intensive process! Merchants frequently had difficulty getting paid, particularly if the field employee forgot or was slow in submitting his invoices. On occasion the merchant would send an additional invoice, raising the potential of duplicate payments. The volume of such transactions rose as local CN supply facilities were being reduced. The whole process was the topic of several scathing internal audits - clearly a better system was required!
THE SOLUTION: CN PROCUREMENT CARD.
To address the issues, CN's Supply Management department assembled a team to find a solution - the initial objectives were:
- Simplify field acquisition process
- Eliminate local purchase orders
- Improve controls and payment processes
The solution they devised was to extend the conventional consumer credit card process to industrial use. The initial challenge was to find a credit card company prepared to meet our specific requirements. CN wanted to avoid the individual cardholder billing process and, additionally, wanted consolidated EDI monthly statements. Our current card provider was the only one, at the time, willing to modify its processes and work with us to simplify validation procedures.
The team also designed and implemented a mainframe based Credit Card Order Management system. This significantly simplified transaction validation and distribution of charges to the appropriate general ledger accounts, and this is accomplished in an on-line environment.
CN has met its initial objectives; current statistics on usage are: 2500 procurement cards in use throughout Canada 110,000 plus annual transactions $ 25 million per year of purchases
While the CN procurement card can be termed a success, there are a number of areas where we are seeking improvement. The main points are:
- Control over certain purchases is difficult
- Acceptance of cards is not universal
- Specific item purchase information not easily accessible
- Difficult to determine if trade discounts are being extended
- Vendor transaction cost adds to total cost
- Paperwork process is still too intensive
1. CN uses other types of cards for other purposes; for example, specific cards are used for travel expenses, and a fleet card is intended for automotive expenditures. In addition, for safety considerations, certain items are not to be acquired. Given the frequent lack of details in either the documentation or billing data, it is difficult to effectively ensure the intent of the card is always followed.
2. Many industrial vendors do not accept credit cards as a method of payment. Until such time as this becomes a more widely accepted method of industrial purchasing, this will continue to be a problem. Additionally, some vendors do not accept any credit card, while some may be Visa or MasterCard customers exclusively.
3. As in consumer credit card billings, the information provided by our card company is too limited to provide a data base for analytical purposes. The benefits to be derived from capturing this data from the invoice documentation are not deemed to warrant the cost of the time and effort.
4. It is difficult to determine whether the traditional trade discounts normally accorded to industrial buyers such as CN are in fact being granted. This is also directly related to quality of item description and pricing breakdown.
5. All transactions processed through the credit card process represent a cost to the vendor. As any purchaser knows, ultimately that cost has to be reflected in the purchase price.
6. In CN's case, the processing of paperwork is still a major issue. Field forces are still required to submit credit card slips and invoices, coded for account charging, to Administrative Support Centres. These centres have to sort, file, and reconcile the transactions to the on-line charges.
Usage analysis: Extensive analysis of usage in terms of location, vendors employed, frequency, types of products is just getting under way. This is expected to yield a better comprehension of usage and identify cost reduction opportunities. We believe the potential exists to obtain retroactive rebates from vendors where the dollar volume warrants it - this should facilitate the designation of "preferred" suppliers.
By-pass for alliances: CN has established a number of alliances over the last few years. These alliances are usually with larger suppliers on a regional or national basis; types of products are usually MRO. The contracts provide for significant price and service advantages. Analysis of procurement card transactions is revealing that many purchases are being placed with these vendors - these clearly result in additional cost to the supplier and, to CN. Efforts are being undertaken with these vendors to modify their systems such that CN procurement card transactions by-pass the credit card provider's process. The goal is to get all these purchases included within the suppliers' EDI monthly billings and thus ensure CN is accorded its price advantage as well as improves vendor's net.
Field Cheque: A pilot has been initiated with our credit card provider whereby CN field personnel are given cheques. These cheques can be used when purchasing goods from vendors who do not accept the CN MasterCard. Controls over the acceptance of the cheques is similar to those in place for credit card transactions, such as getting an authorization number, transaction dollar limits, et cetera. This additional flexibility in acquiring emergent goods and services in the field is being met with enthusiastic support from our field personnel.
CN'S "IDEAL" SOLUTION.
After almost seven years of experience using a procurement card, we have reached a number of conclusions about the type of card which would meet our currently known wishes. The main features are described below.
One card would be used for all uses. The CN procurement card could be used for goods and services, for automotive expenses, as well as for travel and entertainment purposes.
Front end controls would be significantly enhanced. The card would provide added security by having such features as personal identification number coding; it would control transaction limits and monthly dollar volume limits; and it would provide for monitoring excluded types of transactions or purchases.
Eliminate paperwork. The card would have the ability to record and temporarily store transaction details. These could then be periodically downloaded via telephone or computer to CN's credit card order management system, thereby eliminating forwarding, filing, and retrieving of transaction documentation.
Merchant transaction routing. When the vendor being used has entered into an alliance with CN, the merchant would route the transaction into its EDI billing system rather than through the credit card company's system. This would ensure application of appropriate pricing, discounts, and terms.
Card provider transaction routing. Transactions which are for the card user's personal account, such as travel expenses, which need to be separately claimed would be billed direct to the individual. Other purchases such as currently being processed would continue to be EDI billed.
Automatic validation. The download of transactions from each procurement card would be matched to the EDI billings received from the credit card company and the various alliance vendors. This would result in automatic validation and eliminate clerical intervention.
THE ANSWER: "SMART" CARD.
Originally patented as long ago as the seventies, a variety of "smart" card types exist today. These cards essentially contain chips which can provide for the types of transactions and processes previously described. The future for smart cards is bright. They are being introduced for single purposes such as the debit card utilized for paying highway tolls, or long distance telephone calls, or for the identification of the holder's privileges at hotels.
For ten years now smart cards have been gaining popularity as a modern form of cash. The electronic purse is popular in Europe, the U.K. and Asia. It is estimated that 33 million smart cards were in circulation at the end of 1994. The stored value chip cards had a successful debut at the 1994 Olympics in Lillehammer, Norway. More recently, North America has stepped into the circle, albeit cautiously. In Canada, the city of Guelph, Ontario has been selected for an extensive debit card pilot in 1997 - Bell Telephone and two banks are involved in this test.
Other applications are being explored, including for medical purposes such as recording an individual's medical history. The embedded microprocessors are capable of being read and/or modified by computer scanners. Hence the potential to flash a card before the pharmacist in order to ensure the new prescription is compatible with the brands of other medication being taken.
The focus, perhaps rightly so given the volumes, for the development of smart cards has been on the individual or consumer market. The spectacular growth of procurement card usage for industrial and institutional purchasing suggests that developers should start addressing this potentially huge market segment. The needs are different, however the benefits are potentially huge in terms of cost reduction and increased business competitiveness.
Some of the underlying assumptions that need to be made for a workable industrial "smart" procurement card are that the total process will provide for:
- the ability for control data to be inserted by the company using the card;
- the ability for the credit card company to also store control information;
- selected vendors to add transaction routing information;
- the card to temporarily store transaction details;
- wide application of Standard Industrial Classification and Universal Product Coding; and
- point-of-sale terminals which can record transactions on the cards.
TYPICAL CN SCENARIO IN 199?
When this is available, the following scenario will be typical.
A CN track supervisor is heading for her hotel after a day's work. Her vehicle needs fuel, so she stops at a road-side service station and fills up - she pays using her CN "smart" procurement card. She needs some rail grinding wheels, so she stops at the local branch of a national MRO distributor which whom she knows CN has an alliance - she produces her "smart" card and leaves with six grinding wheels. The starter rope of the gasoline-driven rail drill has started to fray; she spots a lawn and garden shop, drops in, and buys a new starter rope with her "smart" card. After cleaning up, she goes to dinner at a local restaurant - again she pays with her CN card.
What would we want to occur as each transaction occurs? At the service station: the station operator's terminal would allow him to verify the license tag on the vehicle; the volume and type of fuel would be recorded on the card, as well as vendor name and location; the transaction would be routed to the parent oil company with which CN has pre-arranged a volume-based discount structure, and would be EDI billed direct to CN on a monthly basis.
At the MRO distributor: the branch's terminal would accept the card, confirming through the UPC that this card user is acquiring the safety-approved grinding wheel designed for rail grinding; the transaction details would be recorded on the card; the transaction would be routed similar to that applying to the fuel transaction.
At the lawn & garden shop: the shop's terminal would confirm that this card user's profile is acceptable for the specific product being selected; the transaction details including pricing would be recorded on the card; the transaction would be routed to CN's credit card company; the purchase would be included on CN's monthly MasterCard billing.
At the restaurant: the terminal would accept the user profile as being appropriate for travel expenses; the transaction details would be recorded on the card; the track supervisor would obtain a receipt for the meal; the restaurant would route the transaction to CN's credit card company; the purchase would be included on the track supervisor's personal monthly billing.
At the end of each week, the track supervisor would find a pay telephone equipped with a card reader, dial CN's credit card order management system (1-800-CN -CCOM), wait for the beep, insert her CN smart card, wait a few seconds for a further confirming beep, retract the card and hang up.
As the various EDI billing systems were fed into CN's credit card order management system, transactions received from the track supervisor would be validated against those received either from vendors or the credit card company. Payments would then be set up for the Electronic Funds Transfer system.
CN'S NEXT STEPS. The system in place since 1989 has served us well, however, continuous improvement and continuous cost reduction is part of our approach - these serve to make us and our customers more competitive! As described previously, the following are our next steps:
CN's cheque pilot is proving successful as an adjunct to the procurement card Analysis of past transactions is identifying alliance and cost reduction opportunities
Smart card pilot is under development with our credit card provider. The ultimate answer, as we see it, is for the evolution of more universal "smart" cards, supported by the type of point-of-sale terminals which will permit transaction recording, while providing the types of controls specific to the industrial and institutional market.
The question is: Will credit card companies and suppliers meet the challenge of industrial users?
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- Allen, C. "Get Smart." Bank Management, March/April 1995, 58-63.
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- Mitchell, R. "The Smart Money is on Smart Cards." Business Week, August 14, 1995, 68-70.
- Nunn, T. "Guelph To Be Test Site For Money Card." The Kitchener-Waterloo Record, November 2, 1995, A1.