Paperless Purchasing -- A Reality
Roland F. Rugoletti, C.P.M.
Roland F. Rugoletti, C.P.M., Purchasing Agent, Norton Company, Worcester, MA 01615, 508/795-5649.
82nd Annual International Conference Proceedings - 1997
Opportunity. Paperless purchasing is, for many companies, a distant goal. At Norton Company's Bonded Abrasives Division, paperless purchasing is a reality. Norton's fully-integrated system automatically faxes purchase orders to suppliers and, in the process, ties together purchasing, material control, receiving, and accounts payable in a tight, well-controlled manner. Competing in the global market requires the best efforts, systems, and processes that companies can muster. Events and processes used to create a culture with paperless purchase orders and systems at Norton Company are outlined from a practioners point of view.
History. Norton Company, the largest manufacturer of abrasive products in the world, was acquired in 1990 by Saint Gobain Company, Paris, France, a world leader in glass products and building materials. The most technologically-advanced abrasives systems are produced at Norton Company using the latest in process equipment. The focus of everyone in the Bonded Abrasives Division is to produce the best possible product and to be the undisputed world leader. Even though the abrading process goes back to the Stone Age, the top management of Saint Gobain reasoned that, in today's advanced, technological world, the purchase order (and other manufacturing systems and documents) should not reside there. They were determined to insure the future and direction of systems within the corporation. As a result of their determination, Norton Company, through a re-engineering process, set out on the path of integrated paperless systems.
Vision. The vision for integrated procurement systems began shortly after the acquisition of Norton Company. Having paperless purchase orders would be a major departure in the way we did business; and, as in all important cultural changes, the role of leadership is paramount. Ours is a story of good fortune. The recognition by top divisional managers to support the best in manufacturing processes with the latest in systems technology brought us to the point of pushing the boundaries of electronic commerce. The managerial and financial commitment of top management was crucial in this endeavor. They fully supported the effort!
System Selection. To determine which system will work best for you requires some research. One begins with answering a basic question...What do I want the system to do for me? One must search the market place for system software that fits one's needs. There are several excellent purchasing and material control systems out there. For Norton Company, we searched for software to accomodate our financial, accounting, and MRP II materials management needs along with the less complex sundries orders. Since our raw materials and process systems are so varied, our management selected one software package for raw materials and an entirely different software package for everything else. A conscious decision was made in both cases to purchase off-the-shelf or canned software rather than buying custom-made systems. In this way, management reasoned that we would not build in any of our bad habits developed over the years. In a proven package, we, the users, could change to fit the software. This proved to be a sound path to follow!
Systems Support Personnel. Critical to systems upgrade are people who have the technical skills and dedication to their craft who can be counted on to do whatever is necessary to "get the job done." A well-grounded base of knowledge in sytems architecture, code construction, hardware capabilities, and software packages proves to be invaluable. These are the people who help define the needs of the organization. They study and learn the infrastructure of the proposed software to guide us in understanding the software and then help to create the culture changes to impliment and support the new way of doing business. For Norton Company, we had teams of such people. One group had deep and vast technical knowledge and skills. This group spoke the language of computers and software construction. They translated software information to another group who were the applications specialists who would, in concert with the technical people, guide us through any complexities to the point of installation. The applications specialists would also help in training and support of the applications software.
Getting Ready. If electronic commerce is new to you, there are a few things that must be considered before that first electronic purchase order flies out of your company -- things such as purchase order format, notice to suppliers, terms and conditions, data base downloading, training, boilerplate, are just a few. This may all sound rather simplistic or maybe even unnecessary to mention; but, if one step is forgotten or overlooked, the timing of implimentation suffers. Therefore, one would be well served to gather the team, document needs, define steps, and develop a checklist -- in other words, PLAN.
Boilerplate. The legal implication of not having a piece of paper can go beyond that of simply having a security blanket upon which one may fall back. Therefore, engage the service of your corporate attorney to review your present Terms and Conditions so that any changes may be made to reflect what will be needed to incorporate electronic commerce into your way of doing business. This is a good time to update your terms in order to reflect the latest federal and state regulations. The full set of terms and conditions in many cases is impractical to include with every faxed purchase order. A condensed boilerplate statement may be developed to appear on the face of the faxed order. This statement puts the supplier on notice that they are dealing with a different but completely legal way of doing business. A form of this statement may look something like:
"ENTER THIS AS A PURCHASE ORDER - NO FURTHER COPY WILL BE SENT - Purchase Order number must be on all items, packages, correspondence and invoices. Packing list must accompany all shipments. On all prepaid and charge shipments, a copy of the carrier invoice must accompany invoice. No C.O.D. shipments will be accepted; order will be refused. This order accepted by Seller subject to terms and conditions on face and Buyer's standard Terms and Conditions of Purchase previously provided to Seller. Any changes to this Purchase Order must be acknowledged by the Seller, in writing and approved by the (Company) Purchasing Department. Direct any questions regarding this Purchase Order or problems with this transmission to the Buyer listed above."
As you can see, the statement is brief but contains a couple of pertinent items:
- This really IS the purchase order,
- Terms and condition were PREVIOUSLY agreed upon.
This second item leads us to the next topic.
Notice to Suppliers. Every supplier you deal with must agree to accept this new way of doing business. In today's business world it is unusual for even a small business to be without a fax machine, but there are still some out there. This may even mean that the supplier must, as a condition of doing business, install a dedicated fax line and purchase a fax machine. To put the supplier on notice of your plans, it would be advisable for you to publish a letter to every one of your current suppliers with a statement similar to the following:
"SUBJECT: TRANSMISSION OF (COMPANY) PURCHASE ORDERS VIA FACSIMILE EQUIPMENT
In the future,(Company), as a part of its continuous improvement effort, will be sending you computer-generated purchase orders via facsimile and wishes to establish a procedure for doing so. From time to time, (Company) may fax to you a purchase order form containing all of the information and data which normally would be contained on a purchase order form that might be sent to you by mail or hand delivered. The new faxed form will include a (Company) purchase order number but will not have the signature of an authorized buyer, purchasing agent, or purchasing manager. You may rely and act on the receipt of this fully-completed fax purchase order as if you had received an original signed copy.
By your acceptance of this letter or delivery of the service or materials in response to (Company) purchase orders sent to you via fax transmission, the following standard (Company) Terms and Conditions of Purchase will govern."
Following the above statement, one may then outline one's new and improved Terms and Conditions of Purchase. Specialty forms covering general or service contracters may also be included at this point along with any supplementary terms. The brief "Boilerplate" statement may be printed for their perusal; and, then, at the end of all of this, a sign-off section should be included to insure that the supplier, or supplier's designate (by title), has read and understood what is about to happen. Be sure to tell them to keep one copy and return the signed copy to you.
Ownership. It must be stated early that, in the event a decision is made by top management to implement fully-integrated cost-saving systems, the type of applications software may be determined at the highest level. This is to insure that the needs of the entire organization are met. Electronically tying together physically separated departments (such as accounting, finance, purchasing, manufacturing, materials control, and receiving) can be quite a balancing act. One should not look at this as top-down imposition but rather as an opportunity to globally improve the business. Therefore, it is important that the purchasing group (and all other groups) takes full ownership of the opportunity placed before them to complete their portion of the system.
Data Base. Whether they are raw materials or M.R.O. items, your company has lists of standard, repeatable goods which are found in computer data bases. All these items are naturals to be downloaded into the new purchasing system software. Here is where those systems support personnel, mentioned previously, are again so valuable. Your job in purchasing would be to review all item descriptions for completeness and also for price. In a computerized system, there is no excuse for not having a price for every item on every purchase order. Once complete, your current data base may be downloaded into the new package through the technical skills of the systems support personnel. Even suppliers can provide data base information with your own item identification numbers on a computer disc for downloading. A natural consequence of computerized purchasing is pre-negotiating contracts for raw materials and sundries items. In this way, the majority of routine items are covered. Full descriptions and pricing are made available for purchase order creators. Item descriptions, units of measure, and prices are then pulled forward onto the order by simply typing an item I.D. number.
Security. Computerized purchasing systems offer a concrete method by which to limit access to company funds. Through a series of access codes and passwords, management may design the security network it wishes to follow. This system of checks can effectively limit any misappropriation of company funds. Even though an argument may be made that no computer system is completely secure, just the knowledge of the ability to track wrong-doing by computer serves as a deterrent.
Approvals. Part of the built-in security is the approvals network. At Norton Company, the spending level of each authorized purchase order creator is determined by his or her area manager. For instance, some managers may feel the need to review each and every order issued to maintain very tight budget control; and their people would have a zero dollar level approval limit. The other extreme may also exist. One may find a group that, because of appropriation levels, it makes sense to have purchase order creators with dollar limits of $10,000 or higher. The system at Norton Company routes all financial approvals through area heirarchy; i.e., purchase order creator, supervisor, department manager, area manager. A separate minimum dollar level is set for major purchases which steers the order to purchasing so that the agent may review the selected order for its commercial, legal, and policy adherance and give final approval committing company funds.
Trust. Who do you trust? At Norton Company, the people in the organization who previously wrote out requisitions and then chased down the department supervisor for signatures prior to the order going to purchasing are now creating the order. For routine purchases, the amount of the order is generally within the creator's dollar limit; and the order is faxed directly to the supplier. This makes much better use of time for both the purchase order creator and the department supervisor. Trust your people! You pay them to do the right thing for you.
Speed. Just imagine the amount of time needed to create and mail a paper purchase order. At a large company such as Norton, this took upwards of a week because of approvals and logistics. Now, we have a system that is much simpler. It has been observed on several occasions where, for example, an order to buy tooling has been created and, in as few as six minutes, has been in the hands of the supplier! Can you say that about your system?
Costs. Fully-integrated systems are expensive. There is no doubt about it. However, the cost of not having these systems in today's global environment is a great deal higher. Some of the costs associated with the new technology are:
- culture change,
- no hard copy of purchase order.
However, comparing the dollars needed to create and maintain a paper vs. electronic purchase order system can often justify the expense.
Benefits. Just imagine the things one can do with a fully-integrated system! Just the first and most obvious benefit of zero paper handling makes this attractive -- no chasing down signatures, no trying to decipher indescribable hand writing, no splitting of purchase orders, no mailing orders to suppliers, no mailing orders to accounts payable, inspection, and receiving. Further benefits are: a much higher degree of control of dollar spending and security, much lower P.O. production costs, efficient and accurate standard costing, accurate purchase order pricing, accurate invoice transactions, much better utilization of buyer time, sophisticated data collection and reports of every imaginable kind, auditing efficiency, unlimited scope (Norton Company's integrated system covers our affiliates throughout the North American continent), and speed!
Utilizing Buyer Time. How many have said in a paper-driven system, "I simply don't have time to do the things I could to make a difference." In a fully-integrated system, without the constraints of paper handling, buyers and agents are freed up to really make a difference in how business is conducted. Many of us speak of things such as supplier-base management, better reporting systems, improved communications, timely auditing, and energy management. The list goes on and on. Well, at Norton Company, we do these things routinely. Some quick examples... one of our buyers has been able to build data bases describing trends in electrical, gas, coal, and oil prices to better analyze futures buys in these commodities; another controls engineering and industrial contractors through systems data collection; sourcing guides to help factory personnel select proper tooling have been made available; still another develops queries for sophisticated data collection and reports. All these things were either not available or just too difficult to accomplish in a paper-driven system.
International Purchases. Generally, international purchases are the only orders not faxed directly to the supplier. Purchase orders to foreign supplier are faxed to the purchasing department so that the buyer may attach importing instructions and broker's agent information. The total paper package is then faxed via the department fax machine.
Training. The ownership, mentioned earlier, required that the purchasing personnel learn the systems well enough to be able to build training manuals, teach the user community, trouble shoot, and maintain the data bases. One can well imagine the different skill levels in an office and factory environment. With a culture change as dramatic as a paperless system, the people must be trained in all aspects of creating their own accurate and approvable purchase orders. Because the system integrates the accounting function into order creation, the concept of using CORRECT accounting, not just VALID accounting, must be understood by all. The understanding of when to describe an item as TAXABLE or NON-TAXABLE must also become part of purchase order creation. The realization that every order must be correctly priced before it goes out the door is another important consideration. All these speak to the element of trust that was mentioned earlier. One must also have the patience to train people who are both highly skilled in keyboard use and software applications so that they stay with the class as well as those people who use the Biblical method of keyboard operation..."seek and ye shall find."
Summary. Paperless systems require some work but are well worth the effort!