Getting Your Procurement Card Program Back On Track
Stephanie A. King
Stephanie A. King, President, CPR Consulting, Inc., www.cprconsulting.com, 925-371-6100, firstname.lastname@example.org
84th Annual International Conference Proceedings - 1999
Abstract. Thousands of companies have implemented purchasing card programs, but many are not performing at even minimal expectations. This presentation presents the analytical tools to evaluate a program, discusses the reasons for the most common program problems, and provides tested solutions for eliminating the problems. Also provided are creative ways to use purchasing cards that can significantly improve program performance and eliminate more small-dollar transactions in the purchasing area.
The Symptoms. Thousands of companies have purchasing card programs in place. Many are thriving and are continually increasing time and dollar savings and minimizing small-dollar transactions. But many others are afflicted with varying degrees of ill health requiring a range of remedies from a quick cure to intensive care.
There are three types of problem programs, each with a clearly identifiable set of symptoms. The first is the program that is stuck in a perpetual pilot-one that has lasted longer than six months. Organizations in this situation are usually slow to embrace the concept of purchasing cards. They may have started the program on a very small scale and are not seeing significant enough benefits to justify a full implementation. Or they may have a reasonably sized pilot program that they continue to prolong, often for more than a year, for fear that there may be "just one more" problem that has not yet revealed itself.
The second type of lackluster program is one that has moved beyond the pilot phase, but is struggling to achieve its objectives, even three or four years after initial implementation. Hundreds or even thousands of cards may have been issued to employees. But the number of card purchases is relatively small or the expected reductions in the paperwork, costs, or time involved in processing small-dollar purchases have not been achieved.
Most p-card program managers would not consider the third type of program difficulty a problem at all but rather an enviable "dilemma". In this instance, there is a robust card program that has reached initial performance goals, but is having difficulty moving beyond them. Management is looking for analytical tools that will surface any hidden program weaknesses. It also wants non-standard ways to use the cards to drive card transaction levels higher and move program benefits to the next level.
The Examination. Before any diagnosis can be made of a card program's condition, there are a few pieces of analysis that must be conducted. The first is to measure the program's performance against the goals set by management. This assumes, of course, that the program has goals. If it doesn't, establishing performance objectives should be the first step. (See "Measuring for Success", Purchasing Today, December 1996, for a discussion on how to develop program goals.) At a minimum, there should be goals for total number of cardholders, total suppliers used with the cards, total card transactions, total dollar value of card purchases, and reduction in POs and invoices.
The next step is to collect and calculate a set of key data points for your program. The first three points can usually be arrived at with data from the general ledger or purchasing systems. Item 4 requires surveying existing suppliers in the vendor database. Data for 5 through 10 can be obtained or calculated from the transaction files provided by your card-issuing financial institution:
- The suppliers generating most of your small-dollar POs and invoices.
- Employees generating the most small-dollar POs, invoices, check requests, petty cash, etc. (If data by specific employee is unavailable, use cost centers instead.)
- Number of low-value transactions eliminated in purchasing and accounts payable.
- Suppliers in the purchasing or general ledger database that accept your purchasing card.
- Total number of suppliers used in the card program.
- Average number of purchases per supplier used in the card program.
- Average dollars per card purchase.
- Average number of card purchases per card per monthly billing cycle.
- Number of cards used at least 3 times per month for the last six months.
- How often cardholders' purchases are rejected at the point of sale.
Use this data and the performance against the above-mentioned program goals to determine the following:
- How many of the suppliers responsible for most of your small-dollar POs and invoices accept your purchasing card?
- What percentage of card transactions comes from the card-capable suppliers in #1?
- How many of the employees with a high volume of low-value purchases have and use cards regularly?
- Compare the performance against goal (%) among the following indicators:
- Small-dollar purchases eliminated in purchasing/payables
- Total card transactions
- Total suppliers used in the program.
The Diagnosis. There is usually not one but a number of problems that are causing poor performance in a purchasing card program, all with relatively equal weight. A weak or non-existent supplier strategy is quite common. The analysis results may show, for example, that the number of suppliers used by cardholders or total card transactions are higher than goal yet the reduction in small-dollar POs and invoices is lower than goal. This can suggest that cardholders have not been making purchases from suppliers who are producing the most small-dollar POs and invoices.
Other indicators of supplier strategy problems can also be: (1) A low percentage of card acceptance among existing suppliers who generate the bulk of small-dollar POs and invoices; (2) a small percentage of card purchases made with existing suppliers who do accept the card, (3) a broad distribution of purchases among suppliers used by cardholders (or a low number of average purchases per supplier), and (4) a low average dollars per purchase.
Defining what constitutes a problem for the last two indicators will vary by program. For indicator 3, a general guideline is that about one-third to one-half of suppliers used in a card program should generate about 80% of the card purchases. If these percentages are similar (e.g., 75% of suppliers generate 80% of card transactions), it may signal that there are too many "one-off" purchases with the cards. Cardholders are not using the card as a strategic tool to reduce low-value purchasing/payables transactions, but rather using it as a convenience card.
A general guideline for average dollars per purchase is that it should be at least 50% of the single-purchase-spending limit on your cards. For example, a card program that has a $1,000 maximum on each card purchase should have an average purchase per card transaction of about $500.
Another commonly found problem among weak card programs is that the wrong employees are cardholders. A symptom of this may be a small number of cardholders among those employees or cost centers that initiate a high number of low-value transactions in purchasing and A/P. Two other signs may be an average of 3 or fewer purchases per card per month or less than 65% of cards being used at least 3 times per month.
Low utilization rates among cardholders can also be indicative of yet another frequent defect in anemic purchasing card programs. Controls that are too tight and procedures that are too cumbersome can act as powerful deterrents to card use. Examples of over-control are too many blocks on supplier merchant category codes (MCC), restricting cardholders to a small list of suppliers, and low spending limits. Excessive administrative procedures can include over-reliance on paperwork such as purchasing logs and requiring management approval prior to individual card purchases.
Along the same lines, cardholders may lose enthusiasm for the program if accounting procedures necessitate too much effort on their part. For example, cardholders may view the program as tedious if they are required to provide an accounting code to suppliers or to record detailed accounting information for each card purchase.
Finally, there are a number of other predicaments that either singly or in concert with others can prevent a card program from reaching its potential. Many programs falter right out of the gate if senior management support is non-existent or lukewarm. Even the best-designed programs will go nowhere if there has been little or no effort to publicize them. And as alluded to previously, a program without performance goals and baseline performance measurements will be difficult to manage.
The Prescription. As there are multiple reasons for sluggish program performance, so too are there multiple remedies. An inadequate supplier strategy requires a series of initiatives to turn it around:
- Survey the suppliers initiating the majority of small-dollar POs and invoices to determine which accept your card and to educate them about your program and its benefits to them.
- Compile a list of card-capable suppliers from the survey results. Include with the list the types of goods and services these suppliers have provided to your organization. Give it to cardholders and instruct them that whenever possible they should use these suppliers for their card purchases.
- For the remaining suppliers who don't accept the card, launch a campaign to persuade them to become card capable. Your issuer can assist you in this effort.
- Regularly review purchasing and payables systems for new suppliers that are producing a high volume of small-dollar transactions. Enlist them in the card program. Frequently provide updated lists of card-capable suppliers to cardholders.
By focusing cardholders on those suppliers responsible for most of your low-value purchasing/payables transactions, you achieve the biggest reductions in the volume of those transactions.
If analysis results indicate low utilization rates among cardholders, take the following steps:
- Get cards in the hands of the employees who historically have generated the most small transactions through purchasing and accounts payable.
- Survey all cardholders to determine their satisfaction with the program. Focus in particular on qualitative issues such as ease of use compared with the standard procurement process, problems with cards being denied at the point of purchase, difficulty finding suppliers who accept the card, and adequacy of training and user manuals.
- Follow-up on any common issues that surface from the survey.
- Cancel card accounts for those employees who historically have purchased few small-dollar items through purchasing or A/P and who use their cards infrequently.
- Continue to regularly survey cardholders as a means of encouraging feedback and discovering problems that may be hindering card use.
- Discourage employees from using the standard procurement process for small-dollar purchases. For example, establish a purchasing policy to not process POs whose dollar value is less than the card program's single-purchase-spending limit.
- Eliminate petty cash.
If survey results indicate cardholders are frustrated with administrative and control issues, reexamine both these areas. Assess whether spending limits can be increased. The single-purchase-spending limit should at least equal your organization's capitalization threshold. Keep MCC blocks to a minimum-cash access, personal services, and travel expenses (if you're not using the card for T&E expenses). Being overly restrictive with either of these controls can result in a high incidence of denied card purchases, an often-embarrassing situation for cardholders.
Streamline administrative procedures as much as possible. Question each step in each procedure to determine whether it really adds value. Rethink the accounting strategy as well. Take advantage of issuer software to automate as much of the accounting process as possible. Consider using MCC mapping to charge purchases to specific expense accounts rather than requiring cardholders to give suppliers accounting information.
If weak management support is an issue, go back to the senior staff to determine the resistance points and work to break through them. Ask management to make program participation mandatory if appropriate.
Put together a marketing campaign for the card program if none exists. The objective is to keep the program visible among employees, management, and suppliers to increase participation.
Rehabilitation. For those programs that are performing well and need to move beyond the original objectives, some or all of the following ways to use cards can significantly improve program results:
- Ghost accounts: supplier-managed card accounts that allow all employees to use the program without actually having a card in hand.
- Back-end payment tool: using a card account to pay for releases against blanket orders, thus eliminating individual invoices for each shipment.
- Purchasing service and spares from capital equipment suppliers.
- Buying non-production inventory, especially items currently inventoried in satellite storage facilities. This will reduce inventory-carrying costs.
- Tracking asset life cycles by assigning a card account to each piece of equipment and using card transaction reports to track service and maintenance costs.
- Project cards: card accounts set up to track expenses on a specific project.
- Issuing cards to contractors to avoid "cost plus" on material acquisition costs.
King, Stephanie A., "Measuring for Success", Purchasing Today, December 1996, 6.