Using a Purchasing Card as a Process Improvement Tool

Author(s):

Jay C. Rising
Jay C. Rising, Vice President, Corporate Purchasing Card, American Express, New York, NY 10285, 212 640-2000.

79th Annual International Conference Proceedings - 1994 - Atlanta, GA

Introduction. In today's economics environment, companies are increasingly interested in using a Purchasing Card to cut costs and "reengineer" processes in the area of purchasing. The Card is designed to increase productivity by empowering requisitioners to deal directly with suppliers for low-dollar, MRO purchases. This enables the purchasing department to focus on more value-added activities. The Card also cuts costs with the elimination of paperwork and the consolidation of supplier invoices into one billing statement.

The Purchasing Process: Benchmarking Low Dollar Purchasing. In December 1993, American Express undertook a comprehensive survey of low dollar purchasing management. Two separate surveys were sent, one to purchasing and one to accounts payable managers. The results were compiled February 1994. The survey to purchasing management covers:

• Major issues facing purchasing managers today
• Definitions of low dollar purchasing
  • Dollar definition
  • Policies for low dollar purchasing
  • Trends in spending
  • Breakdown of spending
• Procedures for low dollar purchasing
  • Requirements
  • Satisfaction with the process
  • Use of various methods
    Changes in policy
    Petty cash
    Automated ordering
    EDI
    Blanket orders
    Systems contracts
    Consolidating vendors
    Outsourcing to suppliers
    Purchasing cards
  • Responsibility for sourcing
  • Cycle time for purchase
  • Audit procedures
• Costs associated with purchasing
  • Components
  • Satisfaction with costs
  • Types of planned improvements
• Use of purchasing cards

The Purchasing Card: Description of the Concept. Given the need to reduce total corporate costs, companies are starting to look very closely at streamlining the process involved for low dollar, MRO purchasing. Today, companies can end up spending up to $100 processing an order, regardless if the order is for $10,000 or for $20.

In addition, for many companies, low dollar orders follow the 80/20 rule. Low dollar purchases can make up over 80% of their total transaction volume, but these orders only represent under 20% of the total dollars spent. Companies are looking therefore for a way to cut down paperwork, reduce cycle time and at the same time maintain control over spending.

In the last several years, various companies have been using a purchasing card to manage these expenses and achieve all of the above objectives. The purchasing card process is simple:

• Employee orders directly from supplier and pays using the purchasing card
• Supplier processes order
• Charge card company automatically checks employee spending limits
• Supplier delivers product and bills charge card company
• Charge card company sends a monthly report to employee to assist in verification of purchases
• Charge card company sends a monthly consolidated bill to company
• Employee calls charge card company with any discrepancies
• Company sends one check to charge card company
• Company receives MIS reporting from charge card company

The Purchasing Card: Benefits to Requisitioners, Accounts Payable, Purchasing, and Suppliers. Four key constituencies are affected by and benefit from the purchasing card.

CARDHOLDERS

• Elimination of purchase requisitions and associated paperwork
• Faster and more accurate delivery of goods
• Greater convenience and control

ACCOUNTS PAYABLE

• One check cut to charge card company vs payments to multiple suppliers

PURCHASING

• Consolidation of supplier information, which allows for improved supplier management
• Improved control with spending limits and reporting
• Reduction in purchase order processing

SUPPLIERS

• Improved cash flow
• Reduced billing and payment processing costs
• Increased sales from existing customers
• Lower collections and credit expenses
• Increased sales from new customers

American Express, in conjunction with Ernst & Young, conducted a study which detailed purchasing process costs as well as potential applications of a purchasing card. The study estimates that the Purchasing Card can reduce 50-80% of accounts payable processing costs for low-dollar transactions by reducing:

• Invoice receipt, logging, and set-up
• Invoice matching and approval
• Problem resolution
• Check preparation and mailing

The Purchasing Card has the potential to reduce 50-70% of purchasing department processing costs by reducing:

• Purchase requisition logging and control
• Creating purchase order and placing order
• Problem resolution
• Copying and filing purchase order

The Purchasing Card: Concerns. While companies see the potential benefits from implementing a purchasing card program, they also have several key concerns:

• Supplier acceptance of this type of payment method
• Control over spending
• Appropriate reporting
  • Supplier management reporting
    minority-owned supplier reporting
  • Policy compliance
  • Financial reporting
    Sales and use tax
    Unincorporated supplier information for 1099
    General ledger distribution
• Administrative ease and flexibility
• Product price relative to value added

The Purchasing Card: Program Design. Below are program design decisions that should be made before cards are issued.

• Identify who will receive a Card
  Popular groups of users include:
  • office managers
  • plant and maintenance employees
  • field sales

Buying/purchasing agents may also want to use the Card, however ledger allocation issues may create more process inefficiencies than cost savings.

• Identify new process flow and improvement over current system
  • 0rder process
  • Receiving process
  • General ledger allocation
    Paper
    Electronic
• Determine documentation requirements and reconciliation process
  • Cardmember reconciliation
    Empowerment:
    Expense reporting
  • Sales/use tax documentation
    Receipts
    Point of sale entry
  • Audit procedures
• Define usage policy
  • Dollar limits
  • Transaction types
    Types of purchases include: MRO (maintenance, repair, operations), non-repetitive, non-capitalized purchases that may fall in industries such as:
    office Supplies
    office Equipment
    Software
    Catering
    Industrial Supplies
    Temporary Help
    Courier Services
    Periodicals
  • Supplier lists
• Develop policy and training for employee use of the Card

The Purchasing Card Marketplace: Future Developments. As the market matures, all players must continue to deliver against all of their customer's key concerns and to focus on delivering additional product functionality including:

• New applications
• New suppliers
• Enhanced features

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