Using Purchasing cards to streamline the purchasing process
While Purchasing cards (or corporate credit cards) are nothing new in business, many may be unaware that they represent an effective method of streamlining an organizations purchasing process helping to both reduce costs whilst empowering procurement staff to focus on value add activity.
For many organizations a typical supplier spend profile may be similar to the diagram below – in the example a large number of suppliers have a spend less than $1000 per annum – while at first glance this may not raise many eyebrows, when you take into account the cost of processing transactions (which could be over $200) it warrants further investigation. Businesses often differentiate between mission critical commodities (eg production materials) and other non-critical items e.g. stationery. These non-critical items are likely to be relatively low risk in so much that they do not require complex terms and conditions, specifications or ordering processes, however many organizations use identical processes for these transactions as they would for a million dollar piece of production material.
Many organizations utilize purchasing cards for managing travel and expenses, in this case purchasing cards represent an effective replacement for petty cash processes. However this only accounts for a proportion of an organization’s low value spend. Typically low risk and low value purchasing transactions represent an excellent target for purchasing cards which can remove the bureaucracy and administration cost whilst empowering employees.
With the removal of the typical purchasing route, the purchasing process is streamlined with the removal of the traditional purchase order steps and approvals. Requirements are able to be channeled via more cost effective routes. A typical purchasing card process is shown below – of particular interest to the originating company is the information that is provided by the bank.
The information that can be provided by the bank in the form of a statement (usually electronic) can be extremely useful to purchasing departments. There are various levels of data that are provided from Level 1 data which is the basic transaction information, Level 2 data – more detailed tax information to Level 3 which includes all data normally associated with an invoice e.g. Item codes, descriptions, unit of measure.
Whilst the level of information provided depends on the suppliers ability to pass data (which is usually dependant on the annual transaction volume) all data is useful as it allows the purchasing organization to review spend on an individual basis. Where data is combined with a transaction management system (used for processing and coding transactions) the data becomes even more useful as it can be used to provide profiles of the organizations spend allowing purchasing teams to review:
1/ Areas of spend within the business at an individual level
2/ Spend on/off contract
3/ Opportunities for Supplier management programs
One concern that purchase organizations have is how to ensure purchase card spend remains on-contract. Staff can be encouraged to use suppliers by embedding a purchasing card with the merchant (a lodged card) and then advising staff of the group deal and appropriate ordering mechanisms – statement data can then be analyzed (by individual) to capture spend off contract appropriate corrective actions can then be instigated. Another common concern is that card schemes may be open to abuse, purchasing cards are a balance of risk and control – whilst purchasing processes can be improved, risks remain that the cards may be open to abuse – organizations need to ensure that limits and controls (through merchant type restrictions and spend limits) are in place and the issuing of cards is tied into an appropriate personnel process (e.g. Staff can be fired if cards are abused).
Whilst benefits exist for the company operating the card scheme there are also benefits for suppliers in accepting cards. Certainly improved payment times are most prominent with payments taking around four days as opposed to a typical company payment cycle – savings can also be made with the need for invoices removed and the associated impact on accounts receivable.
In summary, purchase card schemes can help remove bureaucracy from purchasing processes whilst empowering staff and improving management information. In general schemes require appropriate administration (and benefit from a management team) and organizations should consider appropriate controls. Through process improvements, card schemes can bring significant financial benefits to organizations and unsurprisingly such schemes are becoming ever more commonplace in both public and private institutions.