MRO Today - P-cards: Too good to be true?

Too good to be true?
Not so! You can have a successful purchasing card program, and positively impact the health of your company, by following these 10 steps.

by Robert A. Kemp

The corporate purchasing card celebrated its 10th birthday with little fanfare in 1999. The lack of hype could've been attributed to its no longer being a "new" thing. Purchasing cards (also known as procurement cards or p-cards) are established. They are viewed as a proven, available tool for corporations to reduce costs and streamline inefficient purchasing processes.

That stated, the 1990s will never be known as "The Purchasing Card Decade" because, to this day, most corporations still fail to utilize this valuable tool. After a decade of availability, purchasing cards still hold only a $20 billion a year stake in a market estimated to be worth $450 billion.

In its December 1998/January 1999 issue, MRO Today magazine cited national research showing 73 percent of U.S. manufacturing firms still use a traditional procurement process for most or all of their transactions.

Eighty-one percent of those firms acknowledged that their traditional process "is not the most efficient way" to get the job done or utilize the time of purchasing personnel.

It's amazing so many supply managers ignore a sound method of improving business operations. Maybe these managers stick with outdated and costly purchasing methods because they aren't educated about purchasing cards or are unsure how they could implement a successful program, one that creates value and bottom-line results.

To that end, this article outlines 10 steps to crafting a successful purchasing card program.

Setting the stage
If there is one clear message about managing the business process, it is that every project should have a well thought-out plan, clearly defined objectives and identified steps for the process. Introducing and maintaining a purchasing card program is no exception.

The following steps are essential for a successful launch and program.

The top 10 list
Step 1: Have dedicated support from top managers. Purchasing cards shouldn't be viewed as a purchasing/supply management program. Purchasing/supply management may "champion" the p-card, but the entire company must accept, support and utilize such a program in order for it to be successful.

Step 2: Create a steering team to drive the p-card program. This steering team must be cross-functional -- involving a host of departments and job titles -- and also include supplier representatives. This team leads the creation process, evaluates card service companies (i.e. American Express, MasterCard and Visa), recommends a card service company, and provides ongoing program support to company leaders.

A major responsibility of the team is publicity and openness during the program's development phase. Giving employees a voice in the decision process and providing up-front information about pending changes limit resistance to change.

Step 3: Conduct an organizational audit to identify low-dollar operations and the program's potential. The steering team completes this comprehensive audit, which involves:
A) conducting a complete cost analysis; this includes defining transaction costs and using a Pareto analysis to look at individual transaction costs.
B) identifying the size and complexity of low-dollar processes and
transactions.
C) determining where the purchasing card will create value.
D) determining the initial size of the program in terms of number of cards to issue.
E) suggesting usage limits (dollars and frequency), if any.
F) determining the time and length of the pilot program.
G) and, setting the stage for determining and defining what information is required from users and the card service company.

Most companies using a Pareto analysis to chart their transaction costs find 80 percent of invoice work comes from the lowest 10 percent of invoice value. What does this tell us? Traditional procedures force us to waste precious time on low-dollar items.

Step 4: Determine and specify the information needed from the card service company. With today's systems, you can have whatever information you want from the card service companies. But first, you must decide what information is important for your decisions, evaluations and control processes.

Level 1 (basic) information includes transaction data, the cardholder's name, supplier data, SIC code and total buy. Level 2 (advanced) information adds accounting codes and sales tax to Level 1 data. Level 3 (extended) information adds line item detail for the products and freight information to Level 2 data.

The effort needed to eliminate non-value-adding activities determines your information requirements. Purchasing cards must simplify your processes and make things easier. The overriding questions must be:
-- Is this level of information needed?
-- Does the information add value?
-- Does it add a needed measure of control?

Step 5: Publish definitive objectives for the purchasing card program. Establish meaningful objectives after completing the audit and recognizing the extent of eligible operations. All good objectives include three characteristics. For the purchasing card program, you want these:
-- A "thing" (low-dollar transactions). You must define low-dollar transactions for your company (is it $500, $2,000, $10,000?). Since the goal is to drive out non-value-adding work, set a high value for the pilot study. You can then adjust the value for different cardholders and operations. My advice is to make this value big!
-- An "amount" (100 percent of all low-dollar transactions). This is a finite amount, and it will be easy to catch exceptions. There may be reasons to set a smaller objective. Even so, remember that the objective motivates all activity. Success depends on our ability to benchmark against a finite objective.
-- A "time certain for achievement" (each fiscal year). From the beginning, everyone must know the purchasing card program is an ongoing program with growth objectives. Challenge and obligate cardholders to use the card to support their operations.

Objectives should be challenging, achievable and provide for future growth.

Step 6: Select the card service company. As with the selection of any new service provider, this involves five steps:
-- Build a supplier list from readily available information.
-- Develop a request for information (RFI) concerning capabilities and interest.
-- Select suppliers for the request for proposals (RFP).
-- Conduct a supplier selection evaluation and pick the winning service company.
-- Negotiate the final service contract to meet organizational objectives.

The selection process requires great care and diligence. Failure to reach the best suppliers can doom your program to select-class status or, worse, can kill it.

Similarly, failure to seek the right information in RFIs and RFPs leaves holes in supplier proposals that significantly increase the difficulty of selecting and negotiating the contract with the best supplier.

Step 7: Create and conduct program training for company personnel. For the card program to succeed, you must train people how to use it to improve their operations. Provide them an efficient training and policy manual, along with follow-up assistance, if needed. People must know the consequences of fraud and misuse. Offering training to selected suppliers adds value to the program.

Step 8: Conduct the pilot project. Consider two alternatives for the pilot. You can select the test cardholders from one site or department, or choose to have fewer cardholders from multiple sites. It may be more trouble during the test phase, but using a broader subject base helps identify potential differences and problems between operations.

Set a finite time to conduct the test and modify the program as you need. A popular test period is two complete billing cycles.

Don't fall into the perpetual test trap. Test it, change it (if needed)
and prepare for the formal rollout. Perpetual testing only creates
uncertainty and derailments.

Step 9: Roll out the program. This takes fanfare and publicity to have maximum impact. Track and publicize success. Similarly, identify and solve any immediate problems, and work to reduce resistance.

Step 10: Follow-up, adjustment and growth. Supply managers must work with the steering committee to evaluate the program, report progress against objectives and propose needed adjustments. You may need to issue more cards, create different limits for buys and adjust frequency-of-use limits. By being flexible, you can ensure success, vitality and growth for your purchasing card program.

Adding value
These 10 steps will ensure success for new purchasing card programs, and revitalize or expand existing ones. The bottom line of such a program is the creation and maximization of value.

Dr. Robert A. Kemp was the president of the National Association of Purchasing Management from 1997 through 1998 and a business school professor at Drake University from 1982 to 1994. He is currently a member of NAPM's strategic planning and governance committees, and is president of Kemp Enterprises, a supply management consulting firm in Des Moines, Iowa.

This article appeared in the February/March 2000 issue of MRO Today magazine. Copyright, 2000.