Credit the card
Procurement card programs can save companies big bucks by eliminating paperwork and freeing up the purchasing department to do more value-added activities


by Paul V. Arnold

The old ways are not always the best ways.  And there may not be a better example than the old-fashioned procurement process.

Does this sound familiar?
• Employee needs a hammer.
• Employee fills requisition form.
• Manager approves form.
• Form is sent to purchasing.
• Purchasing fills purchase order and sends it to supplier.
• Hammer arrives in receiving four or more days later.
• Receiving sends it, and invoice statement, to employee.
• Employee sends invoice to accounts payable.
• Accounts payable matches up purchase order and invoice information, and sends check to supplier.

It’s so complex and convoluted, it’s funny.  But who’s laughing?

Up until April 1997, the Ford Motor Company, one of the more respected companies in the world, did virtually all its purchasing the old-fashioned way.

“We figured it was costing us about $130 in administrative ‘soft’ costs to process a transaction,” says Dan Fortunato, Ford’s director of industrial materials purchasing.

When the items being purchased total $2,500, that’s hard to swallow.  When the items being purchased cost $100 or less, that’s obscene.

But it’s commonplace.  A recent survey by Visa USA at a National Association of Purchasing Management conference in Dallas showed 73 percent of the respondents still use a traditional procurement process for most or all their transactions.  Even though it had become an accepted practice to these people, 81 percent acknowledged this method “is not the most efficient way” to get the job done.

What’s a better way?  More and more companies are switching to procurement cards (also known as purchasing cards or p-cards).

The Visa, MasterCard or American Express procurement cards given to employees and/or managers to purchase low-value, low-risk items allow the company to minimize expenses and maximize the purchasing process.

A typical p-card purchase?
• Employee needs a hammer.
• Employee picks up the phone and purchases hammer with 
p-card.
• Employee receives hammer later that day or the next day.
• Employee receives statement from card provider.
• Employee verifies statement and sends it to accounts payable.
• Accounts payable OKs statement and pays the purchasing card provider (usually electronically).

Less paper, more value
“I would categorize it as a major success for us,” says Laura Day, program manager for corporate procurement cards at AlliedSignal.  “I think it certainly frees up time for people to do more value-added activities.  Being able to pick up the phone and order what you need without having to go through a paper-intensive bureaucratic process is certainly more efficient.”

Like most companies that start a procurement card program, AlliedSignal’s goals 3 1/2 years ago were to eliminate paperwork, reduce administrative costs and break old rules.

“On the day we handed out our first cards, in May 1995, I had people tell me, ‘It worked perfect before.  All I had to do was write a requisition, drop it off and the stuff showed up.  It was easy,’ ” recalls Day.  “Well, it’s never quite that easy.  They end up having to wait a week because nobody gets at the order and they can’t find their managers for signatures.  I had to sell them on the concept and the advantages.”

Since inception, AlliedSignal has reduced its per-transaction processing cost by $25.  At more than 270,000 card transactions per year, that saves the company more than $6.8 million annually.

Beyond that, a recent AlliedSignal study revealed the paperwork for each procurement card transaction takes 31 fewer minutes to process than a traditional transaction.  For 270,000 card transactions, that frees up 135,000 hours per year for the purchasing and accounts payable departments to pursue more value-added activities, such as negotiating with suppliers, reducing the vendor base and tracking spending.

“This is one of the biggest and best benefits,” says Jack Huffman, director of procurement education programs at the University of Wisconsin’s School of Business.  “When a company starts a card program, the purchasing area will sometimes think it’s going to eliminate some of their jobs.  That’s not the objective.  The objective is to eliminate time spent on a lot of low-dollar, high-volume transactions so they can concentrate on bigger purchases, production materials, capital purchases and so on.  They can use their time more appropriately and take drudgery out of their job.”

Easing fears, shifting gears
If purchasing card Myth No. 1 is the elimination of purchasing jobs, Myth No. 1a is a total loss of control.

“There was concern, especially from the finance community, that we would lose control of the buying process,” says Ford’s Fortunato.

Taking buying responsibilities away from purchasing pros and giving it to manufacturing employees would surely lead to misuse, fraud and poor decision-making, Ford thought.  And wouldn’t this scuttle preferred supplier agreements and vendor reduction initiatives?

The fear was so great that while it did have a card program from 1988 to early 1997, Ford allowed it to languish.

“Very few cards were ever given out,” he says.  “Needless to say, we had not emphasized or pushed the program very hard or very effectively.  It had very limited features and very limited circulation.”

And no success.

Fortunes turned around when Ford did an about-face.

Two years ago, the company changed card providers and opened up the program, giving cards to nearly 4,000 employees in the U.S.

Ford is now doing more than half its expense transactions under $2,500 with the card, has reduced its per-transaction cost from the estimated $130 to $25 and has enhanced, not hindered, its vendor initiatives.

“We got to know the control features and reporting capabilities that the latest card technology offered,” says Fortunato.  “That’s why we decided to pursue and expand it.”

Capturing data, attention
While procurement cards have intrigued corporations for the last decade, recent technology has sold many of them on the concept.

In 1994, around 10 percent of companies in the Fortune 1,000 incorporated a p-card program.  Today, it surpasses 50 percent.

“Software and the ability to capture information has been the biggest advancement in card programs in the past couple of years,” says Huffman.

Increased information has led to increased control.

Just a few years ago, most suppliers could only gather and send back basic “Level 1” transaction data — the date, cardholder’s name, supplier’s name and address, SIC code and purchase total.

Today, most suppliers gather and provide Level 2 data (same as Level 1, plus accounting codes and sales tax information) or Level 3 data (same as Level 2, plus line-item detail on all products, and freight and duty information).

Full copies of transactions are e-mailed (or, in some cases, mailed) to the cardholder and his or her company.

Software designed by the card provider allows a company to quickly and easily download this data into its accounts payable and general ledger software.  There, transactions can be scrutinized for validity and adherence to supplier guidelines.

“The power of the information is not just receiving it, but being able to manage it and use it,” says Al Diamant, vice president of corporate products for MasterCard.  “The power is working to understand where goods are purchased and where the money goes.”

Adds John Yates, senior VP of corporate purchasing cards for America Express, “Data provides visibility of what is being purchased so a client can then focus on the very best suppliers for specific categories.”

From a security standpoint, inappropriate purchases can be quickly spotted.

Huffman points out a case where a cardholder needed to go to a hardware store to pick up some emergency supplies.

The transaction record that was sent to the buyer, his boss, his boss’ boss and accounts payable listed all items purchased with the card: one container of nuts, one container of bolts, one screwdriver, one pliers, one color television.  The employee was fired.

“Under the old way, there was paperwork, but there wasn’t a lot of visibility or accountability,” says Day.  “The cards aren’t going to keep anybody from stealing.  What it will do is find them a lot faster.” 

The magic bullet
If purchasing cards save so much money and provide information and control, why doesn’t every company have a program?

Here are a few reasons:
1) It involves doing something in an entirely new way and reorganizing some employees’ duties.
2) While card providers say p-cards can work for any size company, card companies tend to provide the most help and support to their larger clientele.  “A large organization really profits from this program,” says Huffman.  “For smaller ones, they should use it as they grow.”
3) The reporting software costs money.  In fact, it’s quite expensive.  Costs are based on the volume of transactions.
4) For every glorious success story, there is one where results have been mediocre, minimal or miserable.

“Issuing a number of purchasing cards throughout a company is not the magic bullet to success,” says Marcie Verdin, vice president, Visa purchasing card.  “What determines success is how a company integrates its purchasing card program with other supply chain management initiatives, including vendor management programs, enterprise systems implementation and electronic purchasing.”

Follow their footsteps
To improve your chances for success, here are tips from veteran p-card users:

Bill Catelotti, purchasing card product manager, GE Capital (provider of MasterCard p-cards): “Training at all levels is important.  People must understand the process. Cardholders must understand what they have to do to reconcile their charges.  Supervisors must understand what they’re looking at when they’re reviewing charges.  Management must understand the program so they don’t have fears of fraud and misuse.”

Day, AlliedSignal: “First, form a cross-functional team with buyers, end-users, members from receiving, internal and external audit, finance, the tax department.  This group will put together the card manual, which is the outline for the entire program.

“Second, understand where you want to go with the program. Don’t just do it because it feels like the thing to do. If you don’t know, you’ll be hard-pressed expressing your needs and wants to the card provider.”

Fortunato, Ford: “You need to get senior management support of the concept from the beginning and do a very professional and credible market search for a card issuer.”

Bruce Woolley, purchasing manager, Lego Systems: “Have controls in place that tell people where they can purchase supplies.  If you don’t, your program will be in trouble.”

Dick Collins, global commodity manager, Arvin Industries: “You must have trust, but you also need card limits and limitations.”

Picture of success
Planning, training and explaining can go a long way toward getting the card program off the ground.

Remember the resistance Day faced on start-up day?

By taking the naysayers on a step-by-step tour of the purchasing process, she was able to show them the inefficiencies of the old system and the strengths of the new one.

Did she have buy-in?

Last year, the company took a survey of cardholders and asked them, “If given the opportunity to give back your card and return to the old way, would you do it?”  Eighty-two percent of those surveyed said “no.”

Getting started
The National Association of Purchasing Management provides a 12-step checklist for starting a successful purchasing card program in its publication, Purchasing Today:

• Establish and publicize senior management support.
• Research card providers thoroughly.  Ask a lot of questions, specifically about their experience and product feature limitations.
• Form a cross-functional team to roll out and monitor the program.
• Think the process through carefully, and map out current and new processes.
• Work closely with your card provider in designing the program.
• Design accounting compliance procedures and integration of data into your system.
• Conduct focus groups comprised of potential users.
• Develop a plan with measurable goals and time lines.
• Establish controls and card limits carefully.
• Test the program with key management personnel, specifically finance.
• Train and educate cardholders and suppliers.
• Develop a communication campaign that reinforces the process, and communicates successes and milestones.

You decide
Here’s a breakdown of the positives and negatives of starting a p-card program:

The positives
• Reduction in purchase orders and invoices.
• Reduction in the costs associated with processing transactions.
• Streamlined buying process.
• Buyers are allowed to concentrate on more strategic tasks.
• Faster deliveries.
• Reports improve capability to pool volumes across company.
• Greater adherence to national purchasing agreements.

The negatives
• Perceived loss of control.
• Some requisitioners are reluctant to use the card.
• Many small suppliers don’t accept the card.
• Work performed by requisitioners increases.

This article appeared in the December 1998/January 1999 issue of MRO Today magazine.  Copyright, 1998.

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