Replacing purchase orders with the right procurement card can save your company a bundle in the long run. Is it time to shuffle the deck at your organization?
Most companies today are looking closely at improving and streamlining the procurement process. Our quest began two years ago at the North Carolina-based headquarters of Lord Corp., a privately held technology-based company with $340 million in sales. It was summer 1994 when we first attended a seminar on procurement cards and realized that the future was indeed in the cards.
Still, it took more than a year for Lord Corp. to investigate the benefits, select a vendor and pilot a program for company-wide use of a purchasing card. The process we went through and the lessons we learned can help other companies in choosing a card. Here are the steps we took to attack our purchasing problems; the criteria we used to select a vendor; and how our procurement card system is working today.
STEP BY STEP
The procurement process is more than just issuing an order. It involves several different steps: identifying a need; requisitioning the product; ordering; receiving the product; and paying the supplier. Lord put together a cross-functional, cross-divisional team to study the process and identify objectives. The team included end users as well as representatives from management information systems, finance and purchasing.
We made a flow chart of the actual process, from the point of requisition through purchasing, ordering, receipts and accounts payable. Believe it or not, we found 19 steps in handling data for a single purchase order cycle. We costed these steps, and then we did a reality check: We benchmarked our figures against data compiled by Arthur Andersen. Frankly, our costs were way out of line.
With a procurement card, we believed we could cut our steps in half and eliminate a lot of the nonvalue-added activities we were going through, particularly for small, incidental purchases under $500. Our team did an analysis of all the purchase orders issued by the corporation. We fell into the 80/20 rule - meaning 80 percent of the paperwork was generated by purchase orders that made up only 20 percent of the total dollar value.
We wanted to focus our purchasing attention on that 20 percent of the orders making up 80 percent to 90 percent of our dollars. We also wanted to maintain control of the cards we were issuing and where they could be used, so that no one could just go out and buy a whole lot of materials or use the card for personal items. Cost control without micromanagement was our goal.
We also believed the card could reduce our supplier base. Instead of buying everything from everyone, it would help us close the loop on preferred suppliers. On the opposite end of the spectrum, it could also help us with odd, one-of-a-kind purchases. We might buy from a supplier only once a year, so we don't need to put that supplier into a purchase order database or provide it with credit information on our company. A procurement card could better handle those purchases.
The procurement card could also cut the number of purchase orders we issue where the vendor doesn't need to be sourced or the price doesn't have to be negotiated. These purchases are more of a mechanical process; there's little value added by the purchasing department.
We were looking hard at the overall cost of buying an item, not just the cost of the item itself. We wanted to lower the total cost of procurement - to reduce the number of steps involved in ordering. For example, maybe you can buy a bearing somewhere for $190, vs. the $200 you might pay to a supplier who uses your card. But to save that $10 you may spend $50 to $100 worth of time and labor. So you're really losing money.
Although we were anxious to move on the program, we ran into an initial problem getting card issuers in to talk to us. Many issuers want to focus attention only on companies that can give them immediate high cash flow - with about $1 million in volume as an entry floor. They were focused on large, Fortune 500 companies.
We were fortunate that we got in when we did, as the vendor we ended up using was...