Are you spending 75 percent of your time processing 3 percent of your purchases? A carefully crafted procurement card program can help redirect your staff's time to focus on strategic purchases and supplier relationships.
The growth of procurement cards is expected to top 300 percent over the next several years. Chances are, if your company is not already issuing procurement cards to key employees, you have probably thought about it. The opportunity to dramatically reduce accounts payable transaction expenses is hard to resist.
The costs associated with processing purchase orders range from $50 to $125 each. However, purchases made with procurement cards typically cost below $10 a transaction, considerably less for high volume users. That $40 plus savings differential is a powerful incentive for implementing a procurement card system.
Inefficiencies in the traditional purchasing process are even more important. Dave Blackburn, project coordinator with Mary Kay Inc., Dallas, says, We were spending 75 percent of our time and energy on purchases that represented 3 percent of our total outlay.
Stephanie King, president of CPR Consulting Inc., Livermore, Calif., adds, The whole idea is to get rid of this little stuff and the administrative burden that goes with it so your staff can focus on the larger dollar, more strategic types of purchases and supplier relationships.
Of course, you will not realize these benefits overnight. Implementing a procurement card program typically takes three to nine months. However, there are stories of companies getting stuck in the pilot phase for over a year. Proper planning can ensure your implementation runs smoothly so you will realize a quick payback.
Define Your Needs
Planning is crucial to a smooth implementation process. But before you can begin planning, you need to analyze your present situation to develop a reliable baseline (see Leading the Charge, right). The data derived from the baseline analysis will to a large extent determine the nature and scope of your procurement card program.
In addition to an internal analysis, study the best practices of companies that already have implemented procurement card programs. Joseph Raia, who manages industry and information, supplier services for Pepsi-Cola Co., Somers, N.Y., says, As part of our benchmarking project, we went to four major companies that already had procurement cards. Using that information, the program Pepsi designed almost exactly matched its expectations.
Your benchmarking need not be a complicated or drawn out process. Pepsi focused on just three areas, asking five questions in each: the actual implementation process, the size of the other procurement card programs in terms of dollars and transactions, and the selection of a financial institution. From this information, Pepsi got a feel for what constituted appropriate limits and levels of usage for prospective cardholders and an estimate of the overall scope of the program.
Pepsi also discovered some pitfalls to avoid. They learned that some companies had initially issued multiple cards to individual employees in an attempt to preserve accounting detail, but all had moved to one card per employee. The need to make sure senior management had bought into the program, was also reinforced says Raia.
King says, The first thing companies should do is analyze their current purchasing payables workload. There are a number of reasons they need to do that. First of all, if they are going to be setting up this program, they want to have some performance measurements. They can't determine how many POs and invoices they want to eliminate with the program if they have no idea how many they have.
Second, taking a look at their current situation allows them to come up with a fairly reasonable and accurate estimate of the size of their card program, she says. Many companies go into these programs without really knowing how big it is going to be. By doing this data analysis and then pulling a bunch of facts and figures together — how many transactions, who the suppliers are and so on — you can then go in and start looking at which transactions would be appropriate for the card and which wouldn't. Many companies just look at how many small transactions they are processing and assume they can put every single one of them on the card when, in fact, that is usually not the case.
The third reason why they need to do this data analysis phase is because much of the information they pull out of this will allow them to set up their program controls, will help them choose the suppliers they are going to be working with, and will help them determine which employees would be the most appropriate cardholders.
Selecting a Service Provider
Finding the right procurement card service provider is critical to the program's success. The provider should be an important partner in the implementation process. Don't overlook current banking relationships, but be prepared to consider other institutions that provide procurement card services. Your needs should be outlined in a request for proposal, which puts everyone on the same level playing field. Based on the responses, the top candidates should then be brought in for an interview with your implementation team.
Pepsi looked at five banks before making their selection. Raia explained that the team also asked how much the program would cost and how much experience the banks had. Though costs may not be a major differentiating factor, especially since potential savings are so high, the experience and services your banking partner can bring to the program are vital. Mary Kay also reviewed several prospects including its current banking partners and large national banks. What sold us was our provider's willingness to bend and customize for us, says Blackburn. We wanted a card that stood out from all the rest. We have a pink Mary Kay card that keeps people from using it inappropriately.
Designing the Program
If you have done your homework, designing the program is a fairly mechanical process. The baseline analysis should enable you to estimate the number of cards and dollars involved; then you can identify the necessary levels of control and the specific design features of the program. You must also consider your reporting needs and whether any additional software is required to administer the program.
One key area in the design process is the type of credit facility you are going to put in place, says Steven Putney, president of corporate payment systems for First Bank System, Minneapolis. When you go through the credit facility setup and account structures, you are doing a couple of things. You are mapping to the appropriate general ledger accounts that the company wants debited with certain types of transactions. You are also going through the empowerment phase of allowing the company to delegate the purchasing authority down to the individuals, and then refining that purchasing authority down to what they can buy, the dollar value of a transaction, the monthly limit on the credit facility, and those types of things.
However, one pitfall to watch out for involves over-administering or overcontrolling the program. King cautions that companies need to be careful they are not just throwing a credit card program on top of a process that is really not an appropriate one, especially when you are only talking about one or two percent of your spending.
Another crucial factor is the vendors. If they are not retailers, chances are they do not accept Visa, MasterCard or American Express. For your program to work, vendors must accept the card you choose. You cannot accept their reply that they are not going to accept credit cards, observes Blackburn. We started off in the beginning telling vendors we would like them to participate. It does not work. You have to twist arms because you are talking about changing business practices that people have been doing for the last 15 to 20 years.
In the end, Mary Kay's vendors became active contributors to the success of the program. Since Mary Kay's corporate employees had not been required to submit purchase orders for many small items, the vendors were enlisted to prompt the employees for their card numbers rather than their department numbers. That assistance was a key factor in getting employees to begin using their procurement cards.
Selling the Program
Just because you design a procurement card program does not mean everyone will use it. Getting senior management, key business unit managers and users to buy into it is vital. To do this, it is essential that you establish cross-functional teams at the front end of the implementation process, says Tracy Gibley, vice president and national sales manager for CoreStates Bank of Delaware's commercial card services division in Wilmington, Del. There must be a corporate mindset to accept change, she adds.
Some of the most successful programs I've seen are the ones where senior management takes a very energetic interest in getting the program off the ground and makes it clear that this is something that the company is going to do, says King. She adds that you want people to view the card program as not just a convenience tool, but a real strategic tool.
At Pepsi, the procurement card program evolved from a corporate initiative for reengineering accounts payable. Because Pepsi was going through a major cultural change to empower our employees, people loved the idea, says Raia. It was the first time they could see something happening as a result of the new culture. As a result, Pepsi was able to roll out 4,500 cards in just three months.
However, you cannot just give employees a corporate credit card and tell them to go use it. Training is another essential component of the process. We used the process of training the trainers, says Raia. Each business unit is comprised of multiple locations and each location has a local process owner. All these local process owners met for a half-day session, went through the pro-card program, got all the cards for their stakeholders, then went out and trained the stakeholders.
In conjunction with the training, you will also need to create a user manual (see Making Your User Manual a Best Seller, below). The user manual is a little time-consuming, says Blackburn, but plenty of people have already done manuals, so we just adapted them to Mary Kay's process. Wallet cards, Rolodex cards and other aids will help familiarize your employee cardholders with the new process.
Promoting your procurement card program before during and after implementation is another key to success. We found the best-in-class companies publish results internally. They have newsletters; they have contests; they have established goals of the number of transactions they want to move over to this mechanism, says Putney. They really have a very formal, structured, ongoing process to allow their employees to embrace their program.
Similar communication programs are also essential with your suppliers, especially those vendors with whom you lack the leverage that comes from high purchasing volumes. Nor should you neglect communications with your banking partner. If you fail to communicate with any of your three constituencies — employees, vendors or card processor — it will be very difficult to get your program up and running. Putney cautions that companies that do not communicate well can get stuck in the pilot phase.
For Mary Kay, the implementation process has meant going from 30 to 40 transactions a month during their pilot to 3,000 to 4,000 transactions six months later. As a result, the volume of invoices our payables people receive has dropped dramatically, says Blackburn. He says, The selling of the system is your number one problem. I think the actual credit card and getting the bank and all that is a slam dunk. That part of the project just takes care of itself. Being prepared is half the battle. Once you have laid out your strategy, the rest is just a matter of tactics.
David Schmidt is a commercial credit consultant and principal of A2 Resources.
|Overview||A description of the program explaining the process, purpose and role procurement cards play in company policy.|
|Cardholder Agreement||The system administrator should maintain some sort of application and training record and include a copy in the manual for the user's reference.|
|Card Restrictions||Consult all support functions for areas of concern. Spell out restrictions such as cash advances, personal purchases and hazardous materials.|
|How to Use the Card||Instructions covering shipping, receiving, packing documentation, receipts, tax data and so forth.|
|Card Misuse||What constitutes misuse and the corresponding consequences must be written to allay legal concerns.|
|Account Reconciliation||Explain how transactions are to be reported on a monthly or cycle basis and then reconciled with the bank statement.|
|Problem Resolution||The process for resolving disputed transactions or billings, including who to contact and the form for reporting problems.|
|Where to get help||Comprehensive listing of all program administrators and bank customer support personnel, and who is responsible for what.|
|Preferred Suppliers||Having preferred suppliers reduces the supplier base and therefore processing costs while creating an opportunity for negotiating substantial discounts.|
|Card Controls||Discuss issues such as lost or stolen cards, cancellation, departmental charges and so forth.|