When it comes to corporate purchasing, all is not what it seems.
For example, that harmless-looking stapler sitting on your desk probably costs no more than $10 tops. Right?
Not quite. While the purchase price might indeed be $10, to get the true picture of its total cost, you need to add the administrative burden your company incurs to purchase it, process the receiving of the product, receive and reconcile the invoice from the supplier, cut a check for payment and then post the transaction to the general ledger.
It’s incredible, but if companies use traditional purchasing methods, that $10 stapler can cost as much as $160!
While your small or mid-size firm may not be spending $160 for a stapler, it’s a safe bet that somewhere along the line it can cut some purchasing process costs. Here are some practical steps to get you started to more efficient procurement of office supplies, maintenance repair and operations (MRO) items, temporary labor and other nonproduction goods and services:
& #711; Utilize A
Purchasing Card
Using a corporate purchasing card to buy supplies is a lot more efficient than the traditional purchase order process.
According to a recent study produced by American Express and Ernst & Young Management Consulting, firms using manual purchase orders to buy low-dollar supplies and services incurred an average process cost of $90 for each transaction , with some firms spending as much as $200 on certain transactions.
In comparison, companies using purchasing cards had a significantly lower average process cost of $21.71 , with some firms reducing it to as low as $5.
When you buy supplies using purchase orders, you add more steps and labor to the procurement process. Consider some tasks on the front end of a purchase: Filling out a purchase order, getting approval, sending the purchase order to a supplier.
And, on the back end of the cycle, there’s the job of receiving and reconciling multiple vendor invoices and cutting checks to pay each one.
In comparison, a purchasing card allows companies to eliminate or significantly reduce the use of purchase orders. The cards can be used to purchase in person, over the phone and through the Internet. In addition, a purchasing card allows firms to set up pre-determined purchase controls for each card member, eliminating the approval process. On the back end, a purchasing card features a consolidated bill , eliminating multiple invoices and making reconciliation a whole lot easier. And, companies can cut one monthly check for payment (to the card provider).
& #711; Map Out A
Purchasing Plan
Form a purchasing strategy that encompasses different buying arrangements you may have with suppliers.
For example, if you’re purchasing heavy volume with a specific supplier, you may want to consider Electronic Data Interchange (EDI), a standardized format for electronically transferring business information that can include payments.
For multiple vendors, however, EDI payment solutions lose value because they don’t consolidate billings or aggregate data across suppliers , unlike purchasing cards.
Another good step is to map out which supply categories to convert to the card. A few tips: Start with simple, low-cost commodities, perhaps cleaning supplies. Then bring more complex higher-cost categories into the fold, let’s say, computers. Seek support of your efforts from senior executives within finance and corporate areas.
Overall, when migrating to a purchasing card, keep the big picture in mind in terms of what you want to accomplish. A purchasing card is most beneficial when you fully integrate it into your system, using it as a tool to manage MRO spending with more control and less paperwork.
It would be a waste to use such a comprehensive system merely as a replacement for petty cash or solely as a payment tool.
& #711; Negotiate
With Suppliers
If you can demonstrate to a supplier that your company’s dedicated purchasing volume will improve their sales figures, you can negotiate purchasing discounts or special services. How do you find the data you need to make your case with vendors?
One of the great benefits of a purchasing card is its detailed spending information that is consolidated across your entire organization. A good card program will break down data by various ways , for instance by commodity, by industry, by vendor. From this, you’ll be able to get a comprehensive picture of your spending.
Further, a card provider should capture and report data that includes , at a minimum , not only the transaction amount and date, but also the sales tax amount, ship-to ZIP code, supplier reference number, a product descriptor field, tax-payer ID number, and any relevant minority status of the supplier.
This information will help you streamline back-end accounting tasks and, in general, give you the data you need to strategically manage your purchasing program.
& #711; Control
Your Spending
Another way to lower your firm’s purchasing costs is to increase the control over what employees buy. And a strong, written purchasing policy is the best tool. Your policy should be communicated to all employees.
Some distribution methods you should consider: your corporate Intranet, E-mail, a handbook, newsletter, and employee orientation sessions.
Among areas to cover, your policy should address which suppliers to use, and it should set reasonable spending limits that allow employees to easily requisition low-dollar items (under $2,500). Back up your policy with a strong audit program to monitor compliance.
A good purchasing card program will allow you to set up a variety of limitations (for example preferred supplier restrictions and transaction limits for each commodity) customized for each card member. With such restrictions in place, out-of-policy purchases can be nipped in the bud.
& #711; The Web’s
The Way
The last powerful step in cutting your firm’s purchasing costs is to source and order supplies online. An electronic purchasing system can connect your corporate buying agents to your firm’s suppliers , helping you to maintain preferred vendor deals to keep your commodity prices down. And, when you use a corporate purchasing card in conjunction with an E-purchasing system, you automate payment, reconciliation and data integration steps.
Using both systems is the most-efficient method of purchasing today. According to American Express’ new purchasing process study, firms that employ Internet-based and other electronic procurement systems to buy supplies, combined with a purchasing card for payment and accounting tasks, can cut transaction costs to as low as $4.44, vs. an average $90 for manual purchase orders.
For whatever supplies your firm buys, be it $10 staplers or $2,000 computers, keeping a tight rein on purchasing costs is a good business strategy. By following these five steps, your purchasing department can become a focused and efficient part of your business.
Cooper is business development manager for the Western Region of American Express Corporate Services. He can be reached at (brett.m.cooper@aexp.com).
