Supply Chain

The Power of Purchasing Cards

P-cards can become a cornerstone of corporate procurement strategies. They can be an efficient way of making low-cost, high-volume purchases that t...
Cliff SaranDecember 1, 2000

A few years ago, if Keith Miller told his colleagues at Ericsson (www.ericsson.com) that the company’s transaction processing would soon become paperless, he probably would have been laughed at. The SKr215 billion ($22 billion) Swedish phone giant was no different from other large companies; it was buckling under the strain of all the paperwork needed for even the most basic purchases. Spending some £70 ($100) on every order processed, the firm’s UK-based purchasing team of 24 could barely cope with all the purchase-order administration generated by the rest of the company.

“There was a heavy administrative burden,” says Miller, manager of system administration and procurement at Ericsson. “We were getting invoices and we weren’t sure which department the cost should be assigned to.” And as the company expanded, the problem could only get worse.

Then Miller found the perfect excuse to go on the offensive and put an end to Ericsson’s paper chase. In 1997, the company announced a new cost-efficiency drive by, among other things, retooling its purchase-to-pay process. So together with Mike Titley, business process director of Ericsson, Miller drew up a blueprint that aimed not only to centralize but also to automate procurement for the firm’s UK operations.

Discarding Old Ways

The centerpiece of Miller’s and Titley’s strategy is a wallet-sized plastic card, known as a purchasing or p-card. Introduced by American banks and credit-card associations in the late 1980s, p-cards are seen as an efficient way of making low-cost, high-volume purchases that traditionally have required labor-intensive processing. But as Ericsson’s re-engineering team have found, maximizing an investment in such programs is a tricky business, requiring a well-crafted rollout strategy and plenty of vision.

The idea is straightforward enough: Staff use p-cards to pay for purchases according to predefined parameters. The goal: Help cut costs, introduce better spending habits, and streamline procurement processes by automatically routing those charges to a general ledger account with minimal or no manual intervention. The cost savings are enormous. Titley reckons that since Ericsson issued 270 p-cards a year and a half ago, processing costs are around one-fourth of what they used to be.

Other companies are experiencing similar savings with p-cards. According to Richard Palmer, a professor of business at Eastern Illinois University who conducted a survey of 188 firms on behalf of The American Institute of Certified Public Accountants, or AICPA (www.aicpa.org), the average cost per p-card transaction is $15, compared with $91 using traditional methods of payment.

The Saving Grace

In the case of Ericsson, a large chunk of the saving was realized when it moved its procurement system onto a corporate intranet, which eliminated much of the paperwork that was bogging down the system. So now, for example, if any of Ericsson’s p-card users want to order new business cards, they type in a password to access a list of approved suppliers on Ericsson’s procurement intranet, which then provides a link to the Web sites of business-card suppliers. The only information users need to type in is the p-card number and the specifications of the business cards. If the cost of the business cards is greater than a predetermined ceiling, the purchaser can get approval from line managers using email, the intranet, or even a WAP-enabled phone.

All that information is sent to Ericsson’s p-card provider, American Express. Then at the end of every month, Ericsson receives two electronic files from American Express (www.americanexpress.com). One is an invoice; the other provides a breakdown of spending card by card, department by department, cost center by cost center, which is fed into Ericsson’s ERP system.

As with their regular credit cards, American Express, MasterCard (www.mastercard.com/business/), Visa International (www.visa.com/fb/main.html) and various banks that provide p-card programs charge a fee at both ends of the transaction. Therein lies a potential drawback for p-card users and their suppliers.

Ericsson’s Titley declines to say how much American Express charges the firm for its service, but he notes that like most p-card users, Ericsson pays a monthly fee based on the overall volume of transactions. The more the card is used, the cheaper it is for Ericsson. Now, p-cards account for between £600,000 and £1 million ($869,000 and $1,449,000) of purchases a month at the firm, with the average transaction totaling around £400 ($580). “Unless businesses exploit the card fully, they’ll never reach [a threshold that makes it cost-effective],” says Titley. “At Ericsson, we’ve already hit it.” But that’s easier said than done.

Increasing volume to cost-effective levels requires the support of suppliers. But studies have shown that suppliers clearly don’t like the prospect of paying potentially big usage fees. “The [per-transaction] fee that suppliers have to pay can be as much as 3 percent,” says Eastern Illinois University’s Palmer. As a result, the survey for the AICPA found that 43 percent of the respondents from large businesses have received requests from suppliers to renegotiate prices or contract terms.

Finding the Forward Thinkers

“Initially, we struggled to get a significant number of suppliers involved in the p-card program,” concedes Miller. But he reckons that the fees weren’t wholly to blame for the lukewarm response. According to Miller, the lack of enthusiasm was due largely to the fact that, though increasingly popular in the US, p-cards weren’t widely known in the UK. “We had to find the forward- thinkers,” he says.

To do so, Ericsson emphasized two major advantages to participating in the p-card program. First, by joining, companies would be guaranteed a slot on Ericsson’s preferred-supplier list. Second, suppliers accepting p-cards would receive payments much faster–five days compared with up to 45 days under the traditional system. That was enough to convince 20 suppliers — “ranging from RS Components (http://rswww.com)[a global company that sells IT and communication goods online] through to couriers and chauffeurs,” says Miller.

Despite the program’s growing popularity, Ericsson is under pressure to keep volume growing, given that the fees charged are linked to the volume of usage. That means Ericsson has been searching for new ways to expand its program to include higher-value goods and services. Employment agencies are one possibility. “When we started out, we had no idea we would be using the p-card today in recruiting temporary staff from agencies,” says Miller. He adds that using the p-card also enables the firm “to capture timesheet information and contact details” that it wouldn’t have had without p-cards.

That’s not all. Ericsson’s procurement department will be able to use p-cards to order desktop PCs and laptops from Dell Computer (www.dell.com). Authorized staff at Ericsson can then log on to a specially designed area on Dell’s Web site, which will have a catalog of the various computer parts that they are authorized to purchase. Miller concedes that getting this system up and running has required close work with Dell to address several technical issues, such as enabling order tracking, which traditional p-card services don’t do.

Not many companies with p-card programs have been as bold as Ericsson. That explains why few companies have even considered using p-cards to purchase computers and other large office equipment.

Beyond Paper

But thanks to the arrival of E-commerce, attitudes are changing. As Richard de Moll, team leader of the B2B practice of Cap Gemini Ernst & Young, explains, the initial stages of a transaction might be online, but purchase orders, invoices, and other documentation are often paper-based. “As the volume of business to business E-commerce transactions increases, there will be a need to move beyond paper-based settlement,” he says.

This is where p-cards can come in handy. P-cards “solve the requisition and payment processing aspect of a transaction; E-procurement promises to deliver 100 percent of the buying part,” says Laurent Gampel, vice president for Europe of American Express. That explains why E-procurement software vendors such as Ariba (www.ariba.com) and Commerce One (www.commerceone.com) are joining forces with p-card providers like Visa International, American Express and MasterCard.

That’s good news for companies, such as Ericsson, that want to use their p-card programs to help them expand further into E-procurement. “It’s a starting point for our B2B activities and will allow us to move towards full B2B transactions,” observes Miller.

A Virtual Revolution

In the shorter term, however, Miller sees other benefits. One of them is how p-cards have helped his department bring value to the rest of the firm. “My team has really moved into a vendor management role, providing services and information to the business and focusing on larger orders,” he observes. Equally pleasing is the fact that the long paper trails cluttered with purchase orders, requisition orders and invoices that purchases once produced are a thing of the past. “For the last seven months, we’ve had no paper in our requisition process,” he gleams.

Cliff Saran is a former technology editor for CFO Europe.