Green Construction Purchasing Story Archives

A place for plastic

Purchasing cards can cut acquisition costs. Do they have a place in your operation?

Your supervisor gets to the jobsite Monday morning and finds the tool shed’s padlock has been jimmied and the door is swinging in the wind. Inside, shelves that were filled with power tools, extension cords and high-value supplies are nearly bare. Tool thieves have struck, and within minutes, workers will be showing up with nothing to do because the tools they need aren’t there.

Although reporting the theft will take some time, it will take even longer to replace what’s lost. According to benchmarking studies conducted by The Hackett Group, the median time it takes a typical company to properly process a requisition into a purchase order is about 16 business hours. Once you add on the time it takes for a distributor to fill the order and deliver it to the jobsite, the true cost of the theft quickly multiplies from downtime and inefficiencies.

This example illustrates just how long it can take procurement systems to respond to immediate needs. In construction, a breakdown in procurement can create a bottleneck that can mean the difference between all-out production and sending workers home for the day.

Streamline the acquisition process

A purchasing card system can reduce acquisition time from days to hours or minutes, says Chris Sawchuk, procurement practices leader at The Hackett Group, which helps companies adopt, monitor and improve upon their purchasing practices.

“We have benchmarked the median cost to process purchase orders. Our research has identified that it costs companies about $8.43 per line item to process conventional requisitions, purchase orders and invoices. With purchasing cards, the median cost is $2.19 per line item,” says Kurt Albertson, business advisor at The Hackett Group. “A typical company not using purchasing cards and processing one million line items annually could save roughly $500,000 a year in process savings through implementation of a purchasing card program.”

Albertson reports that clients have been most successful with purchasing cards on low-control transactions such as office, maintenance and cleaning supplies and tools and hardware. “Any business that deals with low-risk, low-control purchases can gain from a purchasing card program,” he says.

Ironically, Sawchuk reports that some companies are actually using purchasing cards less. These companies initially used purchasing cards as a bridge to handle the transaction, but now they have integrated their e-procurement systems with purchasing systems that reduce the need for issuing purchasing cards to employees.

When a company adopts a purchasing card program, it helps eliminate the handwork of matching up requisitions, purchase orders and invoices. “Instead, the person who is issued the purchasing card places the order, the supplier delivers it, and the person with the card reconciles it so it can be paid. The caveat here is to not put so many controls on it that you are requiring higher-paid workers to spend more time reconciling their accounts. When set up correctly, the reconciling process takes very little time,” says Albertson.

Purchasing cards differ from travel and entertainment cards that many companies use.

“Travel and entertainment cards typically hold the cardholder personally liable for the expenses. It’s normally up to the holder to request payment from the company for the expenses.

“With purchasing cards, the corporation holding the card is liable. That’s why they are good choices where there is a low risk and a low control per item and a relatively large number of transactions,” says Albertson. “If you are looking for line-item detail and control, a purchasing card program may not be the best way to go.”

To reduce liability and exposure, companies can set purchasing cards up with a variety of limits. “It can be a limit on cost per transaction, number of transactions per month, total spend amount per month and even controls on merchant codes.

A well-designed program has these types of controls in place,” says Albertson.

Most purchasing card systems have a very robust transaction reconciling system that, if your transaction volume is high enough, is available at no charge, he adds. The cardholder simply goes in at least once a month and allocates the expense to a department or code.

“These account codes can be very specific, depending on your information needs. We see companies at both ends of the spectrum. Some require that every dime be assigned to a cost code, while others simply put it into one big category. The functionality is definitely there, but increasingly strict allocation rules decreases efficiency of workers because they must spend more time allocating costs,” Albertson says.

Card costs

The banks that issue purchasing cards are interested in volume, and companies starting a purchasing card program have less leverage in negotiating fees and rebates at the front end than when they have a few years of history from a well-established program.

“Once a program is established and you have a purchasing history, it’s easier to re-bid the program and see if you can get fees waived or get rebates. Some banks will even offer a sign-on bonus or other incentives if your volume is high enough,” says Albertson.

But devil’s advocates also point out that banks don’t offer services for free, and that if you’re not paying for the service, it’s covered by the merchant’s cost of doing business with that card.

“Most suppliers have already factored bank card fees into their prices. It’s a cost of doing business. Forcing a supplier to use a purchasing card in an industry where cards are not widely accepted means the cost will likely get charged back to the customer in the product,” says Albertson. However, the costs that the card takes out of your system typically far outweigh the marginal price increase from handling the transaction through a purchasing card.

Pilot program first

Albertson recommends purchasing card newbies to try them with one department or group before rolling out a company-wide program. “Get input from the card users and structure the program so it doesn’t make their jobs harder. Set up the program, test it, then demonstrate its success so it can be rolled out to other departments,” says Sawchuk.

There are five or six first-tier national card programs available as well as many second-tier purchasing card providers that may be interested in your business. Albertson says the key is to find a card issuer that will work with you to set up the program to meet your needs. “You don’t want an issuer who just signs you up. The process needs to be managed to help you get the greatest benefit from this program,” Sawchuk says.

For example, if some of your transactions are tax exempt, then either the program must allow purchases without sales tax or cardholders must realize those types of products can’t be bought with the purchasing card. Or, the system must allow the item to be flagged so the tax can be refunded.

Published in the October 2006 issue of Construction Purchasing magazine.