Procurement Strategy for Mid-Market Companies

Procurement Strategy for Mid-Market Companies
Procurement strategy definition

Procurement strategy is an essential component of effective procurement for all companies irrespective of their size. Procurement team’s at large companies rely on effective procurement strategy to deliver continuous savings which increase company’s EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization). It is not uncommon for companies to see cost savings of up to 10% of the annual addressable spend because of an effective procurement strategy.

Executing a well-defined procurement strategy needs discipline and resources and that might deter some mid-market companies to have a procurement strategy at first place. Mid-market companies should not ignore the value a well-defined procurement strategy. This article is focused on helping mid-market companies getting started towards a path of procurement excellence through effective procurement strategy.

Defining procurement

Procurement strategy is about procurement, so let’s first define procurement. As per CIPS (Chartered Institute of Procurement & Supply)

“Procurement is the business management function that ensures identification, sourcing, access, and management of the external resources that an organization needs or may need to fulfill its strategic objectives.”

Simply defined, it is a process of acquiring product or services a business need, to deliver value to its customers. Value is defined in terms of physical products or services delivered to customers.

Steps in procurement process

There are multiple steps in procurement process, the basic steps are listed below

 

  • Need Determination: The first step in procurement is determining what needs to be purchased. The need could be new or recurring. For example, raw materials required to build the products sold by an organization. The need could be determined by an activity which is non-routine. For example – purchase of a new procurement software.

 

  • Specification definition: This step is generally required for new purchases – products which are not purchased earlier. For example, the company has decided to add a new product to the product line. This drives detailed discussion and collaboration between different departments to come up with the optimum specification. If you over-engineer the specifications, that limits the source of supply and increase cost. If you keep the specifications simple, the results are reduced cost and increased availability from different suppliers.

 

  • Sources of Supply: The next step in procurement is to do an assessment of sources of supply. Do you need a new supplier for this purchase or an existing supplier can fulfill the requirement? Depending upon the type of product, this could be a simple google search or this could be elaborate research leading to RFP. If you are adopting a low-cost country sourcing strategy, then step needs a detailed assessment.

 

  • Supplier selection: Supplier selection includes selecting the vendor and contract negotiations if required. This step generally involves an RFP (Request for Proposal) process which is followed by contract negotiations and execution.

 

  • Purchasing activity: This involves the activities required for purchasing the material. The process generally involves purchase approval, issuing a purchase order to the supplier and any follow up with the vendor.

 

  • Receipt: The purpose of receipting is to inspect whether the vendor shipped per the purchase order. It is also a proof of delivery while approving the invoice.

 

  • Payments: The payment process is the issuance of payment to the vendor. There are multiple payment vehicles available to companies. For example, ACH process, Checks or purchasing cards.

 

  • Supplier management: This is the most important and often ignored part of the procurement process. This is especially critical for strategic vendors, managing supplier performance and relationship can lead to smooth operations and cost savings for both buyers and suppliers.

What is procurement strategy?

 As per Wikipedia “ Strategy (from Greek στρατηγία stratēgia, “art of troop leader; office of general, command, generalship”) is a high-level plan to achieve one or more goals under conditions of uncertainty.

Procurement is defined as the process of finding right sources of supply, agreeing on terms and acquiring product or services an organization needs to deliver value to its customers.

Procurement strategy hence can be defined as a high-level plan to meet the purchasing needs of the organization through a mix of people, process, and technology. The purchasing needs of the organization are not just about acquiring the product or services but maximizing the value through an effective and fair selection of vendors.

Benefits of a procurement strategy?

 The obvious question is why define a procurement strategy. Most of the mid-market companies don’t have even dedicated procurement departments so why define a procurement strategy. Let’s look at some of the benefits of having a procurement strategy

Corporate strategy and procurement strategy alignment

The biggest benefit of having a procurement strategy is to have alignment between the corporate goals and how procurement helps in achieving those goals.

Let’s assume that your organization competitive advantage is to offer custom products in the shortest lead time across the industry. Aligning your procurement strategy with organization competitive advantage will help determine the right partners who can help you deliver products faster and at the desired quality levels.

Let’s take another example, you are probably the Walmart of your industry. In that case, your procurement strategy should be aligned with the corporate goal of being a low cost solution provider. A well-defined procurement strategy would help in identifying partners who are aligned with this goal.

Measurable outcome – Define clear goals and what to expect

A well-defined procurement strategy provides a mechanism to measure the impact of effective procurement on meeting organizational goals.

For example – assume that the goal of the company is to reduce cost and improve EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization). The procurement strategy is then focused on reducing overall cost and the outcome is measured in terms of the dollars saved and impact on the bottom-line.

Since the outcome is measurable, it helps bridge the expectations gap between procurement and senior management of the company.

Standard operations procedures

Procurement strategy brings clarity and provides guidelines on how purchasing should work in any company.

For example – if the outcome of your procurement strategy is that you are adopting a low-cost country sourcing, then the approach for vendor selection doesn’t need to be discussed for every sourcing event.

It also provides guidelines for other employees on how to engage procurement, which in turns help achieve overall procurement goals.

Components of a procurement strategy  

Having defined procurement strategy and its potential benefits, let’s look at the how to define the procurement strategy and the key components of an effective strategy.

Procurement strategy like any other strategy starts with a goal in mind. Generally, most procurement organizations are tasked to with one or more of the following goals

  • First and foremost, design a procurement strategy to support the needs of the business. For example – a credit card company wants to have local call centers to support the customers. The goal itself will drive the locations of the call centers. The procurement strategy is very different in this case as compared to outsourcing call centers to low-cost countries.

 

  • The procurement should be done in an effective manner. Hence the second goal is to reduce operations cost for direct and indirect materials. Direct material being raw materials which are used in products and Indirect materials being product and services required to support the operations.

 

  • Increase compliance with corporate policies. This is especially critical for public companies because well-defined procurement processes would simplify SOX (Sarbanes Oxley) reporting requirements.

 

  • Reduce supply chain risk: Depending upon the size and type of the business, this might or might not be a priority for business. For example, a manufacturing company wants to ensure that raw materials are available at the right time with right quality. This means that procurement strategy should be designed with the intent to reduce supply chain risk. There are different types of supply chain risk. Some of them are – risk of delivery, risk of quality, risk of reputation, natural disasters risk.

So, before you move any further, define the key goals which you want to achieve and then start working on defining the procurement strategy. For example, reducing annual purchasing cost by 10% is a good example of a goal. Your goal should be SMART (Specific, Measurable, Actionable, Relevant and Time-Bound)

Once you have defined goal/s for procurement strategy, it times to start working on the design of the procurement strategy. The process can be broken down into following steps

Assessment of current process

This is no-brainer that you need to evaluate your current processes and how they currently support the goals of the procurement strategy. You should at least evaluate the following

a) Procurement policy

This step covers how you currently source the product and services and where your critical suppliers are located. The goal is to figure out whether your supplier base is local, national or International. This will help you identify levers you can use in the procurement policy. For example – if most of your purchasing is done locally, then does it make sense to expand to national or even adopt a low-cost country sourcing.

b) Bidding policy

Bidding policy defines the supplier selection process which includes competitive bidding. The assessment of the bid policy helps uncover opportunities for further improvement. Key questions to ask during this assessment

  • What do we bid today? For example – some companies have policies that they don’t bid anything under $50,000.
  • How do you bid? Is the process working?
  • Is the process fair and setup in way that it avoids any conflict of interest?

c) Engagement with stakeholders

The goal of this assessment is to understand how stakeholders view the procurement function, what they consider as value add from such function. It is important that they you have buy in from key stakeholders on the value add of procurement function. If you don’t have an existing procurement function, it is still a good idea to assess if having such a function would add value and help meet company goals.

d) Tools assessment

Procurement tool kit might not be the first thing which comes to mind while designing procurement strategy but it should be an important component of your strategy. Things to assess

  • What systems do we use today to purchase products or services?
  • Can all employees use that tool to enter purchase orders or they must send paper requisitions to a single person?
  • Do you have a way to ensure that spend is consolidated with your preferred vendors?
  • Do you have tools to execute sourcing events like RFP (Request for Proposal) or e – auctions.

e) Skill assessment

The last step in the assessment process is to assess whether your existing procurement team has the skill sets to execute the procurement strategy. For example, if you decided that to achieve your goal of savings, you plan to adopt a low-cost country sourcing strategy. So, do you have any team member who has experience in low cost country sourcing.

 Procurement strategy design and execution

The next step towards defining the procurement strategy is design of the procurement strategy and ensuring that you have the right resources to execute the strategies. Let’s assume that one of the goals of your procurement strategy is to reduce the purchasing cost by 10%. So, some of the common outcomes of this step are as follows

a)Supplier strategy

 The supplier strategy would provide guidelines on what kind of partners you would work with to reduce cost. This might include the following scenarios

  • Single source supplier strategy, where you decide to purchase product and services from only one supplier. This not only helps in cost reduction but also helps with keeping a close eye on their performance. The single source supplier strategy has its drawbacks too; it increases supply chain risk. To mitigate that, you would need to put processes in place to track such risk.

 

  • We need to consolidate vendors so that we can route spend to top 2 vendors. This means that you need buy in from all stakeholders and locations, in case you are a multi-location company.

 

  • We need to source from low cost countries because the vendor consolidation efforts will not be able to drive the cost down enough to meet the savings goals.

 b) Bidding strategy

 Bidding strategy will provide guidelines on how would you use competitive bidding to meet the goals of your procurement strategy. Some of the common outcomes of this strategy is

  • The bidding would be done for all purchases greater than $50,000. Anything under that can be purchased without a formal bidding process.
  • A formal bidding process would include a 3 bid and buy process. All bids greater than the defined threshold would require proposals from three different vendors.

c) Procurement Tools strategy

The key component of execution of procurement strategy is the tool sets which would help in execution. Some expected outcomes from this step are as follows

  • Tools for automating the purchase order process and ensuring that negotiated product/services rates are used across the company.
  • Tools to ensure that the bidding process can be automated and scaled up as required.

 

Best practices of a procurement strategy

We close this topic with some best practices you should follow while implementing a procurement strategy.

a) Involve key stakeholders

 Procurement strategy can’t and shouldn’t be defined in isolation. The key to success is to have a strategy which is well adopted and have the buy in from key stakeholders.

It is no good to design a strategy where there is no consensus and hence no adoption. For example, you might conclude that vendor consolidation is the right procurement strategy but operations head might not agree with it because that increases the supply chain risk. So, an effective strategy is first get feedback on the proposed strategy and address any concerns they might have. In the end, the strategy should be quantified into cost savings so that you can evaluate the true effect of the strategy.

If you don’t have a procurement team today, then start with getting feedback from different stakeholders. Then converge the feedback to a coherent procurement strategy which works for most of the executive team. It is difficult to get 100% buy in.

 

b) Keep the bidding process simple

An integral part of procurement strategy is the bidding process. In other words, vendor selection process. Having a bidding policy is critical but ensure that it is practical.

The common advice is to have five step or seven step strategic sourcing process. That is a good practice to follow but might not work for all categories and  product or services purchases. The common feedback from stakeholders about bidding process is that it takes too long to run a sourcing event. Though that is not true in all cases, but sometimes the RFP process can drag on and extend the vendor selection process.

The key is to hear out feedback from your stakeholders and optimize the bidding process so that it can adapt to the unique needs of your stakeholders.

c) Transparency and reporting

Ensure that you provide complete transparency into the results of the procurement strategy. It is critical to support the claims of successful implementation of strategy with detailed reporting at each department level.

For example, if the key goal of the strategy is to reduce cost – then you should report on the overall achievement to senior management on a quarterly basis. For individual department owner, the reporting should be on monthly basis on how they are doing against their allocated budget and how procurement is helping them to reduce the overall cost.

Though savings is an important part of the equation, the focus solely should not be on just savings. You should evaluate the reporting needs of your stakeholders and accordingly support the reporting requirements. For example, procurement can help stakeholders with forecast of expenses and avoid any surprises.

d) Continuous improvement

No plans survive the reality test, no matter how well planned. Procurement strategy is no different. Plan for revising procurement strategy based on the feedback from stakeholders.

Try to get regular feedback. The best way to get feedback is to have a quarterly review meeting with each key stakeholder. Ask interrogative questions, for example – What you think about the effectiveness of the procurement strategy and how we can further improve it.

Don’t ask how we are doing because you will not negative feedback.

Conclusion

An effective procurement strategy can deliver significant benefits for your company including cost savings. Whether you are a Fortune 500 company or a growing mid-market company, it is critical to review about your purchasing policies.  Document the desired goals and then design a procurement strategy to meet those goals.

Hope you found this article helpful. Read more on procurement in mid-market

Purchase order system – Best practices and considerations

Purchase order system – Best practices and considerations

Introduction and benefits of using a purchase order system

I am sure you would agree with me that any automation initiatives done right delivers productivity improvements and cost savings. Purchase order system is no different and done right can deliver significant improvement in productivity and provide better visibility into company spend.

Purchase order system might not be a top of mind issue for many mid-market executives. It could be because that it is a back-office function or the purchasing volume is not high enough to demand automation. But if you are like any other executive or manager looking to reduce waste and increase efficiencies then you should count this automation initiative in low hanging fruits bucket. Implementing purchase order system would increase the efficiency of your staff and simplify the experience for the end users.

In this article, we will cover, what are the benefits of a purchase order system, how you should evaluate different solutions available in the market and what are the implementation best practices. So, if you are in the market for a purchase order system, this article is for you.

Definition of a purchase order 

Let’s define what a purchase order is and what are the different components of purchase order system If you are familiar with what is a purchase order, please feel free to skip this section.

The official Wikipedia definition of purchase order is as follows

“A purchase order (PO) is a commercial document and first official offer issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services. It is used to control the purchasing of products and services from external suppliers”

Like any other legal contract, PO has an offer and acceptance. Buyer sending the purchase order is just an offer to purchase from the supplier. The PO becomes a legal binding when the vendor accepts the offer by acknowledging the purchase order. Vendor can accept the order as is or ask for a change order. Having a purchase order simplifies this back and forth between buyer and supplier.

A sample purchase order is below

Purchase order example

 

Download free PO template in Microsoft word 

 A purchase order has following components

a) Purchase order header

A purchase order header consists of following components

  • Buyer details: This covers the basic information like company name, address, logo etc.
  • Shipping information: This section covers the order location for the supplier, where the order should be shipped to and the Purchase order number.

b) Key terms: This section lists key terms including shipping method, trading terms and agreed or standard payment terms for your suppliers.

 

c) Purchase order line items

Order Line item details: this section contains line items which you are purchasing from the vendor. The key fields are description of the item purchases, quantity, unit of measurement, unit price and total.

c) Taxes and other information

This section lists the taxes related to the purchase and other charges like Freight etc.

Free Purchase Order System

Process flow purchase order process  

Having covered what is a purchase order, let’s look at the basic process of creation of a purchase order. The basic purchase order process is depicted below

a) Requisition process

The requisition process generally involves, identification of the need or what needs to be purchased. If you have a procurement department, then this step would generally include sourcing and price negotiations (in case of new purchase). In case of existing items, this simply means purchasing items from existing suppliers with pre-negotiated pricing.

b) Requisition approval

The second step of the process includes authorization approval of the purchase. Depending upon the level of automation, this could be either manual or semi-manual or fully automated. It is not uncommon for companies to have paper based authorization process for purchase approval. Though it works but the process is highly inefficient. Your purchasing policy should clearly define who should be approving the purchasing request.

c) Purchase order processing

The third step includes creating the purchase order and sending to the supplier. If your system is completely manually, you are creating purchase order using an existing template and then sending to the supplier via email or through fax. Automated systems create the purchase orders automatically and send it to the supplier based on their preferred transmission process

d) Supplier acknowledgement

The fourth step is the acknowledgement of the order by the supplier. This generally means that supplier accepts the order including the terms printed on the purchase order. In case the supplier doesn’t acknowledge the order as is, then it must go through a change order process.

e) Change order process

The purchase order change process can be initiated by the buyer or supplier due to different reasons. Common causes for suppliers initiated changes include, incorrect price, discontinued items or disagreement regarding purchase order terms.

On the buyer side, the change order is commonly initiated due to change in quantity of incorrect unit of measure (UOM) for the item or list of items.

 

Benefits of a purchase order system

Having covered the basic purchase order process, let’s cover what benefits you can expect by implementing a purchase order system

a) Cost savings

When it comes to cost of processing a purchase order, there is no simple answer. There are different benchmarks available from different research house. For example – a study done by CAPS research provides purchase order processing cost benchmark for different industries. For example, manufacturing industry has an average cost of $59 and petroleum industry has an average cost of $741. The reason for such a broad range is due to process complexity and number of people who are involved in reviewing the purchase order before it is sent to the supplier.

One should also consider the cost of processing change orders in case they are not issued correctly.

A simpler solution is to look at the total yearly cost and divide by number of purchase order processed

Cost to process PO = Total yearly cost / number of purchase orders issued

So even if you have single employee with an average annual loaded cost of $75,000 and total PO processed is 60 a month or 720 a year. Then the average cost per PO is $104. By implementing a automated purchase order system you can eliminate the cost of processing the PO by 80-90%.

b) Productivity Improvement

A purchase order system not only saves cost but also saves time required to process a purchase order. If you are manually processing the purchase orders, then every step takes more time, for example approvals etc. By automating these activities, you should be able to save time and increase productivity of your employees. Automation of purchasing process is a very simple way to eliminate waste from your operations and increase the efficiency of your business processes.

c) Better relationship with your suppliers

 A side benefit of automating the purchasing process is improved relationship with suppliers. Automated purchasing process leads to 

  • Reduced errors in the purchase orders, hence suppliers spend less time correcting errors and processing the purchase orders.
  • It provides better visibility to the supplier. Since the process is automated, suppliers know how much time it takes to process orders.

d) Visibility into spend at granular level

 If you have a manual purchase order process, chances are you have limited visibility into company spend. Most of the companies relies on reports like spend by supplier or spend by GL accounts. Beyond that, you must dig up the purchase order documents to find additional information.

With an automated purchase order system, you can get granular visibility at line item level which helps you better plan your budgets, understand cost trends. The granular visibility provides better spend data which you can use for negotiations with your suppliers. It is not uncommon for companies to find out that they are paying different rates for the same product across different departments.

For more on cost savings – Download our free guide on how to implement a strategic cost reduction program

e) Fraud prevention

 One of the benefit of a purchase order system is that you can implement automated workflows. Hence, ensuring that all purchases requires proper authorization before it can be sent to the supplier. Most purchase order systems maintain an audit trail and you can review the purchase approval history at any time.

With automation, you can build approval workflows so that employee don’t need to evaluate who should be approving the purchase. The purchase system automatically does that for you and helps in preventing procurement fraud.

f) Legality

 Though it is ideal to have negotiated contracts for all the purchases but that is not always the case. In those cases, terms on the purchase orders is a good substitute. Every purchase order should list the standard buyer terms for purchase and that provides the general agreement on how both parties will conduct business. A purchase order generally includes commercially terms like payment terms, product warranty’s etc. It also includes legal terms like limitation of liability, indemnification etc.

In case there is a dispute, these terms can help resolve that dispute rather than leaving it open ended. If a case ever goes to court of law, the standard terms can provide the general agreement framework rather than relying on standard commercial terms.

Selection considerations for purchase order system

 I think by now you would agree that purchase order system is a must for any organization including yours, with that said, let’s look at some of the considerations for selecting a purchase order system

 a) Using your current ERP

Almost all ERP (Enterprise Resource Planning) tools have a purchasing module especially the enterprise grade applications like SAP and Oracle. Before you decide – ask following questions

  • How much it will cost to configure the module?
  • Is it user friendly and can be easily made accessible to all users?
  • Do you need to purchase additional licenses to enable this capability?
  • Do you have configurable workflows so that employee’s orders can be approved before they are processed?

If you current ERP like Microsoft Dynamics offer this capability at a reasonable cost, use your current ERP purchasing module. If not, keep reading!

b) Ease of use

 There are multiple purchase order system provider and on paper all provides have similar feature. However, the easier the system is to use, the better the adoption across the company. If the tool is cumbersome, you will never get the desired adoption and hence the benefits which comes along with it. Look for system which has an interface similar to common used web applications, for example if your purchase order system has a user interface similar to Amazon.com, you really don’t need to train users.

c) Installation and Maintenance

 Another aspect to consider is the delivery model. Whether the solution is a cloud based solution or the purchase order systems need to be installed and maintained by your IT team. Internally deployed and managed system might seem cheaper in the beginning but if you do a Total Cost of Ownership (TCO) analysis over 5-6 years, cloud based solution is always a better deal. There are multiple reasons for that

  • You don’t need internal IT resources to manage the system. Maintenance is always a headache because you need expertise and downtime to upgrade.
  • You get better availability and reliability assuming the solution provider uses state of the art infrastructure.
  • Most of the cloud solution providers keep on enhancing the system on quarterly basis so you are always getting the latest and greatest features.

d) Flexible approval workflows:

When you are implementing a purchase order system, the goal is not just to automate the paper based process but also to ensure that the system can help with your compliance needs. The selected system should support

  • Business rules around purchase authorization before placing the order. For example, based on the total purchase amount, the purchase needs to be routed for approval at the correct organization level.
  • Specific category rules – for example, all IT hardware purchases should be first routed to IT so that they can ensure that corporate standards are met.

The easier the tool, the better experience for employees because you can customize the workflow based on the requirements of the business and different business departments.

e) Easy to configure

When it comes to purchase order system, one system doesn’t fit the requirements of different business. The purchase order system should be easy to configure so that you can easily set it up to meet your unique business requirements. It could be a specific business processes or special field structures which needs to be setup.

A word of caution, don’t overly customized the system to meet your business processes. There is value in choosing out of the box functionality because usually that means it is the best practice. Ideally, do minor tweaking to adjust the system to your requirements. If required, review your processes to see if process re-engineering is required.

f) Integration requirements

Once the purchase order is generated, it should also be sent your ERP system for further processing. That includes posting it to correct general ledgers, receiving the goods, inventory management, invoicing and payment.

Make sure that the selected system can easily integrate with your current system/s. Ideally the selected vendor should have pre-built and configured adapters for you ERP system so that your IT team can easily configure the system and it is a plug and play integration.

g) Modular system

The benefits of purchase order system are not limited to just purchase orders, you can extend the capabilities to automated invoicing too. This makes it easy for suppliers to submit the orders electronically. You can expect similar benefits around productivity and cost improvement as in the case of purchase order system.

Our suggestion is that you select a system which is modular, which means it has end to end modules for the entire P2P (Purchase to Pay) process including e-invoicing. This way you can start small and later expand into other modules.

I hope that the above-mentioned criteria would help in selecting the purchase order system.

How to get a purchasing order system for free

 

Implementation best practices

 So, you have identified the benefits, selected the system and started implementing the solution. But before you start implementation, consider the following points. This would increase the chances of a successful implementation.

a) Support from stakeholders

 Like any other initiative executive support is very critical for successful rollout of a purchase order system. Make sure that key stakeholders are aligned with the objectives of the rollout of the program. Most of the times these solutions are sold by purchasing department to internal stakeholders as an initiative to improve productivity of the back office. That is not the most appropriate approach. You should highlight the key benefits stakeholders will get, once the system is implemented. For example – better visibility into their budgets.

b) Effective change management

If you are implementing a purchase order system for the first time, make sure that change management is well handled. Specifically, make sure that users of the systems are communicated in advance regarding the benefits of the system. Make sure that you update the users on a continuous basis before you Go live and they have a channel to voice their opinion and feedback.

When managing change, focus on the bright spots – what is working and then accelerate your efforts towards that.

c) Single ownership

Implementing a purchase order system includes technology implementation and process enhancements. It is helpful to have single point of ownership so that the individual responsible for implementation can get feedback from different stakeholders. The selected individual should be single point of contact for your internal and external stakeholders. 

Ideally a person familiar with technical solutions and process knowledge would be best suited for this role.

d) Minimize customization

 I have mentioned earlier and will mention again, Minimize the customization to the chosen solution. There is always a strong temptation to customize the solution to meet your specific business processes. This might be Ok if the solution is developed only for you but if you are selecting a cloud vendor, chances are that they have the exact same build for all customers.

Rather than customizing, focus on create strong requirements and make sure you choose a solution which fits well with your current processes.

f) Process reengineering

This is often ignored step especially when you have limited resources. The general tendency is to implement the system and then improvise the processes once the system is up and running. That is a wrong approach.

Take time to do a current state process analysis and then come with would-be process. Get buy in from all the stakeholders regarding the would-be process. Once that is done, the requirements should become part of your selection process.

 

Conclusion

Purchasing automation done right by implementing a purchase order system provides many benefits. Key benefits include improved productivity, increased visibility into company spend and increased compliance to the corporate policies. Mid-market companies can gain significant competitive advantage by understanding their buying patterns and strategic cost reduction opportunities.

I hope you find this guide helpful. If you would like to discuss further, setup a free consultation with one of our purchasing experts.

The Ultimate Guide to Corporate Travel and Expense (T&E) Policy.

by ProcureDesk 0 Comments
The Ultimate Guide to Corporate Travel and Expense (T&E) Policy.

I think that you would agree with me that although Travel and expense (T&E) spend is not a major contributor to the total spend, it needs lot of attention and resources to process the expense reports for employees. This includes defining a Travel & Expense (T&E) policy, processing receipts, ensuring that receipts match the expense, auditing, reimbursing employees for out of pocket expenses.

The percentage of T&E expense as of total spend may vary from company to company, but this is always a top of the mind issue for most executives because well controlled T&E expenses can not only save company money but also prevents any fraud by employees and misuse of company assets. As per research done by Aberdeen group, 43% of best in class companies consider T&E expense management as critical strategy and 48% of best in class companies cite “need to reduce expense processing costs” as a top pressure.

Companies whether large or small realize the potential benefits of well managed T&E spend and invest in tools and technologies to better manage the process. However, policy generally comes after implementing the tool and that causes lot of headaches for employees as well accounts payables who is processing those expense reports.

Following Travel and expense policy best practices, companies should first define and implement a policy, ensure that employee feedback is incorporated in the policy and then look at implementing a tool to automate the expense management process. This will not just lead to process efficiencies but also leads to a friction free T&E expense reimbursement process. Let’s look at some of the key components of the T&E policy

Objective of the T&E policy

It is important to have a well-defined T&E expense policy but equally important is to clearly articulate the objective of the policy both for the management as well employees. Some of the key objectives for the T&E policy are as follows

a) Define an expense reimbursement process for both employees and non-employees. The process includes how to report expense, what to include and how employees be reimbursed for expenses.

b) Ensure that employees understand the legal requirements from IRS regarding expenses, for example the need for business reason. Companies who explain the need for policies have a better compliance rate as compared to companies who just implement policies without first explaining the need. You can find guidelines on IRS website.

c) Ensure that employees and their managers understand their duties and responsibilities regarding expenses.

The goal of defining the objective of the policy is not just to define the rules for T&E expenses but to also ensure that employees clearly understand how to behave responsibly while spending company money. A well-defined and communicated policy leads to lower fraud rate and overall reduced spend.

Benefits of Travel and Expense (T&E) Policy

Benefits_Travel_expense_policy

 

 

 

 

 

 

Having a well-defined Travel and Expense (T&E) Policy can have many benefits. Organizations across the board are looking for way to improve their T&E process and having a solid foundation in the form of a policy is the first step. As per Aberdeen research group, the top benefit companies are looking for is reduce expense processing cost.Apart from the obvious benefits of reducing the cost for processing, other benefits of a well-defined policy include 

a) Improved Productivity

Having a standardized T&E policy provides employees clarity on what they should or shouldn’t do, which means the policy administrators are handling less calls from employees on how to do something. It is important to define the policy as early as possible, even if you are a small company. That way, you can tweak the policy as per employee’s feedback and when your company is in growth mode, it is easy to scale the policy across new employees and different locations.

b) Fraud prevention

Having just a policy doesn’t lead to fraud prevention but the visibility backed by a strong process does. What I mean by this is, since you have defined a process to report spend, it will be easier for you to understand the trends and identify if an employee is misusing company assets. For example, if an employee is traveling to the same location again and again, you might want to audit that to check if this is a valid business need for that or the employees have relatives at that location! 

c) Cost savings

Though cost savings is not the only reason for which you should define a T&E policy, having a well-defined Travel and Expense policy does lead to cost savings. Specifically,

  • It helps you to understand key trends by way of gathering spend data (assuming you have an electronic system to capture T&E spend including vendor details). Once you have data about key vendors, you can go back and negotiate the cost with these vendors. On an average, you can reduce your T&E cost by 8-10% across airlines and hotels once you have a decent volume.
  • Standardization leads to reduced exceptions and hence overall reduced cost to process an expense report. As per research from The Aberdeen Group, the average cost to process a single expense report is $20.65 and for organizations with visibility, the average cost is $12.51, or 39% lower. So, if you are a mid-market company processing 1,000 expense reports per month, that’s an approximate annual savings of $97,680.

Component of Travel and Expense (T&E) Policy

 

Components_Travel_Expense_Policy

 

 

 

 

 

 

This section is more an overview then detailed explanation of each component of the T&E policy, use this as a template to create a T&E policy which is customized to your organization needs

1. Expense categories

The first step is to define what spend categories are covered under the corporate Travel and Expense policy and what special rules you might have for these categories. Common expense categories are

  1. Travel – Air, Road, Lodging, car rentals.
  2. Business meals
  3. Client entertainment expenses
  4. Office expenses – for example office supplies which employees can purchase using corporate card or their own card.
  5. Other vendor expenses – expenses you allow

2. Cards vs cash

It should be clearly defined whether employees should exclusively use corporate issued credit cards or whether an employee can use their personal credit card and cash for employee expenses. There are pros and cons of each approach, so you should clearly evaluate the alternatives and decide what works best for you. For example, if you are exclusively using cards, then that gives you better visibility into T&E spend but then you are liable for paying late fees if employees don’t file expenses on time.

3. Reimbursable vs non-reimbursable expense

Not all expenses are reimbursable, IRS guidelines drive some of that and as a company you might decide not to reimburse such expenses. Some common non-reimbursable categories include

  1. Child care
  2. Personal grooming
  3. Dry cleaning services – some companies do reimburse this expense and some don’t and this is dependent on the average number of travel days for your employees.
  4. Parking tickets
  5. Traffic violations tickets
  6. Airline upgrades.

It is recommended that you review your overall T&E spend and identify categories which are not reimbursable. The list of categories generally evolves over time so you don’t need to capture everything on day one.

4. Expense reporting and reimbursement

 The T&E policy should have a clearly defined process for reporting the expense and the pre-requisites for submitting the expenses. Some of the common examples are

  1. Reporting of the expense reports: if you are using an expense management tool then this process is straight forward but if not, then clearly define how and to whom expenses should be submitted after they are approved.
  2. All expenses should be approved at the right authorization level before submitting for processing. The right level depends on the autonomy available to employees at each level of the organization hierarchy.
  3. It is a good practice to have receipts for everything but that also requires additional effort to validate those receipts and match it against receipts. You might want to start with a lower amount, for example anything greater than $20 needs a receipt.
  4. All T&E expense reports should be reported within a certain timeframe. If your company has a corporate credit card program, then you might require all expense to be filed within 30 days so that you can pay the bank in time and avoid any late fees charges.
  5. How soon employees expense will be reimbursed, for example 30 days after the expense is reported.
5. Travel policy

This is the most important piece of the T&E policy. As per financial dictionary, “travel expenses are defined as Expenses incurred when a person conducts business away from home. For example, if one must travel to another location to conduct a meeting with an important client, any lodging, meals, or transportation costs usually count as travel expenses”.

Following should be covered in the travel policy

a) Travel booking:  How the travel should be booked by employees. There are multiple options available including external or internal help desk, travel booking tools or other travel websites like Expedia, individual airlines sites etc. There are pros and cons of each of these approaches but you rather have a defined approach. If you are a medium sized business, it is ok for employees to use any website for booking, however in that case, make sure that you have a good expense reporting tool so that you can get visibility into spend.

b) Preferred airlines:  If you have a preferred contract with any airlines then make sure that you communicate that to employees. If your annual spend is under $500,000 chances are that you might not be able to get any preferred pricing from airlines but you can always enroll in the corporate miles program whereby company accumulates miles for every travel. These miles can then later be redeemed for travel, not huge savings but you can save $50,000 – $100,000 / year depending upon how they are redeemed.

You should also specify if travelers need to book travel in advance or they can book anytime. As per research done by travel booking site cheapair.com the best time to book a domestic flight is 49 days in advance. Now that might not be possible all the time, as per the research, the worst day to book a ticket is one day before the flight, followed by 2 days, 3 days until you get to 11 days out. So, if you can’t do 49 days/ 7 weeks, aim for at least 2 weeks.

c) Business Class vs Economy: The policy should clearly specify when business class travel is allowed. There are multiple ways to structure this, you can implement policy based on job titles, for example – VP and above can travel by business class. The other way to handle this is to structure by travel time, for example – if the travel time is more than 8 hours then business class is allowed. You can decide to keep it simple by not allowing business class travel at all!

d) Lodging: There are couple of things to cover here, first what type of rooms can be booked by travelers, for example standard vs. suite etc. Second, if you have a preferred contract with a hotel, then make sure employees use only that hotel. The problem with hotel bookings is that employees prefer to book hotels with those hotel chains where they already have lot of reward points. This can easily be mitigated by asking your preferred hotel to do a reward/points match. Some hotel chains might not negotiate a national contract so this could be a little bit of work depending upon the number of locations travelled by your employees.

e) Booking cost and exceptions: The goal of this section should be to provide guidelines to employees on acceptable booking cost for airlines, lodging and car rentals. If the booking cost is over the guidelines, then a process should be in place to approve those exceptions.

BTN (Business travel news) publish a yearly BTN corporate travel index  which is a good start to get a handle on the overall travel cost. For example – as per the 2017 index “the average 2016 cost of a hotel room, including all taxes and surcharges, was $177.36, up 2.6 percent from 2015 levels. New York was the most expensive at $385.08, and San Francisco, Boston and Washington, D.C., also exceeded $300.”

Best practices –  Travel and Expense (T&E) Policy

Defining a policy is one thing, implementing it in a user-friendly manner is a completely different ball game, we will conclude this guide by mentioning some best practices which you can use to successfully implement a Travel and Expense policy in your company

1.Ownership of the policy

For the T&E policy to be successfully implemented, there must be a clear defined ownership of the policy. Ideally this should be owned by a finance function or a procurement function. There are two main reason for defining a clear ownership, first – your policy is not going to be perfect on day one so having a clear ownership ensures that someone is tracking the policy adoption and accordingly making changes. Second – when you rollout the policy, there are always questions from employees, so you need someone to handle employee questions and feedback.

2. Executive support

 T&E policy implementation is no different from any other change initiative and if you have key executives backing up the policy, there is a higher chance of adoption. In our experience, the T&E policy is well adopted in cases where a senior executive like CFO (Chief Financial Executive) is supporting the policy. It is good practice for the initial communication to go from CFO on why the need for T&E policy and how employees can provide feedback.

3. Focus on Adoption

 It is not uncommon to see employees going out of the policy and booking travel which is not authorized or travel which is outside the guidelines. The most common reaction to such employee behavior is to act against such employees and set a precedence. Our recommendation is to resist this temptation and focus on rather accommodating the needs of the employees. Understand why the exception handled and if it is a genuine request then figure out a way to accommodate that in the policy. Focus on adoption and not enforcement only, once you have policy fully adopted, you don’t need to enforce it!

4. Keep it Simple

 While writing the policy, use simple language and avoid corporate jargons. There are two benefits of that, first – all employees can easily understand what is expected out of them and second – there will less exceptions because the expectations from employees are clearly define. Policies in general are not well read by employees, I mean who wants to read a 20+ pager document to understand how they should travel. For higher adoption, keep it simple and brief and define as less rules as possible. Again, focus on adoption first.

5. Reporting

 Make sure you have a mechanism to report on the total spend at department level and at company level. There are multiple benefits to having good reporting around T&E spend

  1. It helps budget owners to better understand how their T&E budget is consumed.
  2. It helps understand spend patterns and any transactions which might be fraudulent in nature.
  3. It makes people accountable because their spending is now reported and available to senior management for review.

Conclusion

When it comes to defining Travel and Expense policy, define clear objectives and goals you want to achieve, keep it simple and focus on adoption over enforcement. Hope you find this guide helpful, you can check more topics around procurement in mid –market companies on ProcureDesk blog.

Procurement Fraud Definition and Prevention

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Procurement Fraud Definition and Prevention

If you look at progression of any company from startup stage to a well-established company, there is a common theme on how the procurement process evolves over time. Preventing procurement fraud is not a priority for most of the small to mid-size companies, let’s look at the evolution of the company and when preventing procurement fraud should become a priority.

Procurement Fraud and Company Size

Stage 1:  In the beginning, there is the founding team and 1-2 more people. There is no to limited procurement, especially if you are a services company. Procurement is synonym to owners of the company going to Costco or Sam’s Club and purchasing all what they need to run the business. Very limited procurement, owners controlling all purchases, no possibility of procurement fraud.

Stage2:  In this stage, a Company typically have under 50 employees, procurement now involves buying office supplies, capital equipment, IT hardware and software and other maintenance supplies. Most of the companies have generally a office manager responsible for purchasing all items company needs. Purchasing is simple generally sending an email to the office manager and she takes care of purchasing them and the whole process including paying the vendors using company credit card.

Stage 3: In this stage, the Company is in growth mode, you are hiring as fast as you can and opening new offices. You probably have an accounting/ERP system at this time to handle your books and handling other business processes like creating sales orders, managing customer billing and paying vendors.

  • The focus in this stage is primarily hiring more sales and marketing staff, expanding production capabilities.
  • Most of your employees have credit cards which they use for small purchases, meals ,travel & expenses. This requires you to have a person in accounting to match receipts to the purchases and ensuring that there is no misuse of the card.
  • You probably have grown to multiple locations.

If you are a CFO/COO or CEO of a company which is in stage 3, you should be thinking about procurement fraud. I am not saying that you should not trust your employees but you should be considering implementing measures to prevent procurement fraud.

What is Procurement Fraud

Let’s first define what is procurement fraud. As per Wikipedia –“Procurement fraud can be defined as dishonestly obtaining an advantage, avoiding an obligation or causing a loss to public property or various means during procurement process by public servants, contractors or any other person involved in the procurement.”

It is simpler words, it is a kickback to the buyer from supplier for selecting the buyer’s bid and which might not be in the best interest of the company. The scope of procurement fraud is not limited to certain categories or companies but it is a wide spread issue.

As per consulting firm PricewaterhouseCoopers Global economic survey 2014 twenty nine percent (29%) of global organizations had experienced procurement fraud. Procurement fraud is common in the beginning of the procurement process (vendor selection stage) then the later stages like vendor performance and delivery.

Fraud Triangle

Why fraud happens? There could be multiple reasons but any action of fraud can be captured by these three tenants of fraud. As per ACFE (Associations of Certified Fraud Examiners) , the fraud triangle consists of

1. Perceived financial need: This is the motivation or the reason behind the fraud. Examples include – Financial Debt, gambling or other short term needs which an individual is not able to fulfill with the current income source.

2. Perceived opportunity: The second side of any fraud is an opportunity for someone to commit fraud. For example, if the person committing the fraud understand the controls well or lack of controls in the purchasing process, they can easily identify opportunities for committing fraud.

3. Rationalization: This stage involves the individual planning to commit the fraud rationalize his or her actions. For example, the amount is so small that it will not affect the organization or no one will notice such a small change. Others rationalize by relating to the situation they are in and rationalizing in their mind that the situation is temporary and the fraud is one time and will never happen again. I think you can say the same for gamblers, it always start with a small bet.

 

Examples of Procurement Fraud

Following are some of the common examples of procurement fraud

1. Employees colluding with suppliers: As per cporising.com, this is the most common example of a procurement fraud. In this case, employees responsible for purchasing a product or service colludes with a supplier to purchase a product at a higher cost or a cheaper product which doesn’t meet the quality requirements. In return, the buyer receives a kick back. It is very common especially in companies where there is no well-defined sourcing process or the procurement is decentralized to the individual location or departments. The impact of such procurement fraud could be limited in certain locations; but it could have a devastating impact on your product reputation if you land up buying inferior raw materials which leads to a poor-quality product for your customers.

2. Fraudulent companies’ setup by employees: Though this is not the most common example of procurement fraud but this might cost you the most. In this type of fraud, few employees may collude to form a fraudulent company and then keep on issuing payment in the name of that company. The payments are generally small enough that it doesn’t raise any alarm but over a period of time this can cause serious damage to your company. There are multiple reason this could happen – first, the company doesn’t have a purchase order process so they don’t match invoices against purchase orders before the payment, second if an individual manages the entire process from purchase to payment then it is easy for that individual to commit such fraud.

3. Conflict of interest: Even if you have tighter controls and well defined processes, chances are that fraud can happen in the form of conflict of interest. You would often see this even in companies with well-established processes. The individual responsible for purchasing select a vendor who is related to him/her in some fashion. There is nothing wrong with that if you have conducted a bid process, the selected supplier meet all your qualification criteria and the individual responsible for purchasing have declared the conflict of interest. Unfortunately, that is not always the case.

 Procurement fraud impacts your procurement process integrity. But the reverse of this is also true, which means if your sales team is colluding with buyers of your customers and giving kick back to buyers. In 2010, HP paid $55 M to settle allegations that it paid money to individuals to win US government contracts. So, you should be looking at preventing procurement fraud but also looking at how not to engage in such practices with your customers.

How to prevent Procurement Fraud

 There are multiple ways to prevent fraud, some are basics common sense approach and some needs investments in system and processes from companies to detect and prevent fraud.

1.Educating Employees and Suppliers: The first and foremost step towards procurement fraud prevention is education of employees about your procurement practices including your bid process, how you select vendors, conflict of interest etc. The same is true for your suppliers, create a supplier code of conduct and ensure that suppliers have read and acknowledged it. It is not a full proof process but it will at-least inform employees of what is expected and what are the consequences including termination, that should take prevent conflict of interest cases.

2.Controls and audit: Having proper controls helps in prevention of procurement fraud. Following are some examples of purchasing controls you should have in place.

  • All purchase requisitions should be authorized and approved by the authorized individual in the organization. Based on the transaction amount, the approval should come from different individuals. For example, a manager can approve only up to $5,000, Sr. Manager can approve up to $10,000 etc.
  • All invoices should have a pre-authorized purchase order, if that is not in place proper investigation should be done to understand the gaps in the process and how to fill those gaps.
  • For purchases, which are happening through credit cards, a valid receipt and justification is required to approve expense, including a proper business approval.

However, just having controls doesn’t prevent procurement fraud but you also need to have an internal audit department auditing purchases on a regular basis. Audit department should be randomly select purchasing transactions and ensuring that there are no gaps in implementation of the control.

If you are like many mid-market companies, you probably don’t have the luxury of an audit department, if that is the case, focus on automating the controls as much as possible so that you minimize the chances of procurement fraud, we will talk about procurement control automation in a later section.

3. Segregation of duty: Ensure that duties are segregated and that the same individual doesn’t have control over the entire purchasing process. In others words, a single individual shouldn’t be able to create purchase orders, key in invoices and issue payments. Even if you have tighter controls, segregation of duty minimizes the chances of procurement fraud. An ideal case is that there are two different departments handling purchase orders and invoices, procurement department managing purchase order process and accounts payable managing invoice capture and issuing payment. If you don’t have dedicated resources, employees requesting purchases can handle issuing purchase orders directly but Accounts payable can only handle invoices.

4. Be Watchful: I am not suggesting that you have full time investigator watching every action of your employees but being watchful of changes in lifestyle, extravagant personal spending of people responsible for purchasing could be a sign that something is not right or they hit a jackpot and in that case they might not need the job after all!

Ricky D. Sluder a certified fraud examiner offers a useful tip about reviewing social media accounts, for example if a procurement officer making $60,000 a year posts picture of extravagant purchases on social media, that should be a sign that something is not right.

5. Automations of control: Automation not only helps with productivity improvements; it also helps with fraud prevention. Automated purchasing systems have many benefits but from a procurement fraud perspective, it can offer the following benefits

  • Electronic system for creating purchase orders and ensuring all orders are approved at the right authorization levels.
  • Ability for end users to create a receipt for purchases so that there is a proof that the item was purchased and this is not a fraudulent purchase order.
  • Automatically matching a purchase order with receipt and invoice (also called 3 way match) ensuring that you are paying for the same items which were purchased and delivered.
  • Complete visibility into spend, the data is at one place and any decent purchasing system can run reports and provide historical purchasing information.

Conclusion

When it comes to procurement fraud, the best step forward is to put together preventive controls which can prevent the procurement fraud from happening. As the adage goes “Prevention is better than cure”.

Some of you might say that we are small enough to have any kind of fraud, but it is easier to implement basic controls when your organization is small vs when your organization has grown up to 100 of employees and multiple locations. Also, keep in mind that that you don’t over burden your employees with lot of control, implement sufficient but lean controls. Automated purchasing systems can help in simplifying the implementation of such controls and provides better spend visibility.

Why mid-market companies should automate the purchasing process

Why mid-market companies should automate the purchasing process

Large companies ($1bn + revenue) have high volume of purchasing activity, whether it is the number of purchase orders generated, suppliers, or the number of invoices processed by the A/P department. These companies have implemented an automated purchasing system which automates most of the activities in procure to pay (P2P) process. They are reaping the benefits of purchase process automation in terms of cost control and reduction, better visibility into cashflow and simplified purchasing processes.

When it comes to mid-market companies, especially in the revenue range of $50 – $150M, the purchasing activity has grown over a period and some companies are still using manual processes for purchasing. When a company is in growth mode, it makes perfect sense to focus on revenue generating activities rather than cost center like purchasing, but if managed properly companies can benefit from the purchasing process automation and reap the cost savings from productivity improvement, better visibility into cash flow and compliance.

Let’s first define various activities in the whole purchasing process and how most of mid-market companies are doing it.

Steps in Purchasing Process

  1. Requisition: This the first step in the purchasing process, employees looking to purchase a product or service. If the process is not automated, you are mostly doing it through a manual email process. It is not uncommon for employees to fill a paper form or an excel file with what they need and then send for approvals before it is routed to a buyer for execution. The problem with manual process is that it is time consuming and can’t scale without adding more headcount.
  2. Spend authorization/approval: The second step is approval of the purchase. It is very common to see the approvals routed via emails. In some cases, companies still manage this through paper based process and approvals are obtained on printed forms. If your employees are using credit cards for purchases, then the approvals are likely happening post purchase when they file their expense reports. The best compliance is proactive through pre purchase authorization.
  3. Purchase order: This step includes generating the purchase order and sending it to the supplier. This step normally involves creating the purchase order and emailing the purchase order, this type of activity can be easily automated, resulting in time and savings for your company. Also, manual process leads to more errors while creating the purchase order and that generates lot of back and forth.
  4. Receipts: Creating receipts not only serves the purpose of confirming whether you received your order but it also help keep track of where the assets like laptops are post purchase. It also prevents fraud because there is an audit trail of who received the item and when.
  5. Invoice and payments: Most mid-market companies don’t have automated processes to capture invoices which means that the Accounts Payable team is spending time on entering the invoices in your ERP/accounting system. This is an activity which you can easily shift to your vendors, asking them to enter invoices directly to your systems through a supplier interface. The best practive is to move to electronic invoices so you can completely avoid the data entry overhead.

Benefits of Automating the Purchasing process

Having talked about the process, let’s talk about key benefits which mid-market companies can achieve by automating the purchasing process from requisitions to invoices and payments

Better Cost control: Automating the purchasing process provides a better mechanism to control cost. Since all purchases are approved before purchase, managers have an opportunity to review whether the spend is required or not. Depending upon company spend, this could result into significant savings. As per a recent estimate from research firm Spendmatters, mid-market companies can see cost reduction by 2-3% after implementing an automated purchasing tool. The reason for cost avoidance is that the spend is preauthorized and managers can effectively control spend and avoid unnecessary spend. Also, it helps to align the purchase timing with your cashflow strategy.

The other benefit of purchasing automation is that it helps reduce the fraud. By implementing a workflow for purchase and invoice approval, companies can ensure that one person doesn’t have control and authorization of overall spend process. For example, same person should not be authorized to issue purchase orders and issue payments. This reduces the opportunities for fraud and protect company’s most important asset – Cash.

Reduce Waste and inefficiency: Lean operations is not just doing more with less but also reduce any waste and inefficiencies in your operations and processes. If you look at the overall purchasing process, the value-added activities are negotiating best price and ensuring that purchases are authorized and vetted. If you have a manual purchasing process then you have lot of inefficiencies in the process, which includes

  • Employees filling up tedious requisition forms, takes long time to create a purchasing requisition and leads to errors.
  • Sending email for purchasing approvals and chasing managers for approvals.
  • Keying in the purchase orders and invoices into your accounting systems.
  • Overheads of sending emails for purchase orders and scanning invoices.

The above activities lead to lower productivity and higher headcount requirement as you scale your business. A purchasing system can automate these things, reduces time and effort and eventually allow your employees to spend time on value added activities.

Visibility into cashflow: Having visibility into cashflow is critical for businesses of all size, CFO’s are not only challenged with growing the business but also running the operations effectively. An automated purchasing system can provide detailed view into the cashflow including

  1. Proper accruals of open purchase orders.
  2. Purchases which are received but not invoiced.
  3. Standard invoicing ageing reports.
  4. Predictive analytics on the cashflow requirements based on the purchasing history and trend.

Automating the purchasing system leads to better visibility and provide information on decision maker fingertips.

 

Purchasing cost reduction: When it comes to negotiating better cost with your suppliers, the more prepared you are, the better it is. Most of the companies have limited information about their purchasing patterns. You can pull a supplier spend report from your accounting information but it does don’t help you understand spend patterns, for example

  • What are you purchasing at line item level, especially on the indirect spend side – office supplies, cleaning supplies, marketing, advertising, IT hardware and software etc.
  • Do we buy in bulk or do we buy in small batches?
  • What is the unit price trend over time for key commodity items?
  • When was the last time pricing was negotiated?
  • Are we buying same item from different suppliers across different plants?

An automated purchasing system not only provide productivity benefits but also present granular information which helps in negotiating better cost.

Better employee experience and morale: Policy and controls are important for corporate governance. Creating policy documents is the easiest part, implementing it is somewhat challenging and implementing it in an employee friendly manner is even more challenging. Purchasing policy is no different and that is where an automated purchasing system can simplify the process by automating the controls and guiding the users on what needs to be done at each step. Most of the modern purchasing systems allow companies to define policies in the system and automatically alert employees of any violations and corrective measures which needs to be taken to remediate the situation.

 

 

 

Purchasing automation done right can help in controlling cost, reducing cost strategically, provides better visibility for financial management and high morale for your employees. I am curious to know about your purchasing process and lessons learned, feel free to drop a note in the comments section.