FRASERS and Visa^® are pleased to bring you the third e-newsletter of 2007, designed to help enhance your Commercial card program. Canadian businesses are continually challenged to build more efficiencies into their procurement processes in order to manage company spend more economically. This issue demonstrates, via Procure-to-Pay best practices, how to identify potential benefits and savings of implementing or expanding a Purchasing card program.

What are Procurement cards?

Procurement cards are commercial credit cards with pre-set spending and merchant limits designated by the employee’s organization. With a traditional credit card, the cardholder may buy any products or services up to the preset credit limit. With a P-card, each card can be encoded with controls limiting the amount spent on each transaction, the number of transactions per day and per month, or the dollar amount for specific periods. In addition, the card may be authorized only for specific merchant category codes (MCCs).  For example, an organization may choose to block obvious categories such as jewellery stores, furriers and spas, but any categories can be used depending on corporate strategy and the degree of spend control desired.

P-cards have experienced growth in Canada as key elements in the re-engineering of the procurement function. By automating and simplifying time consuming paper-based procurement processes, the use of P-cards when buying goods and services, may reduce the need for requisitions, purchase orders, invoices and cheques.

P-cards are issued to employees under the terms of an agreement which generally provides for joint liability, meaning both the employer and employee are responsible for the charges, only in the event of card misuse. Employees use the cards to acquire goods and services for their employer’s business; the cards are not intended to be used for personal purchases. P-card purchases can be made in person, by telephone or on the Internet.

Typically, each P-card number reflects the particular departments to which they have been assigned, and link directly to accounts within the employer’s general ledger (G/L). For example, procurement cards issued to employees within the shipping department may electronically include a sub-code which reflects the shipping department’s G/L account grouping.

When the cardholder places an order, the supplier obtains the card issuer’s authorization, provides the goods and/or services and obtains payment from the financial institution. At month-end, or other periodic billing date, the employer receives a detailed statement from the card issuer listing purchases made by all employees by vendor, the date of purchase, and the total amount payable to the vendor.

Employers pay the P-card issuer directly on the basis of the statement. Generally, amounts are posted to the G/L on the basis of the P-card account number – if the account is linked to the G/L account – or on the basis of the employee coding of the P-card statement. This feature allows employers to process one document for multiple purchases, reducing the per-transaction processing costs.

The benefits to employers are numerous and include the flexibility to make purchases from a wide range of vendors that accept credit cards; timely transaction information on departmental ledgers and an improvement in the payment process to vendors. Using a P-card for payment consolidates purchases into one statement and thus simplifies the record-keeping, settlement, auditing and reporting processes. It also potentially eliminates the need to match purchase orders and receipts with an invoice, the creation and signing of cheques for individual purchases, the use of petty cash and the requirement to seek reimbursement through employee expense claims.

The numbers speak for themselves. A study of medium to large-sized Canadian businesses shows that it takes an average of 5.3 days and $55 to complete a single purchase order.¹ With the average company processing 4,835 purchase orders a year, the costs add up.² By simplifying and speeding-up the process, a P-card Program can lower internal transaction costs by as much as 76%.³

Benefits of using a Purchasing Card Program

In summary, P-cards permit large organizations to acquire goods and services more efficiently by minimizing transaction processing costs and paperwork.

In an effort to understand these processes and offer improvements, Visa Canada commissioned Deloitte Consulting to conduct a comprehensive study of best practices used in managing Procurement, Travel & Entertainment and Commercial Card Programs.

Medium to large-size Canadian companies, situated from coast to coast and covering a wide array of industries, were interviewed to identify leading-edge practices. Differences among companies were found in the scale of implementation, their ability to dedicate resources, and the level of technological sophistication. These factors were all considered in identifying 56 Best Practices from which six key themes emerged:⁴

1. Proactive, ongoing senior management sponsorship for Procure-to-Pay Initiatives

Senior management sponsorship is necessary for endorsement of existing initiatives, encouraging policy compliance, and increasing awareness of procurement initiatives throughout the organization. In recent years, leading-edge companies have become more innovative in achieving sponsorship by using relevant and realistic return on investment (ROI) measures, sharing information and actively communicating goals and successes to senior sponsors and throughout the company.

2. Collaboration to ensure communication and enforcement of Procure-to-Pay policies and procedures

Leading companies encourage business unit partnership and mutual understanding. Where possible, leading firms share savings with business units to reward compliance and cooperation. Shared objectives and successes, performance measures, as well as training and support have led to more formalized ties between business units, resulting in increased compliance with company policies and a reduced overall cost structure.

3. Progressive migration to automating the entire Procure-to-Pay Information Technology platform

Leading companies are taking a pragmatic approach to automation, focusing on the implications of technology investments to the entire end-to-end platform. Well designed Enterprise Resource Planning (ERP), e-procurement and Internet systems continue to unlock opportunities for cost containment in the Procure-to-Pay process. To support Information Technology (IT) initiatives, companies are setting realistic and achievable ROI objectives, monitoring the achievement of these measures, and incorporating process changes as part of the solution. These companies employ change management techniques to achieve user buy-in and consequently, optimize the benefits associated with improved processes. Mid-size companies are no longer excluded from receiving the benefits of increased automation as IT solution providers are increasingly targeting mid-size companies by offering cost-effective, tailored solutions.

4. Aggressive strategic sourcing focus to continuously enhance supplier Relations

Strategic sourcing is an important strategic priority for leading companies and a powerful tool in cost reduction efforts. While companies have traditionally attempted to achieve discounts with suppliers, they are learning that a Strategic Sourcing discipline may be the most value-added procurement activity.

A 2002 Deloitte Research study on Strategic Cost Reduction indicates a potential cost savings of between 15% and 25% through a focused Strategic Sourcing initiative. Strategic Sourcing offers the following benefits:

• Rationalizing the supplier base
• Maintaining stronger oversight of relationships with suppliers
• Using the data to understand spend share
• Pushing suppliers towards deeper discounts and better service

Leading companies continue to dedicate resources to this discipline, with a noticeable change in strategy towards multi-functional negotiating teams (e.g. Procurement, Accounts Payable, IT, and other key stakeholders) that focus on a corporate-wide view of spend. Formal tools have been developed to assess spend, establish achievable sourcing targets, and support and monitor sourcing initiatives.

5. Comprehensive data aggregation and reporting to support management and enable continuous improvement of the Procure-to-Pay function

Leading companies understand that data aggregation and reporting is critical to accomplishing any key activity. They also understand that reporting is not a function of the quantity of reports, but a function of the ability to integrate and analyze their data. These companies accurately define required reports and use them to share information across the business and track performance to goals and policy.

6. Expanded integration of commercial cards’ functionality into the Procure-to-Pay process

Leading companies continue to look to commercial cards as an integral part of Procure-to-Pay strategic initiatives. As benefits of consolidating spend through a single payment mechanism are realized, companies continue to target key spend categories and search for additional spend categories. Categories of spend previously considered ineligible for card spend are being re-evaluated and added to card purchases. In addition, leading companies are expanding card usage by identifying eligible users and actively enforcing use of the card for all eligible purchases. Companies also continue to find that card programs, properly implemented, can yield greater control and accounting accuracy while enhancing end-user satisfaction. For example, the use of virtual accounts or ghost cards helps channel spend with preferred vendors and enhances the reconciliation process. Moreover, leading companies are utilizing MCC blocking and reporting to better control spend.

Visa^® Commercial Card Programs

Canadian businesses are continually challenged to gain control and balance of their procurement and travel & entertainment (T&E) expenses. 

Lowering operating expenses is an ongoing management challenge. Visa Commercial Card Programs can help companies manage the purchasing process more efficiently to meet this challenge head-on. This not only helps to lower costs, but also speeds up the delivery of goods and services and frees up time for more strategic business priorities.

For more information on Visa Commercial Card Programs and how they can help your business, or to contact a Visa Issuing Financial Institution, please visit www.visa.ca/largecorporate