AlliedSignal isn't timidabout expanding card use
Benefits of using and accepting procurement cards will eventually lead to their use as primary vehicles for acquiring MRO items, says Laura L. Day, AlliedSignal.
By Susan Avery -- Purchasing, 4/23/1998 2:00:00 AM
Although satisfied with progress they've made so far at managing procurement card programs, some buying operations appear almost timid about expanding card use beyond MRO's traditional scope. Others are stuck in perpetual pilot, unable to maneuver programs to gain maximum benefit that comes from using the cards. Yet cards can--and do--play a vital role in many companies' purchasing strategies.
One clear benefit to these companies is the additional resources gained from ridding the buying operation of the task of processing mountains of paper reqs and POs. Now, purchasing at these companies can focus on such value-added activities as supplier management and negotiation. AlliedSignal, winner of Purchasing Magazine's 1997 Medal of Professional Excellence (PUR: Sept. 18, '97; p. 38), is a good example of such a company.
Implemented in 1994, the card program at AlliedSignal, Morristown, N.J., eliminated processing of more than 211,000 paper transactions last year, representing roughly $72 million in MRO goods and services. In 1995, these figures were 13,000 and $2.2 million, respectively.
At the same time, the dollar value of an average transaction placed on the cards has doubled, from $170 in 1995 to $340 in 1997. This is partly because Laura L. Day and Bill Labadie, implementation leaders, corporate purchasing card, have been creative in expanding use of the card.
While clearly pleased with the success of her company's card program, Day "cannot be satisfied with average results... As AlliedSignal moves from a purchasing to a materials management environment," she explains, "we need to challenge the status quo to achieve premier results. This requires out-of-the-box thinking."
Which means having cardholders at one division use the cards to fuel vehicles in the company's fleet of 40 test automobiles. "We had been using our T&E card for these expenses," Day says, "which was inflating that budget." Typically, cardholders use the cards to pay for such non-production goods and services as office and maintenance supplies and promotional and marketing items. "Really, anything not considered production qualifies." AlliedSignal, however, has blocked use of the card for several travel and entertainment expenses, but allows certain categories to be opened (i.e., hotel and restaurants when used for non-travel-related expenses).
In training sessions, Day provides cardholders with an approved supplier list which they are encouraged to use. Should an emergency arise, however, she says that cardholders are told to "go get what they need to keep the business going."
The standard policy at AlliedSignal for putting purchases on the card is that a single transaction be valued at less than $2,000. Purchases for items priced higher than this can be acquired, Day says, by using other payment vehicles the company now has in place. "We've determined that the cards are the most cost-effective for "low-dollar purchases."
Not yet fully implemented, AlliedSignal's card program eventually will be used by employees at 78 of the company's locations in North America. (The company, which employs 70,500 people worldwide, recently 'desectorized' into 11 strategic business units.) Day expects full implementation to occur by the end of the year. As of February, 1998, she and Labadie, who is responsible for implementation at five of AlliedSignal's 11 businesses, have issued more than 2500 cards to requisitioners.
One tool to lower process costs
To measure cost savings in hard dollars, Day figures that typical costs for processing a payment transaction at AlliedSignal is about $2.50 to $3.00 per line item. Items purchased with the cards represent two lines of input, or $5.00. She reports back to each business unit estimated cost savings for the number of transactions placed on the cards.
For soft dollar savings, such as elimination of requisitions and purchase orders, Day conducted a survey of cardholders and other company employees involved in processes surrounding use of the card. Results show use of the card saves those involved about 31 minutes for each transaction.
Working closely with Allied Signal's card provider, American Express, Day has plans for the program that builds on its early success. (She, in fact, suggests program administrators approach card companies with a list of long-term goals.) For instance, she and Labadie intend for cardholders to use the card to pay for contract labor services, to purchase items for company tool cribs and special projects, and to pay for goods and services while working for the company overseas, among others.
Still, like many card program managers, Day has had to overcome a few obstacles during the implementation process. Perhaps most challenging has been convincing requisitioners of the benefits of using another method of payment for purchasing MRO goods and services.
Training cardholders on benefits to the company of using the program helps alleviate some of the pain of change, says Labadie. "Once cardholders use the card, 90% are pleased with how easy it is."
"Change is very difficult," Day agrees. "However, we must be relentless. Processing paper invoices is not a best practice." The program has support of the purchasing and materials functions as well as top management (the chief financial officer and the vice president of materials).
On other issues that tend to bog down some purchasing managers with card programs, such as sales and use tax reporting, Day says that while these buyers have some valid points (i.e., users having to maintain logs), "business is not being conducted the way it used to be done.
"The card companies, however, are listening to our concerns and are doing the best they can to meet our needs. Some states now, in fact, accept reports regarding taxes paid developed by American Express. Card companies are providing us with products with ever more capability." Each AlliedSignal site, which receives monthly reports from American Express, handles sales and use tax individually. Cardholders do keep logs for purchases over $250; monthly statements are reconciled with packing slips.
Advanced applications of cards
In efforts to further eliminate small-dollar invoices, AlliedSignal now is piloting use of the card to replenish tool cribs. While Day intends to continue to use front-end systems now in place, the cards are replacing an old payment vehicle. "Our system still issues min/max reports," she says.
Like some other purchasing operations expanding card programs (PUR: Mar. 26, '98; p. 94), AlliedSignal now uses "supplier cards" for requisitioners to acquire "commodity" items from preferred suppliers without having a card issued to them directly.
This way, the company's preferred supplier, in one case, its forms supplier, Standard Register, keeps a single card number on file for each facility. When a requisitioner contacts Standard Register to purchase an item either by telephone or fax, the supplier understands that he or she will pay for the purchase with the card and requests a department number and reference field. The supplier then sends the monthly statement to the local buyer for reconciliation. AlliedSignal also applies this use of the card to site-specific locations such as company cafeterias.
Similarly, AlliedSignal has issued a card for requisitioners to use to acquire supplies for a single piece of equipment. Often, to maintain or repair a piece of equipment, the requisitioner may have to go to a number of different suppliers. This way, Day can track spending activity (for labor and/or supplies) to keep the machine up and running.
For subcontract labor, AlliedSignal's Labadie currently is piloting a program at its aerospace facility in Phoenix, Ariz. He says that after six months, the program is working well and will be fully implemented later this year. Labor is a service that is relatively easy for requisitioners to purchase off contract, Day adds, "if we don't closely monitor the spend." To encourage users to source from preferred suppliers, Labadie has designed the program so that it is simple to use. He also works closely with American Express to ensure that AlliedSignal's system receives data it needs to account for such purchases as contract labor and items bought to maintain a piece of capital equipment.
At strategic business units that used to make up the company's aerospace sector, cardholders are ordering office supplies, forms, and business cards electronically and paying for the items with the card. The system automates the cardholders' logs and reconciles their monthly statements. Labadie says suppliers particularly like this application of the system because now they have more direct contact with requisitioners.
Also on the agenda for AlliedSignal's card program: a European application of its domestic system. The company had applied the American Express program to a small number of cardholders working in Great Britain, but has yet to expand it to include a greater number of cardholders and/or overseas locations. "Some cardholders, however, do travel overseas and use the cards," says Day.
Cardholders also use the program to purchase items at AlliedSignal facilities located on the Mexican border. Because of cultural differences surrounding use of credit cards, in this instance, Day has issued multiple cards to one cardholder in the purchasing operation. "The buyer still uses all the front-end systems for purchasing we have in place at the facility. The card replaces the invoicing part of the process."
As implementation leader, "my challenge is getting people to push the envelope," says Day. "Change can be difficult for the supplier as well, especially those with centralized systems in place." Still, she believes that benefits of using and accepting purchasing cards will eventually lead to their use as primary vehicles for acquiring MRO items for any business. In fact, Day envisions a day when "all MRO purchasing will be done this way. The card is an ideal vehicle for getting to a paperless society."
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