Designing Your Purchasing Card Program: What Makes Sense for Your Business?
Spend Matters welcomes another guest post from Laura Gibbons, a senior consultant at The Hackett Group.
Businesses use purchasing cards in different ways and for different reasons. When implementing or updating a p-card program, it is important to define your goals and have a plan for reaching them. While your organization may have several motivations in using a p-card, they typically would be one or more of the following:
- Reducing the number of invoices or check payments: By doing this, you will increase operational efficiencies as well as realize savings from the costly check writing process.
- Achieving rebates: Your bank will provide a tiered rebate system, so the more you spend on p-cards, the larger the rebate you’ll receive.
- Streamlining payments to high-volume suppliers: Here, you are cutting down on manual payments for predictable spend, thus increasing operational efficiencies.
- Streamlining payments of e-procurement based transactions: Again, cutting down on manual payments, increasing rebate savings, and increasing operational efficiencies.
- Providing suppliers options for early payments: This is the best incentive to get suppliers on p-cards. In exchange for receiving an early payment, they will keep their prices stable despite taking a processing fee from the bank.
- Ability to track purchasing behavior: Many organizations see low dollar spend as only a payment to a supplier, due to the fact that a purchase order is not created in most cases. Using a p-card program to include low dollar, non-PO spend will not only provide the ability to track what is being purchased, who the supplier is, and spend frequency, but also allow your sourcing organization to encourage working with preferred suppliers, thus reducing maverick, non-PO spend.
In order to understand what your goals are, first it is important to look at what you are buying, who is buying it, and how they are buying it. In other words, you will most likely need to develop a spend cube for your business. Your best option is to conduct a full and comprehensive spend analysis, but if you lack the resources or funds, an abbreviated analysis can help point you in the right direction. For additional information on this step, check out this Spend Matters article from last year.
Now that your spend analysis is underway, let’s look at the p-card options that are out there, so you know what to look for:
Physical (or Ghosted) Purchasing Card: These are your typical corporate credit cards, used in the way you would make purchases with your personal credit cards. Individuals or groups are given a card or credit card number and have authorization to make purchases on that card for a specific purpose. You can choose to limit what they can purchase by frequency, volume, and/or type of vendor (sometimes referred to as MCC Code, or “Merchant Category Code,” which describes their category type when vendors are set up to accept credit cards for payments). For example, if Joe is given a credit card for gas only, you can limit his account to spend up to $100 per day only at gas stations. These cards are best used for one-time purchases, immediate and unexpected needs, and other small purchases. Some creative uses of this type of purchasing would include government institutions or other business that cannot change their prices based on the buyer.
Virtual Purchasing Card: Virtual purchasing cards are a bit different from your standard credit card. These cards involve a third-party institution (i.e., a bank) to automate all payments on the customer side. Typically the bank sends an email to suppliers for each payment with a unique credit card number (and specified payment amount) for the supplier to process in their own POS system. This type of purchasing card payment is best used for recurring suppliers with regular payments. A good option for the virtual purchasing card would be a utilities company, e.g., paying the electricity bill each month. For companies with the ability to change their pricing, you would need to offer them an incentive to take this type of payment because they will incur credit card fees (~2%) for every transaction and you want to avoid suppliers raising your prices to offset this transaction fee. The ability to articulate the benefit of early payment is very important!
Both: Both a physical (or ghosted) card and a virtual card system can be implemented. Option 3 allows for more common p-card spend as well as the more difficult-to-get spend that a virtual card might be useful for.
Now that you know your goals and what options are out there, you are ready to tie everything together. When developing your spend analysis, identify all of your in-scope spend, i.e., which categories and which suppliers are good candidates for p-cards. When developing this profile, focus on the common characteristics of p-card spend:
- One-time, low-dollar purchases
- Frequent, predictable, low-dollar purchases
- Suppliers with inflexible prices (i.e., retail stores and government institutions)
- Other non-strategic spend (in most cases, strategic spend should be kept off p-cards unless that is a negotiated element of the contract)
After calculating your potential spend profile, you are ready to select a bank – best done via RFP. From there, your bank will provide support to implement the payment solution, integrate with your financial systems to enable automated reconciliation, train your employees, and onboard your suppliers into the program.
As you go through the process of creating or expanding a p-card program, remember to keep in mind your other payment options. You should look at all of your payment channels together, ensuring that as a full payment suite they are well-equipped to meet all of your needs.