29 May 2014by Former Member
Do Procurement Cards Have A Place In The Modern Supply Chain?.
In this guest post, ASM Technologies' Iain Tomkinson argues that procurement cards can mute the impact of supply chain and purchasing strategies.
Procurement cards are as popular as ever. While they serve a purpose – providing a relatively easy way to make low value, high volume purchases, or for transacting with suppliers which only accept credit card payments - they are far from perfect.
The issue with procurement cards is that they create more problems than they actually solve, and there are better alternatives on the market today. Their overriding benefit – to make small transactions relatively more convenient – is easily outweighed by the numerous new problems they add to any organisation that uses them.
I see four main issues with procurement cards:
- Undermining the integrity of a carefully crafted supply chain – Procurement cards open up the supply chain to virtually any supplier, effectively circumventing the organisation's stringent supplier vetting process that all other suppliers are forced to go through. This not only risks the organisation transacting with suppliers that do not meet its stated procurement standards (i.e. for sustainability, ethics etc.) but it undermines the credibility of the organisation's own vetting process, making a mockery of the organisation's 'approved' suppliers that were made to jump through so many hoops just to work with you.
- Over-spending on goods and services – Transactions made on procurement cards are often made at comparatively expensive high street stores rather than through suppliers and distributors with negotiated rates. This can leave organisations paying significantly over the odds for their purchases. Costs can also be pushed up by the fees that the card issuers charge to the suppliers for each transaction (usually around 1 to 2.5% of the order value). With ever tightening margins not every supplier wants to give away 2% of their profits. At the same time these costs tend to find their way back to the customer some way or another, so it's another way in which procurement cards can lead to organisations paying over-the-odds for goods and services.
- Lack of accountability and scrutiny of purchases – With pre-approved budget limits and a more streamlined administrative process for purchases (i.e. often no Purchase Order or senior approval is required), the sheer convenience of procurement cards can result in purchases being made with little in the way of supplier vetting or personal accountability. They also expose the organisation to impulsive purchases where value for money is less scrutinised.
- The potential to be over-taxed – while most procurement card schemes in the UK put the onus on tracking VAT onto the card issuer and not the card user, this may not always be the case. This is especially true when transacting with a vendor that is not a recognised merchant. Without a transparent paper trail in these instances, the VAT paid on purchases through procurement cards could be left unclaimed.
Each one of these issues is significant in and of itself, but when combined and then multiplied by the many hundreds or even thousands of procurement cards operating within the organisation, can result in significant waste.
In most instances organisations are better off negotiating unique trading relationships directly with suppliers or resellers that mimic the convenience of a procurement card (such as the ability to make transactions without POs, pre-approved spending limits for individuals, etc.). Such a relationship will not only deliver the same convenience of a procurement card, but will eliminate all of the issues listed above. If such a relationship is established with a reseller with a significant supplier portfolio, rather than with a single vendor, you won't need to establish too many relationships to secure this benefit quickly.
Iain Tomkinson is director, ASM Technologies.