Do You Control Your Spending or Does It Control You?
Procurement, the purchasing of products and services to run a business, is an important part of a companyÂ’s operations. Purchase management works in tandem with revenue generation to produce the bottom line and is critical for planning and forecasting. It is also an area that can be well served by technology.
Over the past 30 years technology and business management have become partners in the quest to produce profit. Using technology to run their business, companies are changing how they structure and control their daily operations. Purchasing is no exception and the technology space of electronic procurement is helping companies get their purchasing, or spending, under control.
Best practices for procurement management must be considered and translated into company policy. Purchase policy for any company of any size is the first step to controlling spending. Who can place purchase orders on behalf of the company? Is there a size or dollar limitation on the order? Does it vary by category or purchase or vendor? When a company has determined its own purchase policies based on corporate culture, specific needs, and best procurement practices, it can then begin to use technology to support and enforce those policies, known as electronic procurement.
This means that application software is used to manage purchasing, replacing manual processes such as faxes, phone calls, spread sheets, and vendor placement. The software enables companies, of all sizes, to structure the purchase process and manage when and where products and services are procured, according to company policy. This is most critical when a company is operating more than one physical business unit and wants to control and consolidate procurement across all business units.
Electronic procurement ensures that approved vendors will be used, correct product and services will be ordered, purchase orders will be approved before they are placed, not audited after they are paid, and that the purchasing power of the company will be utilized. Maverick or rogue spending can be eliminated, invoices can be received electronically and paid electronically, and at the end of the year, full spending reports across vendors and business units are available.
An electronic procurement system works together with an accounting system to manage the spending of the company. The accounting system is either a generic enterprise resource planning (ERP) system known to many industries, such as Quickbooks, PeopleSoft, or Oracle. Or the accounting system is specific to an industry and operated by a software company with traditional ties to that industry.
In either case, the primary function of an accounting system is to track all incoming and outgoing financial transactions of a company to report profit and loss accordingly. The electronic procurement system manages the purchase process based on company policy and feeds the information back into the accounting system. A procurement system is a tool to a purchasing director and purchase managers as an accounting system is a tool to a controller.
Electronic procurement systems work very closely with the accounting system and their integration is necessary to produce a paperless process from purchase to pay. A paperless process and a management process that can help control spending and reduce costs are no longer luxuries, they are becoming mandatory.
When the accounting scandals erupted with Enron and WorldCom, Congress moved into action and produced the Sarbanes–Oxley Act of 2002. This act basically outlines that companies must be able to report and show control over their expenses. The first companies made to comply were public companies, followed by large private companies and then medium and small private companies, which must be able to show internal controls over purchasing.
The recognition that technology, specifically application software, can drastically help this process has thus been growing considerably over the last several years. The Aberdeen Research Group, of Boston, MA, has conducted numerous surveys and studies on purchase management and will host its third annual Chief Purchasing Officer summit in Boston this November. Their research indicates that more companies are using electronic procurement to manage requisitions, spend categories, and suppliers as the technology of procurement has become more affordable and provided faster ROI over the past five Years.
So whether the incentive to manage purchasing through electronic procurement comes from the government, the bottom line, or a basic desire to understand purchasing patterns, the rewards are tremendous. Aberdeen research also indicates that companies are saving between 5 and 20% of spending costs with the implementation of electronic procurement systems that enable and enforce purchase management.
Over the next five issues of NSIDE Magazine, I will go into the details of electronic procurement. These five topics will include Supplier Enablement, Catalog and Contract Management, Content and Workflow Management, Invoice Automation, and Spend Analysis. This series of articles on purchase management and electronic procurement will hopefully help continue the education process on managing the expense side of the ledger. So stay tuned and see how you can use this technology to improve the structure and profitability of your business.
