Smart PO Policy: Improve Compliance and Go Green
Ata Khan, Director of Consulting
In today's demanding economic environment of rapid change there is constant pressure for organizations to look for new, smart ways to manage spend and lower costs through effective compliance management while building more efficient and sustainable operations.
This article discusses the benefits of "Smart PO policy" that mandates appropriate buying channels for each purchase and the ability to automate the document exchange process which allows a company to ‘Go Green".
Compliance management following strategic sourcing
The execution of the strategic sourcing process for indirect purchases leads to a contract with the selected vendors and sets the stage for the requisition-to-payment process. Indirect purchases include all goods and services other than those directly related to the production process. Examples: Marketing, IT, transportation, warehousing, capital, MRO and general/ professional services.
The strategic sourcing process is typically followed by some change management and communication activities to inform users about the new contract and potentially new suppliers. In a perfect world, users abide by the contract and submit POs for the purchase of goods and services from the selected suppliers; however the reality is usually quite different. Our experience with Fortune 500 companies indicates that many companies still lack a clear PO policy that is communicated, accessible and enforced. While enforcement and communication are strong on the direct purchasing side, indirect purchases don't garner as much attention.
Current state of indirect purchases
Indirect purchases usually suffer from lax oversight. Indirect purchases may not have standard approval requirements nor set criteria for the use of POs. Our client experience with indirect purchasing processes at Fortune 500 companies indicates:
1. Use of varying minimum thresholds (e.g. $5,000) below which POs are not required.
2. Automated, recurring payments without POs. While in some cases automated payments are acceptable (e.g. lease payments), in many other cases they are just another means of quick payments without sufficient controls.
3. Handwritten payment authorizations on invoices. In such cases, no PO record is created and the invoice is created and paid per the instructions on the note.
4. Use of unapproved vendors based on location and user preferences rather than contracts – this may be due to local preferences or lack of information about existing contracts.
Smart PO policy to improve compliance
PO policies provide internal controls over disbursements, contracts and vendor set up. The policy simplifies transactions and streamlines the entire procurement to pay cycle while strengthening compliance. There are three key elements to policy implementation:
1. Smart PO Policy:
A smart PO policy forces all purchases to utilize prescribed buying channels. These buying channels include the use of purchase orders, on-line catalogs, purchase and travel cards, recurring automated payments, etc. The policy sets the appropriate guidelines for the use of these buying channels and provides examples, limitations and appropriate thresholds. The policy enhances the use of POs, minimizes one-off payments through check writing that can be costly per transaction, and encourages the use of purchase cards in appropriate situations.
2. Vendor Management to minimize proliferation:
Smart PO policy is more effective with improvements in the vendor set up process. When new vendors are added to the system, they may be available to all users and may compromise contract compliance.
In most large organizations the vendor set up process may be dispersed. Several employees may be able to add vendors as needed. The vendor set up process needs to include a review by procurement of all new vendor set up requests.
3. Req-to-Pay process improvement and help desk:
The requisition-to-payment process should be reviewed and streamlined as part of this initiative. The Smart PO policy is facilitated through the use of a PO help desk to assist with PO creation. Such a help desk is especially useful if users are not familiar with the new PO policy, vendor set up process and PO creation process.
Improve Compliance and Go Green
Designing strategies considering the environment and applying them at every stage of the supply chain process will lead to business process efficiency and an environment friendly, green organization.
As shown in the diagram above, PO transmission and invoice receipt and reconciliation can be automated using internal or 3rd party EDI solutions. The use of such EDI connections eliminates the use of paper entirely from the process, enhances the ability of systems to conduct checks on the information (for compliance purposes) and significantly reduces the use of manual labor to review paper-based documentation.
Benefits of a Smart PO policy include:
Result: Enhanced compliance to existing agreements and vendors through the use of prescribed buying channels, enforcing the use of purchase orders and minimizing vendor proliferation. Companies can ‘Go Green" by automating the process through EDI connections that eliminate the use of paper from the process.
Reference: Smart PO Policy - Improve Compliance and Go Green