Critical mission support achieved through custom procurement solutions

Critical Mission Support AchievedCritical Mission Support Achievedthrough Custom Procurement Solutionsthrough Custom Procurement Solutions

Historically procurement has been a paper-based process resulting in manual and decentralized oversight. In recent years, the Department of Defense (DoD) has made significant progress in adopting custom purchase and payment programs to help streamline complex procurement of commercial products and services.

This paper will address the rationale and advantages behind custom purchase and payment program adoption and the options that should be considered to achieve further cost saving enhancements.

Federal government procurement policies.Federal government procurement policies.

The rationale for payment programs.The rationale for payment programs.

The general purpose of a payment program is to capture the required transaction and vendor information which, in turn, will help streamline administrative procurement processes and promote efficiencies. A fully-functional program will help minimize management and oversight costs and maximize purchase value.

Purchasing programs bring valuable Purchasing programs bring valuable administrative savings.administrative savings.

The National Association of Purchasing Card Professionals (NAPCP) estimates that a traditional transaction initiating with a purchase order (P.O.) and closing with a payment made by check can cost the buyer $50 to $250 in administrative expense.1 These figures do not include ongoing costs associated with qualifying suppliers or managing and auditing contract use and payments.

Up to 60 percent of these purchasing and payment costs can be saved through the implementation of compliant payment programs2, and a well-implemented program will provide the consolidated spend oversight program that financial managers require.

1National Association of Purchasing Card Professionals. Purchasing Card Essentials. 2008. pg 8. 2Indian Institute of Materials Management. http://www.iimm.org/knowledge_bank/2_purchasing-cards-e-procurement.htm

Spend oversight and the transaction and Spend oversight and the transaction and payment data.payment data.

A major reason for the increased popularity of card-based payment programs among procurement professionals is the ability to capture more detailed transaction information. The more detailed the transaction and payment data available, the better the oversight. There are three generally recognized levels of transaction data:

- Level I data- Level II data- Level III data

Ensure that your payment program can track Ensure that your payment program can track the data points you require.the data points you require.

• Level I data is basic transaction data received by consumers on a consolidated monthly credit card bill which includes total purchase amount, the date of purchase, the merchant’s name, the date the charge or credit was processed by the vendor.

• Level II data includes all level I data and has the potential to add sales tax amount, additional merchant information, purchase order information and other basic data elements.

• Level III data includes levels I and II data and has the potential to provide line-item detail which includes unit cost, quantities, unit of measure, product codes, product descriptions, ship to and from zip codes, shipping costs, VAT amounts, order date, discount, purchase order number, and other data elements. Level III data provides the management team with a clearer understanding of how funding is utilized within an organization and the opportunity to leverage total spend with a supplier for more advantageous product pricing as well as recovering taxes and unauthorized charges.

Supplier network considerations. Supplier network considerations.

Whether a payment program will be facilitated through a physical charge card, virtual account number or an electronic order management system, procurement personnel must consider how widely the payment method must be accepted among merchants, what data will be required to facilitate spend oversight, and whether the merchant and its processor can supply required data.

- Acceptance vs. Non-Acceptance

.

Network acceptance among broad retail Network acceptance among broad retail establishments.establishments.

• Purchase cards are currently the most widely adopted form of payment program3, because they offer a standardized payment platform with broad acceptance worldwide. Because purchase cards function within VISA®, MasterCard® and American Express® Interchange networks, any merchant capable of accepting VISA®, MasterCard® or American Express® could accept a purchase card.

• This open-loop Interchange network (meaning across all traditional bank card networks) is highly valuable to procurement managers with responsibility over a broad range of purchases and a large number of suppliers, many of whom may only do business with the government once or twice within a fiscal year. An open-loop network, however, creates challenges within specific procurement processes and with certain vendor communities both domestically and internationally. The aviation and marine fuel sectors offer prime examples of significant challenges

3PayStream Advisors. P-Cards: Purchasing Cards Management Market Analysis Report. 2007.

Non-acceptance with specialized suppliers.Non-acceptance with specialized suppliers.

• While open-loop networks provide broad acceptance among many retail suppliers, there are any number of specialty suppliers that do not accept purchase charge cards despite conducting regular business with the Federal government.

- Very few Fixed Base Operators (retail style establishments) that accept PFT cards to support unscheduled general aviation fueling outside the United States.

- Most marine fuel suppliers do not accept bank or general purpose cards for large delivery or contract bunker transaction processing. From the practical standpoint, there is no point-of-sale mechanism to accept a payment card on a commercial air strip outside the United States or industrial marine dock.

• With both aviation and marine fuelings, government transactions are typically negotiated and priced with a corporate central office and not at the actual merchant location.

When a POS devise is not available, PFT When a POS devise is not available, PFT purchasing controls cannot be verified.purchasing controls cannot be verified.

• PFT charge cards have risen in popularity because they allow procurement

managers to implement purchasing controls according to:

- Supplier categories, - Transaction limitations and - Spend limitations at the user-level.

• With many card programs, the physical existence of a PFT card may replace the need for a P.O. at the point of sale because purchasing controls can be verified electronically by the merchant at the point of sale; however, when a POS device is not available for transaction processing, purchasing controls cannot be verified.

• Instead, industry-specific payment programs are needed to prevent fraud and misuse by limiting the merchant network.

Data captured at transaction is supplier-Data captured at transaction is supplier-dependent.dependent.

In standard payment programs, merchants are provided a POS device by their merchant acquirer (the bank that facilitates payment for cards accepted). Though an issued payment card may have broad acceptance anywhere consumer credit cards are accepted, the level of data available on transactions will vary based on each merchant’s POS device, the transaction processor’s capabilities, and the type of card presented. Within a closed-loop network, a buyer can ensure that level III transaction detail are captured and itemized within the transaction process.

True spend oversight relies upon data from various True spend oversight relies upon data from various

points in the procurement process.points in the procurement process.

Beyond transaction data, the value of electronically tying requisition information, contract details, purchase orders and approvals, confirmation of goods received, and invoice verifications into a streamlined payment program should be considered.

- Contract processing- Approvals and workflows- Specialized billings

Contract processing: leveraging supplier Contract processing: leveraging supplier relationships.relationships.

• The value of a volume-discount can only be guaranteed if a payment program is capable of ensuring that the price charged for the product correlates with the price contracted.

• Between 2008 and 2009 alone, nearly one million U.S. dollars in erroneous product pricing were flagged prior to invoice processing within the U.S. Government AIR Card® program.

• When a government negotiates supply and pricing with a supplier, the government guarantees exclusivity at a particular location for a particular product type and selects pricing escalators based upon specific pricing indices. When using a closed loop, private network, purchasers can be directed to contracted suppliers over non-

contracted suppliers.

Approvals and workflow documentation: Approvals and workflow documentation: maximizing efficiencies.maximizing efficiencies.

• Where a pre-negotiated contract is not already in place, requisition must initiate with a bidding process to ensure the lowest price, technically acceptable (LPTA) purchase.

• In an open-loop payment program documentation of this process is tracked manually and later matched with final transaction data.

• With some technical considerations, a payment program can streamline requisition and approval procedures within a closed-loop network of suppliers.

- The U.S. Government SEA Card® program incorporates a custom order management system, which connects government vessels with eligible bunker fuel suppliers. This order management system ensures proper approvals from accountable officers and confirmation of goods received prior to invoicing.

- Since 2006, there have been zero known instances of fraud or misuse within the SEA Card® system.

Specialized billings: ensuring accurate Specialized billings: ensuring accurate fulfillment.fulfillment.

• With a typical PFT card or purchasing program, transactions are easily assigned to a cost-center at the user-level or the merchant-level. However, decentralized billings still assume that a single transaction will always be charged to a single cost-center. Within government purchasing, splitting a single transaction into multiple billings may be required.

- In the case of the Federal government, for example, the cost of fuel is billed to the DESC while the costs of other aviation-related services within the same transaction are charged to the DoD branch of service.

• Split billings are only possible when level III transaction data is guaranteed throughout the entire merchant network.

Achieve strategic objectives.Achieve strategic objectives.

• Compliance to government policies cannot be sacrificed in order to streamline the procurement process. Payment programs should provide back-end support for front-end purchasing strategies:

- Supplier relations- Contract management- Data compilation- Compliance- Invoice verifications- Transaction processing

• By identifying requirements prior to program adoption, the Federal government and other eligible program users can ensure meeting their broad strategic objectives while providing critical mission support and improving upon cost avoidance and savings.

Multi Service. Innovation Where it Matters.Multi Service. Innovation Where it Matters.

Multi Service specializes in the design, implementation and management of custom billing and payment solutions. The company collaborates with clients to isolate specific commercial credit and payment issues, identify measurable business goals, and design tailored private label payment solutions.

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