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Advice and Information for Finance Professionals

How to Control Costs with Smarter Procurement

Guest Author

By Jim D’Addario, Director, SCM Product Marketing, Cloud Business Group

From office supplies to raw materials to machinery parts, businesses are continually making purchases to ensure their employees have what they need to be productive and keep the manufacturing lines running. Procurement is a critical part of the business that ensures uninterrupted supply, consistent supplier performance, risk mitigation and cost control.

To control costs, buying activities must be managed because of the effect they have on profit margins and the company’s cash flow. Managing a company’s spend is a top priority, but many organizations today lack effective processes and controls over employee buying activity.

Procurement: Holding the Line on Expenses

Procurement is a complex discipline covering many activities. For many companies though, getting basic purchasing activity under control can be a challenge. It’s a problem that can be blamed, in part, on the tools businesses are using to manage their procurement processes.

Smarter spend management involves both incentives and deterrents. Many businesses struggle with getting spending under control because they lack the systems to support it. eProcurement systems emerged in the 1980s as a component of larger, on-premises ERP systems.  

However, legacy eProcurement systems—those that manage transactional purchasing by employees—were often difficult to use and expensive to deploy. Their intimidating user experiences were often a deterrent, enough for well-meaning employees who simply gave up in frustration and “went around” the process.

Still other companies, including small and midsize businesses, simply didn’t consider deploying eProcurement systems. Instead they focused on financial management systems in an effort to get their finances in order.

The Downstream Effect: How Unchecked Spending Impacts Productivity

One company, a fast-growing provider of medical language interpretation services, followed that formula. However, several months after deployment, the company’s controller found her finance staff overwhelmed with invoices from vendors with no reference to a purchase order. Perhaps even worse, her finance staff had no way to identify the employee who made the purchase.

As a former accountant for a regional developer and property management company, I can personally attest that processing “orphan invoices” was the least favorite part of my job. The hours I would spend attempting to find out “whodunnit” were almost as enjoyable as receiving phone calls from vendors attempting to collect on their overdue invoices. To add insult to frustration, most of our vendors were contractors or building supply companies, prone to using colorful language to emphasize their point, which gave me a new appreciation for parking enforcement officers!

But back to our language translation company. Their controller recognized she had several big problems, including:  

  • Out of control spending
  • The burden placed on her staff, who received invoices from over 2,500 different vendors
  • Each of the vendors had to be manually entered into her ERP system
  • Every invoice lacking a purchase order had to be verified with the purchaser in order to approve it for payment

Advantages of Integrated eProcurement and Financial Systems

The company controller deployed Oracle Procurement Cloud (part of the Oracle ERP Cloud suite) to provide a control mechanism. The interface resembles an eCommerce web site, making it easy for employees to find the products and services they need from approved suppliers. Employee requisitions are automatically routed to an employee’s manager for approval via workflow rules. Only then does the system generate a purchase order to send to the vendor.

With a firm “no PO, no pay” policy, the company’s vendors quickly got the message. Now her accounting staff receives invoices with PO references; in most cases, they are processed automatically by matching the PO to the invoice and an “OK to pay” authorization.

The result: a 12% reduction in expenditures and an impressive annual reduction in invoice processing times, with more than 2,000 hours saved. This has freed up her finance team to focus on more strategic work.

Creating Strategic Value with Better Procurement

For many companies, such a shift to more strategic activities requires getting the company’s transactional procure-to-pay processes under control. Often, that requires a combination of eProcurement cloud systems that make it easy for casual users to find what they need quickly, along with compliance enforcement through approval rules and purchase order creation. Ultimately, it makes accounts payable much easier—if not completely automated—and reduces a company’s expenses considerably.

For more, download the report from Gatepoint Research, “Trends in Strategic Procurement.”  

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