Objective:
To implement streamlined processes for low risk, low value purchases
Definition
The organization should establish alternative processes for ordering specific types of low risk, low value goods and services that require fewer resources than the normal purchase order (PO) process. A strategy for low value transactions could include:
- Alternative acquisition processes:
- Purchasing cards;
- Standing orders and blanket orders; and
- Online supplier catalogues.
- Strategies to reduce low value transactions:
- Invoice consolidation; and
- Minimum order quantity/minimum order value.
Rationale
Implementing alternate processes for low risk, low value transactions can free up supply chain resources for strategic purchasing of high risk, high dollar value transactions, which generate greater returns — in cost savings and risk mitigation — than comparable investments in low value transactions.
Benefits
Financial Stewardship
Alternative purchasing processes for low risk, low value transactions result in increased contract compliance and savings through better pricing than ad-hoc buying.
Process Efficiency
Alternative acquisition processes reduce the workload on supply chain staff, allowing them to focus on more value-added activities.
Customer Service
Efficient acquisition processes improve customer service and allow the supply chain department to focus on areas that deliver greater value to their customers.
Risk Management
Using alternative, less time-consuming processes for low value transactions allows supply chain resources to focus on high risk, high value items, reducing overall operational and financial risk to the hospital.
Supplier Relationships
Establishing alternative acquisition processes that are more efficient for the organization also creates process efficiencies for suppliers, resulting in improved supplier relationships.
Related Metrics
2.3 Operating Costs as a Percentage of Expenditures
3.1 Number of Purchase Orders in One Month
3.6 Percentage of Invoices with Purchase Orders
3.8 Percentage of Low Dollar Value Purchase Orders
Guiding Principles
Organizations should conduct a spend analysis to identify the quantity and frequency of low value transactions. Based on this analysis, the organization can prioritize those areas that would deliver the greatest benefits from both an efficiency and risk management perspective.
Alternative strategies do not necessarily involve major system changes and could be as simple as authorizing specific employees to make purchases online from preferred suppliers without obtaining a signed requisition. The goal is to implement streamlined, less resource-intensive processes.
Customers and suppliers may be excellent resources for identifying alternate purchasing processes. The spend analysis should identify which departments or service areas in the organization are making low value purchases. Staff in these areas may already have recommendations for making these purchases more efficient. Additionally, suppliers may also have preferred processes that have been executed with other customers.
Organizations should ensure the amount of diligence applied to the selected purchasing process is appropriate for the level of risk to the organization (extremely high levels of risk may be associated with some low value items).
Spend analysis should be conducted at regular intervals, especially with the introduction of new items to centralized purchasing, to ensure that alternative purchasing processes are still appropriate.
Compliance monitoring is also critical to the management of low value processes. The spend analysis process and the alternative acquisition processes should be part of the supply chain department’s documented procedures. The internal audit team should be involved in validating new processes and ensuring procedures are followed. A risk assessment may be helpful to identify potential risk areas and mitigation strategies for any new processes.
Key Components
Alternate Acquisition Processes
Purchasing Cards
Purchasing cards are a common solution for ad-hoc low value purchases. They enable cardholders to make product choices, shorten lead times, and reduce administrative burden (including supplier management). Purchasing cards also provide clear audit trails and detailed spend information to track compliance.
As an alternative to issuing a card to each staff member, it is possible to issue purchasing cards that only can be used with preferred suppliers (such as catering providers or building maintenance suppliers). Two benefits of this approach are (1) the card will be held centrally and (2) potential compliance issues are minimized since the card can only be used with select suppliers.
Standing Orders and Blanket Orders
Blanket and standing orders are normally used when there is a recurring need for expendable goods. They have the benefit of allowing organizations to carry lower inventory while still avoiding the administrative cost of processing separate POs each time supplies are needed and capturing favourable pricing through volume commitments.
A standing order is a type of PO covering repeated deliveries of goods or services in specified quantities, at specified prices, and according to a specified schedule. One PO is issued to cover the total volume over a predetermined time period. Deliveries are scheduled with defined volumes at regular intervals or on fixed dates.
A blanket order allows the supply chain department to create one PO for multiple deliveries of a specified good or service for a fixed period and/or quantity at an agreed price. A blanket order differs from a standing order in that the deliveries’ schedules are not predetermined, but are on an as-required basis.
Online Supplier Catalogues
Buying online directly from preferred suppliers is an ideal way to empower employees, reduce administration costs and encourage contract compliance. The supply chain department must negotiate clear terms and conditions, including rebate terms, with the supplier and establish consistent payment and invoicing processes.
Suppliers should provide electronic statements to support the organization’s trend analysis. The suppliers’ systems might also support allocation of budget codes for each transaction to enhance future spend analyses.
Strategies to Reduce Low Value Transactions
Invoice Consolidation
Requesting suppliers to consolidate invoice lines for individual POs into fewer invoices can reduce administration costs for both the supplier and the organization. This approach should only be considered if (1) an approach is established for resolving issues; (2) it does not result in loss of valuable information; and (3) the consolidated invoice can be approved by a single individual (as opposed to requiring approvals by authorized individuals for each invoice line).
Minimum order quantity/minimum order value
The supply chain department should establish minimum order quantities or values for low value items that are used in high volumes. This requires a policy for batching requisitions and waiting until minimum quantities are reached before issuing the PO.
Implementation Challenges
Challenges:
- The supply chain department must retain control over all alternate acquisition processes.
- Organizations have had issues with purchasing cards in the past, but lessons have been learned and the general consensus is that purchasing cards can be useful as long as the proper controls are in place.
- The starting point for implementing alternative strategies requires some upfront analysis of spending. This may be a difficult process if consolidated information is unavailable, i.e. disparate information held by finance, supply chain (purchasing card systems), and/or suppliers.
- Developing and fully implementing strategies for managing low value transactions can take considerable time. Support from all stakeholders must be gained to be successful in introducing changes to the practices for ordering low value items across the organization.
- As with all new policies and procedures, proper training is essential to ensure that users understand the alternative procedures and the risks and benefits.
