Urgent and one-off purchases

While electronic payment and corporate purchasing cards had proven their worth with regular and larger suppliers, an ongoing problem has been purchases from infrequently used or one-off vendors, particularly those where there was also an element of urgency relating to the purchase.

The two major issues were security and speed. In the case of speed, a vendor with whom the city had never dealt before might be reluctant to extend credit terms on the spur of the moment. If the transaction was urgent and substantial, such as a large one-off heavily discounted purchasing opportunity, or a major emergency breakdown, then this caused major upheaval. Making urgent check issuance was disruptive, and checks had obvious security implications. The Card Shuffler functionality was suited to this sort of situation. Initially the city started with a set of 150 card numbers that were randomly used as required and preloaded with approved funds for a specific payment only. Therefore, there was not a credit issue.

In administrative terms, the Card Shuffler functionality can also save time. The effort involved in setting up a vendor for a one-off card payment is significantly less onerous than it would be to pay the vendor by check. While an extremely urgent check payment could potentially be processed in perhaps four or five hours (at considerable administrative expense), a vendor can be set up and paid via the Card Shuffler feature in as little as 15 minutes.

Vendors like the near instantaneous nature of the payment. From their perspective, the administrative workload is no greater than accepting a card payment from an individual retail customer. A further benefit has been that the Card Shuffler experience puts vendors in a more favorable mindset regarding electronic payments in general. As a result, those with the potential to become regular suppliers to the city are more inclined to participate in the electronc payment program for future transactions, thus creating efficiencies on both sides.

City employees were similarly positive in their response to the Card Shuffler feature. For them, the simplicity and reliability of the process were especially attractive. Training requirements were also minimal; having obtained authorization for the transaction (ideally via the ERP system), the workload simply consists of issuing a card number over the phone. The functionality also helped to improve vendor relations; in many cases, city personnel might be making a personal commitment regarding punctual payment as part of the transaction. It also allows them to take advantage of one-off special end-of-line purchase opportunities, such as for spare parts and machinery used by the city's utility businesses.

Card Shuffler also proved painless for the city's finance department. The associated technology workload was minimal, as the product slotted in easily on top of the existing ePayables infrastructure. This was reflected in the timeline; the Card Shuffler took less than three weeks to implement, including testing.

The initial adoption rate demonstrates the program's acceptance by city personnel and vendors. The original projections were that shuffler transactions would account for perhaps $50,000 of spending per month to start with, rising gradually thereafter. However, shuffler transactions in the first month topped $300,000 and are currently running at $240,000 per month.

The numbers clearly reflect the response from vendors and city personnel to the progressive adoption of electronic payment methods. In 2005, immediately prior to the implementation of electronic payment, purchasing cards were already accounting for nearly 10 percent of total annual payments. The addition of ePayables and the Card Shuffler has more than doubled that percentage, with total electronic payments currently running at approximately $27 million per annum.

Working capital benefits

The electronic payables program has had an appreciable and beneficial effect on the city's working capital position. This is particularly apparent in the case of the Card Shuffler, where instead of having to make urgent check payments throughout the month, all purchasing activity is rolled into a single monthly payment to the bank. This improves the working capital position by extending days payable outstanding (DPO), but also improves predictability, which may improve cash forecasting. More efficient liquidity management enables funds to be left on deposit until month end when just the appropriate single amount is transferred across to the operating account to pay the bank.

Looking ahead, the success of Pasadena's electronic payables program has been a strong incentive to continue to bear down on check payments. One possibility is to extend the current standard terms for check payments beyond 30 days to encourage vendors to accept electronic payment, while another is that new city tenders and RFPs will by default only offer electronic payments; checks will not be an option.

Looking to further drive down costs and improve processing efficiency, Pasadena is implementing Bank of America Merrill Lynch's Comprehensive Payables solution, which will allow it to move even more payments to electronic by combining multiple payment options for their vendors. This turnkey solution will allow the city to send a single file to the bank to process card payments, leverage a proven network of over 85,000 suppliers for ACH payments and include wire payments.

About the author

Larry Hammond is purchasing administrator for Pasadena, Calif.