August 2004 | Case Studies | I.T. Toolkit

Purchasing Management Software: A Smart Spend

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Purchasing management software helps a Caterpillar dealer recover parts costs and make more profitable sourcing decisions.

"We buy what we need, we run out of stuff, we go yell at the vendors and they sell us more stuff."

That's a typical purchasing process at companies that don't use software to manage what they buy and spend, says Tehseen Ali, president and chief executive officer of Verian Technologies, Charlotte, N.C.

According to Ali, companies that follow this model face at least four major challenges:

  1. Employees indulge in "maverick spending," buying where they choose rather than sticking with vendors who offer lower prices on contract.
  2. As different locations buy independently, no one spots chances to negotiate volume discounts with much-used vendors.
  3. Because they can't easily access information about purchases, companies make costly mistakes—paying twice for the same order, buying more than they need, or running out of inventory then paying extra to expedite their orders.
  4. Companies forget to bill customers for materials they use when performing services for them.

These are the kinds of challenges Verian Technologies takes on in the procurement module of its ProcureIT Spend Management Suite. The module provides tools for requisitioning goods; obtaining approvals; placing orders with vendors; receiving goods; reconciling purchase orders, invoices and receipts; and creating reports for analyzing purchase activity.

Using the web-based system to gain better control over purchasing, and better access to purchasing data, a company can save a good deal of money, according to Ali.

Gaining Better Pricing

In a company that practices decentralized purchasing, the system "takes all the knowledge of good negotiations and good practices that each location has developed and aggregates it in one database," he says.

Where each location used to negotiate discounts with its own vendors, now all can take advantage of every agreement. Different locations can also combine their purchasing power to gain better pricing.

"In our experience, companies that aggregate spend, use preferred vendors and consolidate vendors can reduce the price of the supplies they purchase by as much as five to eight percent," Ali says. "For companies with a $20-million spend, five percent is one million dollars."

Verian first designed ProcureIT for use in the healthcare industry, later adding customers in financial and industrial services. One customer in the industrial services category is Whayne Supply, a wholesale distributor of heavy equipment based in Louisville, Ky.

Operating from 16 locations in Kentucky and Indiana, Whayne primarily sells and services Caterpillar brand products. It also carries products from 50 other manufacturers that complement the Cat line.

Whayne's largest customer group consists of mining companies in and near Kentucky. But it also sells products for road construction, marine and truck transportation, backup power generation, and snowmaking—"anything that requires heavy equipment or diesel-powered engines," says Les Long, the company's purchasing manager.

Since mid-2003, Whayne has been using ProcureIT mainly to manage the purchase of parts it uses in the service side of its business. About 80 percent of the company's purchase orders are related to service jobs.

"We generate anywhere from 30,000 to 50,000 purchase orders a year," says Long. "ProcureIT was the system we selected to help us find out what those 30,000 to 50,000 POs are."

Whayne was no stranger to purchasing software when it implemented ProcureIT. Back in 1991, the company designed a system in house to help recover money it was losing through inefficient manual purchasing procedures.

Employees working under pressure often forgot to record materials they ordered for service jobs, so Whayne didn't include those costs when it billed customers. Those omissions cost the company at least $2 million a year, Long says.

Whayne's proprietary purchasing software stopped the waste, but the relief lasted only a few years. During the 1990s, Caterpillar introduced a new software platform, the Dealer Business System (DBS), for conducting transactions and sharing data with its dealers.

At the manufacturer's direction, Whayne implemented this system in 1998. Unfortunately, DBS ran on hardware that was incompatible with Whayne's purchasing system, and DBS provided no support for service-related purchasing.

"Most of our software systems at the time were more advanced than DBS. We had to take a couple of steps back," Long says.

Whayne stopped using the homegrown purchasing system and returned to paper-based processes. "We did that with a promise from our administrators that as soon as possible, we could go back to an automated system," Long says. "We got them to write that in blood."

In the meantime, Whayne used corporate credit cards to cover many of its purchases. These were handy, "but you lose all visibility by using them," Long says. As a result, the company started leaving some costs off service invoices again. Also, it had no easy way to retrieve purchasing data for warranty purposes.

Realizing they had a problem, officials at Whayne started to investigate purchasing systems they could use in conjunction with DBS. They chose ProcureIT in part because Verian could help them create a custom interface tying purchase orders to work orders.

Implementing ProcureIT took three months, an unusually fast schedule that Whayne could meet because it had extensive experience with a purchasing system, and officials knew how they wanted to configure the new software, Long says.

Most companies need more time to put ProcureIT into live operation. "We try to understand a customer's true expectations, their current state, and what the desired state should look like. Then we help the customer migrate from one step to another to another until we get to that stage," Ali says.

ProcureIT offers several functions that Whayne's old purchasing system did not. For instance, the homegrown system entered the process only after the company received a PO. ProcureIT helps manage both the requisition and purchase, and every change to a PO triggers a corresponding change in the work order.

"You don't touch the work order until you're ready to bill the customer," Long says.

The new software allows managers at Whayne to analyze how they spend their money, and to build an internal catalog to control where buyers source different items. "After collecting data for about one year, we're starting to see some trends occur," Long says.

This data helps decide which items to add to the catalog. "We're even looking at maintaining some supplies as stock at certain locations, where there's critical need and we can't wait two or three days for items to come in," he notes.

Although Whayne has a central purchasing department, more than 240 employees at its 16 locations currently use ProcureIT to make purchases. These tend to be people who need the goods to do their work—"everyone from the tool room man and service coordinators to supervisors, foremen, and management," Long says.

In the future, Whayne will probably make specific supervisors and administrators at each location responsible for purchasing. These people will use ProcureIT to analyze past purchases and make sourcing decisions.

No More Maverick Spending

"Instead of forcing decisions from the top down, we've decided to make our people at the very front the decision makers," Long says. They will evaluate products and decide which ones offer the company the best value.

"Once they've decided, we'll set the product up as stock or as a catalog item," he says. "Our people are held accountable for their decisions, so they're going to make sure they make the right one. We don't have to worry that they will even attempt to go outside and do maverick spending, because they're the ones deciding what they're buying."

Since Whayne started using ProcureIT, the company has once more started billing properly for service parts and materials. "It has closed that $2-million loss gap," Long says.

Using the software, issuing a PO, receiving the items, and paying the invoice now takes 15 minutes and costs $12.60, the company estimates. Without automation, the same process took two hours and cost $83.25.

Another benefit lies in the fact that ProcureIT is a web-based application. Running on a server in Whayne's headquarters, the system is accessible from anywhere via a browser. "I don't need to be at work to access it," Long says. "If someone calls me with something critical in the evening, I can log on, call it up, and take care of it from home."

Each day at 5 p.m., Whayne's system backs itself up to a server in Verian's offices in Charlotte. "If anything happened to our server, we could log on to Verian's server over the Internet and operate as if nothing were going on," Long says.

Along with procurement management, the full ProcureIT suite addresses three other areas of spending: employee reimbursements; payments for maintenance and repair; and payments for utilities, professional services and other expenses that don't involve purchase orders.

Taken together, they add up to "spend management," Ali says. "Our approach is to help customers understand the whole purchasing process and help them figure out the best mix for their needs. We have a holistic approach to purchasing."

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