Controlling PO-less supply, service purchases

by David S. Kaczmarek, FAHRMM, CMRP

Based on my experience, many hospitals have 50 percent or less of their payments supported by purchase orders (POs). The remaining payments are supported by an accounts payable voucher, check request or other such instrument. Other organizations have gone to the other extreme requiring that all payments be supported by a purchase order.

Both of these practices are less than optimal. In the former many purchases are made outside the procurement system, valuable history is lost and excess costs are common. In the latter, many purchase orders are attached to payments where no real value is added, and extra processing costs are incurred.

In general, purchase orders are the best way to document an organization’s purchases. It provides a clear record for the following:

• What the purchase was intended to be;

• What was ordered;

• How many items were expected or in the case of a service exactly what was to be done and

• The unit cost for product or how the service was to be paid (e.g., cost per hour, cost for the job).

Through the receiving function there is documentation that the goods were received or the service performed.

Accounts payable has appropriate documentation of the three-way match, that is, PO for price and quantity, receiving document for quantity, and invoice for price and quantity, and can process the payment with no further action needed.

However, some purchases are not suited to a purchase order. One instance occurs when there is not a firm set price, and quantity can change from month to month. A good example of this is electric utilities. Monthly costs change based on the electricity used, the current cost per kilowatt hour, and a variety of other possible variables.

Another instance might be related to an advertising media buyer where the specific costs for media can change rapidly and the number of ads placed can vary. The only way to use a PO for these transactions is to create an AFT (after the fact) PO. After the invoice is received a PO is created that mirrors the information on the invoice. The PO is then received and the invoice forwarded for processing. This exercise adds a lot of extra work and provides little or no value.

Most organizations have an alternate method, such as the AP voucher, which provides approval to pay an invoice without a purchase order. The voucher is typically completed by the person who purchased the item or service and then must be approved by a senior executive – often the CFO. The approval process is supposed to provide a check and balance to assure that these payments are appropriate. But often there are so many vouchers being generated and sent for approval by a single individual that little or no actual review occurs. Rather, most vouchers are signed as a matter of course.

The best practice is a structured combination of the two extremes with purchase orders used for most purchases of supplies and services. In transactions where purchase orders add no value, AP vouchers are used.

The specific instances where AP vouchers are allowed are delineated on a hospital policy, and approval is delegated by policy to the position best able to assess the appropriateness of the listed transaction. Once this policy is put into effect, purchasing will no longer generate after-the-fact purchase orders. Payment for items acquired that should have been processed through purchasing would now go on a voucher. However, the purchaser would need to include a justification and the voucher is only approved at the highest level.

This last aspect of the policy is an important difference from most AP voucher processes. By having the voucher approved by different individuals for different types of purchases, the vouchers will receive the proper scrutiny because executives will no longer get stacks of vouchers to sign and they can actually review the ones they do get. Further, inappropriate vouchers – those for things that should have been placed on a PO – will be flagged and can receive the proper attention.

Some examples of purchases that might be designated for AP voucher – and the position that might approve them – include:

• Advertising – vice president, marketing

• Advertising agencies – vice president, marketing

• Ambulance charges – CNO

• Architects – COO

• Attorney fees – CFO

• Employment agencies – vice president, human resources

• Gas, electric – director, plant operations

• Bank fees – comptroller

• Mortgage payments – comptroller

• Telephone – director, communications

• Waste haulers – director, environmental services

• Landfill charges – director, environmental services

• Cylinder demurrage – vice president, supply chain

• Insurance – vice president, human resources

• Taxes – comptroller

• Physician services – CMO or CFO

• Water – director, plant operations

• Worker’s comp – vice president, human resources

• Collection agencies – certified financial planner (CFP)

• Postage – vice president, supply chain

• Items that should have been on a PO – CEO

Of course, this is just a potential list. Each institution should determine the specific items to put on its list and who will approve each one. The important thing is to have the policy and the listing.