Reengineered Purchasing Process |-------------------------------------| | Paper presented at CAUSE92 | | December 1-4, 1992, Dallas, Texas | |-------------------------------------| REENGINEERED PURCHASING PROCESS Wayne K. Maki, Information Services & Telecommunications Richard P. J. Duffett, Administrative Services Ferris State University Big Rapids Michigan ABSTRACT This presentation will explain how Ferris State University is developing a reengineered purchasing process. In the development of the new process it became evident that there are really only two major stakeholders involved: the customer and the vendor. The customer has a personal interest in obtaining a quality product in a timely manner at a competitive price. The vendor is interested in providing good service and receiving timely payment. The new process is designed to empower the customer to deal directly with the vendor. Paperwork and bottlenecks have been significantly reduced while maintaining adequate control and accountability. PROJECT OVERVIEW Management consultants have long recognized an unusual dichotomy which exists in institutions of higher education between the expert teaching of current business management strategies in the classroom and the implementation of these strategies in administrative operations, which traditionally have been slow to evolve. In recent years a multitude of social and economic factors have directly impacted institutional finances, forcing public universities to realize that business-as-usual can no longer continue. The costs of faculty and staff compensation, equipment, supplies, and maintenance of deteriorating facilities escalate while operating revenues fail to keep pace. In Michigan, public universities engaged in strategic planning anticipate continuing cost increases and fluctuating revenues well beyond the 1990s. The national recession, Michigan's depressed economy, school finance reform, and tax shifts are among the factors affecting the level of State appropriations to higher education. Revenues from tuition may be reduced by a shift in enrollment from full-time to parttime students. Ferris State University has a history of lean budgets which has necessitated creative and innovative approaches. The University now is increasing its efforts to improve administrative efficiency and effectiveness by using a management tool, Total Quality Management (TQM), which currently is popular in business and industry. APPROACH A Cost and Productivity Management Committee was appointed by the University President in August, 1991. The purchasing process was selected for intensive analysis because it is a complex process that impacts all campus units; therefore, the committee's work would have campus-wide visibility and impact. The timing was appropriate because improvements already were underway with the installation of an on-line computerized purchasing system. Process improvements could, hopefully, be implemented along with the automated system. Fifteen committee members were selected to achieve cross-functional representation from all organizational levels and University divisions. The committee was divided into four teams; each team was assigned some members with prior understanding and experience in the processes being studied. These teams were: Purchase Order Initiating and Approval, Bids and Quotations/Order Processing, Receiving/Stores, and Accounts Payable/Fixed Assets/Stores Inventory Accounting. As this was the first process review to be conducted at the University, an outside consulting firm was hired to guide the committee's work. The purchasing process was to be reengineered from the perspective of the "customer" - to design a purchasing process to fulfill the "wants" of each customer. Opportunities to streamline and improve the purchasing process were identified during each step of the analysis. CURRENT PURCHASING PROCESS The teams found that many parts of the purchasing process were slow and frustrating to customers, particularly if a budget problem occurred, a purchase order was missing, or a package arrived without proper identification. Customers also felt confined by excessive time requirements, multiple approvals, confusion over which form to use to initiate a purchase, and the inability to track the progress of a requisition through the system. Because of the time delay between initiation and issuance of a purchase order, they also felt their budget information was not accurate and timely. To compensate for the time lag in recording financial data, the end users maintained parallel, duplicate bookkeeping records. Duplication of effort and redundancy also existed in the area of receiving, in the maintenance of records by both the University's Central Receiving Department and individual departments. In total, the current process included 405 activities from the point a requisition was initiated through the distribution of monthly reports, which provided a record of the charge of the purchase against the account. The number of activities required in cases of exceptions increased significantly. The teams determined that 143 of these activities added value to the purchasing process, and 262 added no value. Examples of non-valued activities included multiple approval signatures, transit time and redundant activities. The number of verifications required in the normal process, between 20- 25, was deemed to be excessive. The entire process required a maximum of 59 documents, of which as many as 12 were needed to get a purchase order issued. The teams also discovered a lack of understanding of the process, which suggested the need for improved communication and training. ISSUES Before examining ways to improve the process, the teams explored several new and different approaches to the purchasing process. This produced three foundational principles to drive the development of a new process: --Employee empowerment based upon decentralization of the process and accountability; --Elimination of non-value-added processes; and --Establishment of quality at the source. Employee empowerment and process decentralization required removing perfunctory signature approvals. This necessitated making revisions in the balanced budget accounting process as well as increasing the accountability of individuals with budget or account manager responsibility as accurate, timely and appropriate information must be provided to the manager responsible for the cost center. A manager should be making purchasing decisions based on clearly stated goals, and then held accountable for those decisions. Process decentralization also creates a new role for the Purchasing Office, changing its function from processing requisitions to optimizing the institution's purchases. Establishment of quality at the source is enhanced by an electronically based purchasing system which is user-friendly and real-time to provide all parties with the information needed to make better informed and quicker decisions regarding all purchases. This will reduce unnecessary budget transfers, reduce or eliminate invalid object code assignments, improve processing speed, and eliminate paper. Paradigm shifts, organizational changes, enhanced teamwork and the removal of institutional barriers are essential for the implementation and success of the new process. OPTIMAL FLOW The overall philosophy behind the reengineered purchasing process is that only two major stakeholders are involved: the customer and the vendor. The customer has a personal interest in obtaining a quality product in a timely manner at a competitive price. The vendor is interested in satisfying the customer order by providing good service and receiving timely payment. The proposed process is designed to empower the customer to deal directly with the vendor whenever possible, thus satisfying another important vendor need to resolve any problems. Paperwork and bottlenecks have been significantly reduced while maintaining adequate control and accountability (see Exhibit A). The reengineered process (Exhibit B) begins with initiation activities typically involving the identification of a need. Standard product descriptions, sources, and Ferris State University price information are published by the Purchasing Office for reference. In order to allow timely access and reduction of paper copies, office supply information is provided on the on-line campus-wide information system. The Purchasing Office provides additional assistance when required. Beginning in 1993, the customer will be empowered to enter requisition and receiving information directly into the new On-Line Purchasing system. Consistent with decentralized budget responsibility, only one approval level will be required. Following approval, a requisition is handled in one of three ways, depending on the expenditure level: Amounts of $250 or less are handled directly by the department with a new Purchase Order With Check (POWC) form. This new document empowers a department to make payment directly to a vendor, bypassing all of the traditional purchasing process steps. The department records this transaction on-line after the check has been cut. Appropriate controls guarantee accountability without adding processing steps. Amounts from $250 to $3000 will be handled directly by the department through the use of the new On-Line Purchasing system. The system will generate a purchase order automatically upon electronic requisition approval. The purchase order document will be printed remotely on a LAN- attached PC printer whenever possible. Centrally printed purchase orders will be forwarded to the issuing department. In either case, the department will be responsible for communicating the order to the vendor. Electronic ordering opportunities are also being explored. Amounts greater than $3000 will be handled by the Purchasing Office using the new bids and commodities module of the On-Line Purchasing system to reduce the time currently required by these activities. Upon receipt of the purchase order (refer to steps 2 and 3 above), the vendor will be responsible for shipping the product directly to the requesting department. Terms, conditions, and prices (including shipping) are controlled by the Ferris State University purchase order. No price changes will be permitted after the order is accepted by the vendor. The customer department will be responsible for the acceptance of packages, verification of goods received, and on-line entry of the information necessary to trigger vendor payment. Once the customer has electronically acknowledged receipt of the order, payment will be processed automatically based on payment terms associated with each vendor (i.e., net 10 days, 30 days, etc). Payment amounts are controlled by the original purchase order. Vendors will be instructed not to send invoices, and any invoices received will be discarded. All of the accounting and descriptive information necessary to record a transaction will have been entered on-line during each step of the process. The optimal flow concludes with all detail and summary financial information available on-line. Performance measures will be developed to monitor the process on a real- time basis to measure timeliness, and costs and quality, as well as to support the continued improvement of the process. PURCHASING SOFTWARE MODIFICATIONS The University's current On-Line Purchasing system has its origins in the implementation of Information Associates' Financial Records System (FRS) in 1983. IA's Human Resource System (HRS) was added in 1986, followed by the FRS Fixed Assets module in 1989. The need for an On-Line Purchasing system had been recognized for several years, but other University funding priorities delayed action until 1990. At the request of the University Purchasing Department, a "build versus buy" purchasing system analysis was conducted in the winter of 1990. The following options were considered: Buy Information Associates' On-Line Purchasing system Buy purchasing software from another outside vendor Build an interim/partial system a. Electronic mail requisitioning (bid items) b. Stand-alone PC c. Stand-alone mainframe Build an in-house system with equivalent functionality The need for close real-time integration with FRS and the Fixed Assets module eliminated other vendors and the stand-alone options. A preliminary analysis indicated that three-to four-person years of internal systems development effort would be required to meet minimum customer requirements with an in-house system. Upon completion of the analysis, a recommendation was made to bundle the purchase of Information Associate's On-Line Purchasing system along with other mainframe software. This proposal was approved in June, 1990 as the most cost-effective solution. An integrated Bids and Commodities module was included with the On-Line Purchasing software contract. The original On-Line Purchasing software implementation plan was divided into three phases [CHART MISSING] In August, 1991, the University decided to conduct the purchasing process review described on page 3 of this paper. The original implementation plan was placed on hold. The process review team recommended significant changes to the original software implementation plan. A new, five-phase implementation plan was developed in November, 1991: [CHART MISSING] Phase 2 involves modifying a system that was designed to support a traditional purchasing department function to meet the requirements of the reengineered process. A new series of 14 screens was created using a vendor-supplied tool called Screen Builder. The original purchasing screens were used as a model for these new screens. The goal of Phase 2 is to protect the underlying COBOL applications from modification as much as possible. Screen Builder is being used to make cosmetic changes to the screens. For example, one original screen contains 20 fields related to Receiving/Invoice data. Only 11 of these fields are relevant to end users entering routine receiver transactions. A total of nine fields has been deleted. When extensive modifications are required, the original program is copied to a new program name and the modifications are made. All changes are documented and kept with other system changes. To date, the programming and analysis effort to modify all 14 screens in our test system and eventually move them to production has amounted to 340 hours. Most of this time has been spent working with a group of five end users to identify, prototype, and test the screen changes. Phase 3 covers the decentralized implementation of the modified system. Rather than typing purchase requisitions to submit to the Purchasing Department to process, using the On-Line Purchasing system, each department will be able to create purchase orders for amounts up to $3000. These purchase orders created will be printed nightly at a central location. Remote purchase order printing on demand is also being considered. Phase 4, the installation of the Bids and Commodities modules, will occur concurrently with Phase 3. The primary benefit of this module will be to automate manual bid processing within the Purchasing Department. Phase 5 represents the University's goal to deliver a purchasing system that is easy-touse and is tailored to the users' needs while taking advantage of the computing resources available on users' desktops. This future system will have the following characteristics: 1. Data entry screens that look like the underlying document (e.g. a purchasing screen that looks like a purchase order). 2. Separation of the screen presentation software from the application software. 3. Simple ad hoc query capabilities. Whether this future scenario involves a migration of FRS, On-Line Purchasing and other mainframe applications to new client/server applications from Systems and Computer Technology Corporation (SCT acquired Information Associates in 1992) remains to be seen. Several options for providing the needed services are available. Stand alone PC applications could be used to feed the mainframe system, networked PC's could feed the system with data from PC-based or Client/Server-based systems, or PC's could be given direct access to mainframe data using any of several database gateway solutions. CONCLUSION Ferris State University's administration is committed to the concept of continuous improvement of customer service. By instituting this cost and productivity study, the University has experienced significant improvements to a purchasing process that impacts all areas of the institution. To date, the University has realized operational savings of approximately $105,000 as a result of this effort. However, we recognize the need to continuously evaluate to determine what additional refinements might be made to further improve service. Other areas are undergoing study. Accounting, Human Resources and Auxiliary operations are applying TQM concepts in their operations. We are confident that through commitment to improving processes and meeting customer needs, both the University and its customers will benefit in cost-efficiency and effective service. FACTS ABOUT FERRIS STATE UNIVERSITY Ferris State University is Michigan's premier polytechnic university, providing careeroriented education to 12,000 students through the Colleges of Allied Health Sciences, Arts and Sciences, Business, Education, Optometry, Pharmacy and Technology. More than 120 undergraduate programs, three masters programs and two doctoral programs are offered at Ferris State University's 600-acre campus in Big Rapids, Michigan, a city of 12,600 residents 50 miles north of Grand Rapids. A number of courses and programs are also offered at off-campus locations. Ferris serves the technological and work force demands of business and industry, the health care professions and society in general through applied research and practical education. MISSING: EXHIBIT A: COMPARISON OF THE NUMBER OF DOCUMENTS USED EXHIBIT B: PURCHASING PROCESS OPTIMAL FLOW