The ARMS Procurement System at Tustin State University1
Christina Abrams angrily pushed the purchasing audit reports to the back of her desk. As director of purchasing for Tustin State University’s purchasing department, she knew she could not avoid studying the reports. But for a moment she needed to cool off before she had a meltdown. Walking across the campus, she remembered how, for the past two years, the consultants told her that the new Administrative Resource Management System (ARMS) procurement system would solve her procurement concerns.
The ARMS procurement system went live at the beginning of May 2009. Since then, many problems have come to light from the various departments using the system.
BACKGROUND
With the start of the year in 2006, three administrative managers pulled together to work on improving the computer information system used by the university. The existing system was cumbersome and inaccurate. A new computerized information technology–based system was expected to reduce a significant number of errors in the process. It was decided that a supplier would be chosen through the competitive bidding process. Peoplesoft was awarded the contract to implement the new purchasing information system.
Shortly after the human resources department implemented ARMS, the TSU purchasing department analyzed its computer systems. The purchasing department discovered that it was using at least seven different ways to purchase items. Purchasing realized that this was confusing and difficult for its customers and felt that it was very important to identify the customers’ needs. The customers responded by stating they wanted an integrated purchasing system that included reconciliation of outside orders and internal orders. In addition, the customers wanted a system that would reconcile emergency departmental purchases with a procurement card to the purchasing system. With the knowledge of the customers’ needs and an idea of successful purchasing systems, a TSU purchasing evaluation team was formed. In cooperation with Andersen Consulting, a conceptual design was developed for an integrated purchasing system. For the next year, a team was set up to study, review, and make changes to the newly designed integrated purchasing system. The team developed two major interrelated forms of purchasing—the ARMS system and the procurement card—to solve the procurement problems at TSU.
THE OLD PROCUREMENT SYSTEM
Order Processing
The ordering process under the old procurement system contained several steps. The first step was for each department to identify a need. This would be accomplished through at least eight different sources, including vendor catalogs, shopping trips, sales representatives, knowledge from past usage, yellow pages, colleagues, magazines, and newspapers. The method used varied by department and was based on individual preference. The next step was to identify the issuance method. There are seven different methods available. One such method is the paper 1303, which is a requisition for materials from outside vendors. An alternative to the paper 1303 is the online 1303, which is essentially the same. The third option available is the paper 100W. The paper 100W is for internal orders from inventory. The comparable alternative to the paper 100W is the online 100W. The next choice available is a low-dollar-amount purchase order, or LOPO. This is used for purchases of $400 or less. Another option is through reimbursements by accounts payable, or reimbursements by stores. This is used when a department purchases item(s) through petty cash that should have been purchased with a 100W or 1303. Once the issuance method is identified, an order is placed.
Assuming an outside vendor order is placed, the department must complete a paper 1303. (See Figure C4.1.) Next, department approval must be obtained. After the proper approval is acquired, the data are entered into a shadow system by the department. The shadow system is an internal departmental system that contains the department’s purchasing records. It is important to note that this system varies by department and does not share information between departments. Next, the requisition is entered into the centralized system by the department, so that purchasing can process the information.
FIGURE C4.1 Requisition Form
Linda Jones Room 606 MRF
Phone: 310-5641 Fax: 310-8500
Attn: Team Tom Crawford and Jane Marlowe Exhibit 2
Human Cancer Genetics 8850
EFFECTIVE 11/01/06
DEPARTMENT NUMBER IS 2516
When the requisition is entered into the central system, it must remain in a queue and print overnight for the purchasing department. The requisitions are sorted and distributed to the appropriate buyer. The buyer then verifies pricing with the selected/preferred vendor. Once the price is verified, the buyer reviews the paper/online requisition and creates the vendor’s purchase order. (See Figure C4.2.) Similar to the requisitions, the purchase orders must remain in a queue and print overnight. The purchase orders are sorted and distributed to the appropriate buyer. The buyer then signs and prepares the purchase order for mail/fax.
FIGURE C4.2 Purchase Order
This ordering process was used by Tustin State for many years. However, there were several problems associated with the old purchasing system. The first issue is the number of sources that the department must reference to determine what is needed. This creates difficulty for the department to select the best vendor. The next issue is the large number of issuance methods. The departments must understand the stipulations for all seven methods to place the proper order. This is confusing to the departments and employees who did not have constant interaction with the system. In some departments, specific employees became experts on the process. Another problem is the shadow system and the central system. Each department maintained its own internal computer system where purchasing records were maintained. This creates an issue because the shadow system is not standardized across the university. In addition, entering data into two different systems increases the chance for errors. Posting errors cannot be detected unless a manual audit of all of the departmental purchase orders is conducted. A final problem with the old system is the purchase documents are handled too many times. The information is repeatedly sorted and distributed. This handling increases the possibility of a purchase order or requisition being lost.
Invoice Process
The invoice process is another costly and drawn-out procedure. The invoice process is manual with a lot of duplicate entries and reviews. The invoices are manually manoeuvred through the system by handling and mailing. A typical invoice transaction would first be sent from a requisitioned to his or her department. After opening the invoice, the department will approve or not approve the invoice. If the department approves the invoice, then the invoice will be mailed to accounts payable. Accounts payable will then open and sort the invoices. A photocopy of the invoices will be made at this time by accounts payable. This is done to keep a record of all invoices. Accounts payable then previews and prepares the invoices for data entry. After entry into the computer system, accounts payable are manually verified. Then, the invoice is sent back to the originating department. The originating department then receives its returned invoice. At this point, the department will correct any differences between the original invoice and the current invoice. The invoice is approved if there are no changes to the invoice. The department then enters all invoices into its shadow system. The purpose of the shadow system is to keep track of all invoices received by the department. The final step is filing the invoices into the department’s file cabinets. The total invoicing process takes from 30 to 90-plus days to complete.
ADMINISTRATIVE RESOURCE MANAGEMENT SYSTEM (ARMS)
Order Processing
The first step in the process requires the department to identify a need and source through the vendor catalogue. The vendor catalogue contains approximately 280,000 inventory items and represents “one stop shopping.” Next, a requisition is created through the ARMS system. (See Figure C4.3.) The first required information is the vendor name, which is obtained by using the vendor database. The requisitioned enters the vendor name, and the ARMS system will provide all applicable options. (If the requisitioned wants to give special instructions to the buyer and/or vendor, he or she can put them under the header comments of the ARMS form.) Once all of the information has been verified and approved, it is sent to the buyer via ARMS. The buyer receives the requisition and verifies the price and selected vendor. The requisition is sent to the director of purchasing for online approval. Once the requisition is approved, the buyer creates a purchase order. (See Figure C4.4.) It is then sent to the vendor through the ARMS system by fax.
FIGURE C4.3 ARMS Requisition Form
FIGURE C4.4 ARMS Purchase Order
The end user can track the status of the requisition through the ARMS system using the master inquiry panel. The master inquiry panel provides departments with information on the status of open requisitions/purchase orders. The user can confirm that the requisition has been approved and whether a purchase order has been created. The end user also can print out the purchase order once it has been created. If there is a problem with the requisition, there will be notes in the requisition activity section.
Invoice Process
The ARMS system has simplified the invoicing process by eliminating many cumbersome steps. Accounts payable receives the invoice via electronic data interchange (EDI). The system then automatically matches the purchase order to the invoice received. Next, accounts payable reviews and approves the invoice online. Once the invoice is approved, payments are generated and issued through electronic funds transfer. Despite the convenience of this process, there are several difficulties. If the invoice does not match the purchase order exactly, the account clerk and purchasing must research the purchase order and identify where the error occurred. If the two departments cannot determine what caused the error, the department must amend the purchase order. This requires many additional steps by all parties involved.
Procurement Card
Another feature of the ARMS procurement system is that it allows reconciliation of the procurement card, which deals with emergency orders. (See Figure C4.5.) The procurement card is issued through the First Chicago Bank and is facilitated locally with World Bank in Tustin, California. The account can be assigned to either a department or a specific member of the university’s faculty. The credit limit is $1,000 per purchase and $5,000 per month. Individual departments also can change these limits, if additional purchases are needed.
Simply stated, the procurement card is a credit card for special circumstances with special limits imposed on it. This card is used as an alternative to the university’s original LDPO. This gives the department authority to approve purchases that do not exceed $400. It is also an alternative for formal requisitions that are below $1,000 per purchase. To ensure security of the procurement card, there are certain items that cannot be purchased with the procurement card. Some of the restricted items are given below:
• Airline tickets
• Capitalized equipment
• Cash advances
• Controlled substances
• Gasoline
• Guns and weapons
• Moving expenses
These items are declined if the card user attempts a transaction. If abuse of the card is suspected, the department head can inform the purchasing department to suspend usage of the card. Currently, the procurement card allows the user great flexibility with low-dollar purchases. The department only needs to reconcile the charges to the ARMS system when the bill is received.
The university has seen a boom in growth with the card since the introduction of the ARMS system; there are approximately 2,000 active cards. This is primarily because of the ease of using a credit card: A simple order can be placed without a purchase order. To obtain a purchase order, the department must wait approximately one week. However, the procurement card offers immediate purchases. Figure C4.6 is an example of a procurement card report.
FIGURE C4.5
Procurement Card
THE DECISION
The first problem Christina needed to solve was the problem with searching through 280,000 vendor catalogs. There are also a significant number of errors in the vendor database. The ARMS system cannot decipher between a vendor’s billing address and its shipping address. Despite the convenience of this process, there are several difficulties. If the invoice does not match the purchase order exactly, the account clerk and purchasing must research the purchase order and identify where the error occurred. If the two departments cannot determine what caused the error, the department must amend the purchase order. Her walk was completed. Ms. Abrams returned to her office to begin looking for alternatives.
FIGURE C4.6 Procurement Card Report
(Benton 453-461)
Benton. Purchasing and Supply Chain Management, 3rd Edition. McGraw-Hill Learning Solutions, 41432. VitalBook file.
Case: The ARMS Procurement System at Tustin State University #3
Questions
Use flow diagrams to show the differences between the new and old system.
How should Christina solve the errors in the ARMS purchasing module? How do you recommend searching through 280,000 vendor catalogs?
There are also a significant number of errors in the vendor database. The ARMS system cannot decipher between a vendor’s billing address and its shipping address. What should you recommend?
If the invoice does not match the purchase order exactly, the account clerk and purchasing must research the purchase order and identify where the error occurred. What is your recommendation?