Purchase cards and inventory control - An analytical framework

In the context of e-business, companies use purchase cards (P-cards) to order merchandise directly from the supplier (or use the web or other e-procurement systems). The card company does the budget control and record keeping. Hence, P-cards are touted as leading to reduction in ordering costs for the buyer and financial settlement time for the seller. However, P-cards have a credit limit, and exceeding the limit results in penalties that increase the cost of ordering. So, the question is whether P-cards will reduce total inventory management costs for the buyer compared to obtaining a direct credit from the supplier? This paper shows that for the single item situation, a critical ordering cost exists such that the P-card can be used if and only if the actual cost of ordering using a P-card is less than this critical value. If the actual ordering cost using a P-card is above this critical level, it is preferable to continue with the traditional way of dealing directly with supplier credit policies rather than using a P-card. Numerical/graphical examples are given to illustrate this point.