This is the 4th post in the series: How Much Does It Cost to Process an Order?
1st post: http://www.p2insight.com/blog/how-much-does-it-cost-to-process-an-order
2nd post: http://www.p2insight.com/blog/how-much-does-it-cost-to-process-a-purchase-order-internally
3rd post: http://www.p2insight.com/blog/calculating-the-cost-to-process-a-po-externally
I was tasked with analyzing the average costs of processing an order through its various stages from Purchase Order (PO) creation through to invoice closure.
I decided that my starting point would be the concept: time is money. I had to figure out:
How long does it take to expedite an order?
I should define what I mean here, as there doesn’t seem to be a standard term for this process
“Expediting” here means the time and cost to your organization associated with contacting the vendor to confirm delivery dates, reminding the vendor of required delivery dates, trying to get earlier delivery dates, discussing delivery for partial shipments, communicating information between the vendor and the interested parties within your organization, possibly revising orders based on delivery delays, etc.
It’s the time and cost associated with the process of figuring out when the vendor will deliver the order they committed to fulfilling.
How long does it take to discuss order delivery with a vendor?
Hopefully the majority of discussions with a vendor about delivery dates go like this:
But even then… how many rounds of phone tag does it take to get the vendor on the line, or how many emails + wait for response does it take to get a response?
And some expediting discussions are going to take much more time and effort than that. Some will require several internal discussions about options if shipments are split, if manufacturing dates are pushed out, if work dates are moved up, if critical parts are delivered late, etc.
So how long does it take to expedite an order?
In this case, I'm just going to throw a number out there that seems reasonable, rather than attempt to segment different types of problems / vendor profiles / etc. So, all things considered, I’m going to say it takes on average 2 hours to sort out expediting per order. Many will take less time than this, but the ones that take more than 2 hours have the potential to take a lot more than two hours.
Based on the hourly staffing rate of $27.78 (established in the 2nd post in this series), that works out to an extra $55.56 per order.
So how often would your organization need to spend that extra money on an order?
How many orders require expediting discussions?
I found an APQC study that states that the median percentage of orders received by the order request date is 81%. So it’s fairly safe to assume that at least 19% of orders involve considerable back and forth with the vendor about delivery.
But we cannot assume that the 81% of orders received on time are received without any discussion of delivery dates.
For each group, I'll estimate that the following percentages of orders require expediting discussion with the vendor.
Number of orders requiring expediting discussion in each group
As I encountered in my previous post… you can’t calculate a percentage of a percentage, so I’m converting the 100% of orders into 100 orders. So far, we know that 19 of 100 orders is not received on time, so I’m looking at the remaining 81 / 100 orders.
Of that 81 orders:
From the table above:
So, for every 100 orders placed, 44 require some discussion or action to confirm delivery dates with the vendor.