This is the 3rd post in the series: How Much Does It Cost to Process an Order?
2nd post here: http://www.p2insight.com/blog/how-much-does-it-cost-to-process-a-purchase-order-internally
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:
This post discusses how I came to determine the average cost to process a PO externally.
Definition: Processing a PO externally
For the purposes of my research, I consider the step of "processing a PO externally" to cover the period of time from when a vendor has received an order to the time they agree to fulfill it. This can include:
How many orders require further discussion?
In the previous post in this series, I determined that it costs $250 on average to process a PO internally. If a vendor agrees to provide the materials ordered exactly as indicated on the order, there would be no extra cost to process the order externally. But how many POs that are successfully processed internally are accepted by the vendor as-is?
More research. Commonly accepted numbers regarding spend:
Number of orders in each group
One thing I remember from math class is that you can’t have a percentage of a percentage, so I’m applying simple numbers to this to make more sense of it.
I chose to convert “spend” into “number of orders” – the logic is imperfect in that it implies that every order is worth the same dollar value, but it gives me a starting point.
So for every 100 orders, 23.5 of them require further discussion before they’re accepted by the vendor. Let’s round that to 24 because you can’t half-way discuss an order.
Seems like a reasonable number. Of the orders sent to a vendor, how many of them:
The result is that 76% of orders placed are accepted by the vendor as-is, without further discussion required; 24% require further negotiating.
How much time is spent on negotiation?
This one is tougher to measure. There are so many different reasons for having to discuss an order with a vendor, and then there are so many different possible process paths stemming from each of those discussions… it’s difficult to quantify, to say the least.
What’s reasonable? Let’s look at it in terms of the amount of change or action required for the order: small, medium, large
From the table:
Total extra minutes spent on problem orders per 100 orders: 3,240
This works out to 135 extra minutes per problem order (on average).
By my calculations, an average of 2.25 additional hours (135 minutes) is spent on processing problem PO’s externally before the vendor agrees to fulfill the order.
Cost to process a PO externally
Conclusions based on what has been established so far throughout this series of posts:
24% of orders will cost 25% more to process on average because further clarification or negotiation is required before the vendor will agree to fulfill the order.
I had less concrete data to work with as a starting point here, but I would argue that the logic is sound and gives me a reasonable representative cost for this step in the order process. What do you think?