This is the 2nd 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
3rd post: http://www.p2insight.com/blog/calculating-the-cost-to-process-a-po-externally
4th post: http://www.p2insight.com/blog/calculating-the-cost-to-expedite-an-order
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 internally.
Definition: Processing a PO internally
For the purposes of my research, I consider the step of "processing a PO internally" to include:
Studying studies: how do the pros calculate the cost of processing a PO?
The first thing I did was try to find someone else's answer. And I was in luck - sort of. There are a lot of different studies available that discuss the average cost to process a PO, and they're available from many well-reputed organizations that develop complex analytical studies.
That didn't work out for me, either. Every study I consulted had very different numbers from the next.
The cost to process a PO can include a staggering list of variables, some obvious and some… downright creative. It can include a discussion of direct vs. indirect costs, and it can include non-monetary costs – like the impact of a mishandled order on your business, or on your relationship with your vendor.
All of the studies I consulted used different variables to determine their costs; some defined the variables loosely, most didn't offer any explanation at all.
With no generally accepted number or range, no standard consideration of variables, and no common threads running through the expert studies, I decided I'd have to come up with my own system.
I chose to base my figures on staffing costs: what is the average cost to process a PO based on how long it takes the staff directly involved to process that PO.
What does an hour cost?
Again, there are many variables here that could affect the answer.
How many people do you consider to be directly or indirectly involved in processing a PO? Surely the procurement agent, but what about the person identifying the need and creating the requisition, all of the people involved in approving the request, and then what about the cost of the people in IT who presumably are involved in maintaining the systems through which an order is placed or an automated approvals process is run...
And do you use their fully weighted hourly rate (the cost of paying the employee plus the costs of supporting their employment), or their rate based solely on salary?
Cost to process a PO internally
So there I had my answer:
9 hours * $27.78 = $250.00
The number I arrived at exceeded the "generally accepted" number I had heard from "them" by $100, but I have no information as to how "they" arrive at that number. For my purposes, I had established the average cost to process a PO from the time the need is identified to the time the PO is sent to vendor.
I had also established the variables I would use to determine the costs of the rest of the steps in processing an order from end to end. I will be posting the next step in the process: calculating the cost of processing a PO externally within the next week.
What do you think of how I arrived at $250.00 per purchase order? What variables would you consider in calculating the cost to process a PO internally?