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When it comes to the operational procurement process, teams are often looking at ways to reduce costs, thereby increasing their profitability and becoming (at least in part) the organization hero that saved the day. Unfortunately, with so many potential cost-saving measures available, it can be hard to know which investments will bear fruit and which will fall by the wayside. In nearly every one of these investigations, one reality has been proved true: user-friendly technology, process improvement, and automation can significantly free up a team's resources, freeing them up for value-add activities and decreasing time spent on tactical purchasing tasks. Not to mention that any reduction in process complexity can turn a cost center into a profit-generating one.
Although this is a general statement, one commonly debated and easy-win opportunity many teams have identified is reducing the cost per purchase order. After crunching the numbers, many purchasing organizations have recognized that they are spending on average $14.48 per document, according to one Hackett study. In contrast, top performers have reduced this amount to only $3.33, an $11 difference. With such a discrepancy, it is no secret that procurement teams from businesses of all sizes have begun to wonder what they can do to reduce these costs.
But, before we get into how you can take your team from the former to the latter, let's dive deeper into how this cost can be measured.
Calculating the Cost Per Purchase Order
Looking at the total cost per purchase order, teams are examining the processing effort, including labour and outsourcing. This value must later be divided by the total number of the purchase order and order/blanket release transactions processed annually.
The cost can be derived within your team in a few steps. First, teams must document their current purchase order process, including creating a purchase requisition, approving the purchase order, and eventually sending the document to the vendor. Next, teams are encouraged to calculate the average time spent for each of these steps, keeping in mind time can be converted to a dollar value by looking at employee salaries. Then comes the final step, adding each value together to get the total cost per purchase order.
With this baseline in mind, teams may notice they are either in line with the top performer value we noted above ($3.33) or that some level of improvement is needed. If after some calculation you have found that reducing the cost per purchase order is a lucrative path for your team, we encourage you to take a look at the following strategies for reduced costs.
1. Reduce Time for Approvals with User Friendly Solutions
One reason Purchase Orders become expensive is the amount of time it takes to approve them. Consider that in many manual approval processes, users spend a significant amount of time figuring how who needs to approve what, and when that can’t be determined, approving managers may need to route approvals to the right managers.
Consequently, the extra time spent getting the PO to the right person adds up significantly to the total labour cost in the above calculation.
Therefore, one strategy to reduce the total purchase order cost is leveraging the purchasing process's automation. With a backend system that holds the hierarchy information based on the spend department, and other relevant parameters, the end user experience is greatly simplified, and documents are sent directly to the correct approver.
In addition to automated routing, teams have also benefitted from guided processes, that help people select products from the right suppliers, right items and right rates. The benefit is that by guiding users through a simpler process, invoices are easier to approve than their ad hoc, free text alternative which takes longer to interpret.
Some teams have taken this process one step further and enabled approvals on a mobile app. The benefit is that now managers and even executives who may be required for approvals can do them in between meetings or whenever is the most convenient for them, accelerating the processing time and reducing the amount of time spent doing the approval itself. Consider that in some organizations where executives have a significant number of approvals the savings may be considerable.
2. Eliminate Redundant Steps in the PO Process
Alternatively, teams can take an alternative route and attempt to simplify the purchase order process. Some teams have found that the current purchase order process is unnecessarily complicated, with some steps being either redundant or time-consuming for end-users.
Consider that before a purchase order is sent, it needs to be approved. However, many companies will also require a purchase requisition to be created and approved. Therefore, some teams have considered a model where the approval of a purchase requisition results in automatic generation and approval of the purchase order, streamlining the process and eliminating the human capital otherwise needed.
In another example, some purchasing organizations have been known to toggle between their purchase order system and their email when it comes time to submit a purchase order. Although the process may not seem difficult, consider that any complexity in the user experience results in wasted time. Therefore, with a software or system that enables you to send a PO directly upon completion (such as through a vendor portal), friction in the process is further eliminated.
3. Automate Purchase Order Creation
In looking at automation, consider the advantages that teams have noted in the purchase order creation process. Presently, many teams still create these documents manually in their system, which does take a lot of manual effort for their staff.
Fortunately, modern technology typically integrates with an ERP system or is a part of an ERP system, meaning when purchase order data is input; it becomes available to anyone with access to it. Therefore, teams have the option of “duplicating a purchase” for repeat materials by copying a previous document or by filling in the repeatable details in a new order whenever possible.
Again, with the use of a solid guided process, through the right vendors, teams can also take advantage of a PO flip, using data from the purchase requisition and automatically generating a purchase order.
4. Consolidate Purchase Orders
A final strategy we will consider in this blog post is limiting the number of purchase orders since fewer documents also equates to a lower processing cost. Some ways of doing this are asking if purchasing across departments or people can be consolidated in a single order for volume discounts, a reality often apparent for materials such as office supplies.
Alternatively, teams who have and maintain inventory and vendor-managed solutions can also reduce the number of purchase orders by putting the onus of orders onto the supplier.
Strategies at Play
The ConvergentIS team continues to look at ways to transform the purchasing process, as evidenced by our work in our Rapid Vendor Portal products. Our operational portal is specifically designed to help teams reduce their cost per purchase order through user-friendly guided processes, automation and a design thinking approach to process efficiency.
Ready to put these strategies into practice? Let us know how we can help by filling out the form below.