Another important cost factor in the PO process is the cost of labor to support supply chain management. After adding up your fixed and variable costs, set that number aside and then calculate your employee costs. The cost associated with each stage in the PO process should be multiplied by the minute or hour rate cost to perform it. The equation might look something like this:. But remember, this is for just one aspect of the process and just one team member involved.
You will need to repeat this for every team member involved and for each process. In addition to understanding the true cost of this aspect of your business, you can also begin to calculate how much a purchase order solution that includes automation can save you. Through automation, you can remove your labor costs by allowing the purchase order system, with the help of artificial intelligence AI and Optical Character Recognition OCR , to complete the processes for you.
With a simple rules-based, if-then, logic, much of the repetitive purchasing processes associated with your procure-to-pay processes can be automated. Furthermore, the benefits of automation can extend beyond your accounts payable processes to other aspects of your business including Human Resources, Inventory Management, and Data Entry.
At Wave, we understand better than most that maintaining a competitive edge and achieving long-term sustainability for a business requires back-office modernization and digital transformation.
While these may be broad terms, we can show you how they add up to removing silos between business units, increasing collaboration, finding areas for efficiency and cost savings, and embracing automation as much as possible. To do this, you need the right tools that fit your needs, budgets, and growth objectives. We can come alongside your organization and talk through your existing systems and processes to identify the easiest areas to automate or otherwise improve with the right toolset.
We use a blended set of technology which we apply on a case-by-case basis, depending on your exact needs. Would you like to learn more about how Wave can help you implement the right purchase order automated solution and take your business processes to the next level? Here at Wave we have over 20 years of experience in working with growing businesses everyday, helping them by automating processes, streamlining workflows, and migrating to the cloud to increase efficiency and productivity.
Lets have a chat and determine which works best for your organization. Phone Number. Instead of relying on a standard benchmark, the goal of this blog post is to introduce you to a methodology on how you should think about calculating the cost of a purchase order and let you be the judge of how accurate the calculation is. The short answer is getting to your numbers by looking at the various components of the cost factor in your purchase order cycle.
The cost of a purchase order includes creating a purchase order and the additional cost of the change order. In the steps below, we will walk you through a step-by-step process to calculate the cost of a purchase order. The first step is to list down all stages in the purchasing process. If you already have a well-defined process, then that is great.
In this, you are documenting how the employee creates the requisition. For example, whether the process is manual or system-based. If system-based, do you have catalogs or other ways to reduce the data entry by the user?
Here you are documenting the steps which are involved in the approval process. The critical step is to note how many requisitions are approved at each approval level. Are most of the requisitions approved by a manager, or do most of the requisitions go to an executive for approval?
Measuring this is important because executives are paid more than managers, so it is crucial to accurately document where the approvals are happening when calculating the cost of this step.
Let me explain. Based on the type and amount of the requisition, it might go to different people for approval. So if you can reduce the number of steps or simplify your purchasing process , you can reduce the overall cost of the process.
We will cover this in a later section. For now, document the average number of steps in the whole process. For example — the time it takes to create a 1 line vs. It takes time to enter the information like item details, quantity, shipment details, shipping costs, etc. If the process is fully automated, then that is great. In that case, you are already adopting the best practices. The manual process, of course, takes time, and if the process is automated, you have reduced at least one step in your purchasing process.
Here you want to calculate the average time taken at each step. This step is tricky because you have to take the average of all the steps in the process. For example, calculate the average time for steps required to approve a purchase requisition. The time it takes to create a requisition for office supplies is significantly less than creating a requisition that includes a bill of material for new capital equipment.
But you can do a high-level break up of the type of requisitions and the average time for each of them. You can use a model like the following. Calculate the weighted time and add all three types to get the average time. In this case example, the average time for creating a requisition is We mentioned that it is an estimated time because you can spend all the time on this to get a perfect measurement.
The idea is to do a quick assessment. The reason is that the average time for requisition approval is in minutes, and you want to calculate the cost based on that time.
So with all this data, you are now ready to calculate the total cost of a purchase order. Create an excel sheet that looks like the following. The resource type is the different resources involved in your approval process. Note that we include the resource type and not the resource title since that will take more time.
Bonus: Download the free PO cost template. Of course, it is up to you to decide if this is worth your time and effort. Procurement can categorize cost savings into hard savings and soft savings, or in other words, cost reduction or cost avoidance. Another example is automation — you decided to invest in a purchasing system that would automate the process and reduce the cost.
The obvious next step is to build a business case to secure funding and present it to your finance committee or boss. If it does lead to headcount reduction, then the business case is straightforward. By embracing procurement software and leveraging the power of automation, you can whittle down your average PO processing costs to the bare minimum, and focus your time and resources on what really counts: growing your business.
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What is the Cost of Processing a PO? PO Processing Costs: A Thorny Issue Before you can reduce the average cost of purchase order processing, you have to be able to define and measure it. Keeping these costs in mind, break down the purchase order process, from procurement to payment P2P : Internal Purchase Order Processing: During this stage, the person ordering the goods chooses an item to fulfill an outstanding need, selects a vendor, and creates a purchase requisition.
They then submit their request for approval, and when it is approved, a purchase order is created and sent to the supplier.
This might include revisions, clarifications, adjusted quantities, or discussions about shipping times, product availability, and potential replacements for items ordered. Order Receiving: When the vendor fulfills the order and ships it to your shipping and receiving department, the order needs to be checked to confirm it is of sufficient quality and correct quantity.
Invoice Processing: At this point, the invoice connected to the purchase order is checked against the purchase order and the shipping documents for any discrepancies. As with Order Receiving, errors and additional communication can generate higher costs as staff chase exceptions, wait for approvals, etc.
Ask yourself: How much are you paying, and to whom, each hour for the tasks in each step? How many POs are you processing, and how long does each one take to travel through all five stages of P2P? How many exceptions are you dealing with, on average, and how long does each one take to resolve? Using artificial intelligence and process automation, eProcurement software solutions have an absolutely transformative effect on your procure-to-pay process, including: Streamlined PO Cycles: Automated approvals with reminders , preferred vendors, and total transparency can reduce the time a PO spends in the system from days to mere hours.
Improved Accuracy and Less Risk: When each PO is automatically linked to and verified against its corresponding invoice and shipping documents, needless errors, exceptions, and wasted hours spent chasing them are eliminated. Invoice fraud and rogue spending go the way of the dodo as well.
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