Friday, September 25, 2009

Cost of a Purchase Order: The Great Mystery of Procurement

One of the most common questions in procurement - and the one that has never seemed to have a definitive answer is - "how much does it cost to process a purchase order?" I get asked this question so much that I have decided to dedicate this blog post to it.

Ask 10 "experts" what the cost of a purchase order is and you're likely to get 10 different answers. Here are a few stabs that people have made at answering this elusive question...

  • A 2006 report from APCQ found that the cost of a purchase order differed depending on the capabilities of the procurement department on a continuum from bottom performer to top performer. This report indicated that the cost of a purchase order ranged from $35.88 to $506.52.
  • A 1994 study by the Environmental Protection Agency on its own processes revealed that some of its procurement officials had estimated the cost of a purchase order to be as high as $300, but published a conservative estimate of $94.20 per PO.
  • The Supply Management Handbook says "it often costs organizations more than $100 in administrative expenses to generate a purchase order" and that "in many firms, the cost of managing and generating a purchase order can exceed $200 per transaction."
  • CAPS Research indicates that the cost per purchase order varies by industry, from $59 in industrial manufacturing to a whopping $741 in the petroleum industry with the average being $217.

Would one of these benchmarks apply to your organization? Maybe, maybe not.

There are many variables, including: the procurement department's capabilities, the industry, the organization's specific processes, the systems used, etc. If you want a number that is true to your organization, you'd really need to track everything involved with an order; know the salaries of each individual who gets involved in an order; amortize the price paid for systems by the number of purchase orders generated over the life of the systems; know the telecommunications and/or paper costs; factor in overhead costs such as facilities, supervision, and benefits, etc.

The cost of obtaining such information would likely outweigh the benefits of having that information. This is a true example of a situation with the potential for "paralysis by analysis." So you may just want to pick a number out of the range of benchmarks I previously mentioned - like $100, $150, or $200 - being as conservative as you need to be to fit the culture of your organization, and go with it.

To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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1 comment:

Ed said...

Almost all procurement organizations seem to go through this exercise at some point. I agree with you, the key is to place a stake in the ground at what seems to be the appropriate target for your company and start making improvements.