Nobody wants to spend more money than necessary. I’m sure everyone can relate to trying to save money on purchases such as gasoline, insurance, cell phone service, groceries or travel and accommodations for that vacation you’ve been planning all year. It makes sense to shop around for the best deal on a vehicle or home. Why wouldn’t you do the same for your spares procurement?
I know this sounds cliché, but time is money. Take a look at your purchase order history over the last three months. Three months is the initial suggestion because it is a pretty good sampling of the number of POs issued during a specific period of time. Look at the number of POs created per vendor per week (and per day when applicable).
It’s important to know that the true cost of raising a PO can vary, some costing around $50-$60 and others $150 or more. So what are some of the fixed costs included in the cost of raising a PO? Fixed costs include overhead costs such as salaries, including benefits of every person who touches that PO and the parts purchased on it, as well as supervisors that approve the purchase requisition. These costs are incurred from the requisition stage and at every step until the part has been checked-in to the system, placed in its proper location in the warehouse, and the invoice is paid. These costs are based on time spent by employees, and can be lower for salaried employees than hourly. Costs can also include things you might not have thought of, such as electricity to run computer equipment and heat/ac.
For example, clerk, administrative and warehouse staff costs can accumulate as follows:
- Receive notification of need from personnel or system and clarify precise requirements; create and submit purchase requisition – 30 minutes.
- Create PO from approved requisition and submit to vendor – 15 minutes.
- Acknowledge receipt, compare items received with PO, and file if OK. If not, corrective action has to be taken – 15 minutes.
- Items received, checked-in, and placed in storage – 30 minutes.
- Forward invoice for approval to pay, pass invoice for raising check, write check, pass for signature, confirm its details on file, address envelope and mail – up to 2 hours.
- Send expense to cost center, send report to cost center, confirm entry – 15 minutes.
An example cost of management time is shown here:
- Approve purchase requisition; possibly confirm need first – 15 minutes.
- Approve invoice, with clarification – 15 minutes.
- Sign check, return to Accounts Payable – 15 minutes.
It’s important to define your own process steps and apply proper costs relevant to your organization. This will allow you to come to an approximate cost for raising a PO, which could be less than $50 or more than $150, depending on how complex your process is and how much staff are paid.
Variable costs are also included in raising a PO. Examples would include additional moneys used to account for time spent comparing price, contacting vendors and negotiating prices, which are not necessary on all POs.
When analyzing POs, examine the number of POs created for each individual vendor over the course of a week. It is a common occurrence for facilities to create over a dozen POs for one vendor in one week’s time (even instances of multiple POs being created for one vendor during one 8-hour shift). If the calculated cost of a PO lifecycle, including receiving and shelving items, is $100 each and 10 have been created for one vendor in a week’s time, you’re looking at $1000 per week ($52,000 per year) in processing paperwork.
Approx. Cost of PO Lifecycle x Total POs Created per Vendor per Week x 52 weeks = Total Cost of Raising POs for One Vendor per Year
Example for Vendor Acme Widgets:
$100 x 10 POs/wk = $1000/wk
$1000 x 52 weeks = $52,000/year
NOTE: This is representative of overhead costs only. This does not include part cost or shipping cost.
Try to consolidate orders as much as possible. Is it feasible to place orders once a week? Even placing orders twice per week can reduce overhead costs dramatically despite the added line items per PO.
How many POs are issued due to stockouts then have to be priority shipped? Priority shipping costs a small fortune, even though the cost is potentially insignificant when compared to equipment shutdown waiting on a part to arrive. Unfortunately, emergency ordering isn’t completely avoidable, even the most efficient organization will have to create an emergency PO every now and then. Evaluating part criticality, performing ABC analyses, and reevaluating min/max levels and an Economic Order Quantity (EOQ) will greatly help drive down emergency ordering, as well as having a robust cycle counting program in place to ensure inventory accuracy. Whatever you do, do not overcompensate by over-ordering and carrying parts that are unnecessary. Excessive inventory is a sure-fire way to drive your spares costs sky high.