Purchasing comes at a cost, just going to put that out there.
So, before I discuss purchasing automation, do you know how much it cost your business to create a purchase order (PO)? From experience, few businesses have any idea how much it actually costs them to generate a PO. Even worse, a substantial portion of these businesses don’t care. That’s where the opportunity arises. Because if businesses did know, the automation topic will quickly rise to the surface with the goal of reducing this unseen cost.
This is a core driver as to why I often use PO Automation as a KPI.
The thought of automating the PO creation process triggers a set of questions that starts the journey to the next level and pushes more effort to the front to the process, but more on this in a minute. Additionally, this helps to create the burning platform needed to push teams out of their comfort zone. For various reasons, I often come across Purchasing Teams smack-dab in the middle of this ‘no-man’s land’ which is also a reason I felt the need to write about it.
As mentioned in my previous articles, KPI’s are built and implemented to ensure the ‘comfort zone’ stays at arm’s length. I’m a firm believer that everything can be improved and a well drafted KPI can be the catalyst to inspire innovation out of necessity to hit the target.
PO Automation
Automating your transactional purchasing processes can provide a significant return on the investment once you have calculated the cost, but for me, the ROI (return on investment) and cost calculation is only necessary because you may need additional resources initially to enable this automation. I’m more focused on using tools that you already have at your disposal to do what they were built to do. Converting a requisition into a PO is fundamentally simple once you have all the data that you need to generate the PO, so why not let your ERP create the PO once you have this data? Would you rather have a Purchasing Officer whose role is centered around conversion of requisitions into PO’s or a Purchasing Data Administrator whose role is centered around collecting and managing data that drives the creation of PO’s? Being proactive is always more effective then reactive.
Services aside, materials and all the data that you need to automatically create a PO is quite achievable. If you take the time to catalogue your materials AND source them effectively with all the data built into your ERP system, you will begin to change how your business thinks and operates. It’s more effective to have a purchasing resource collecting data and performing basic negotiations than reacting with little value capture. In most cases all you need to do is ask for a discount to get one, but so very few people ask. Not much negotiation training required to do that! Listed below are the building blocks to calculating your purchasing cost.
The six points below form the structure needed to calculate your Purchasing Cost.
- Requisition (Req) Creation – Manual requisitions consume a lot of time and therefore cost more. MRP Generated requisitions are instantaneous and cheap.
- Requisition Release – The average time it takes your business to release req's. Who releases your req’s and how many levels? Each level is an additional cost.
- Req to PO Conversion Process – Manual conversions are more expensive especially when changes are required. Automated POs are obviously cheaper but if the data going into them is poor, changes will be required which will drive up costs.
- PO Expediting – How many and what is the average time per line item to expedite?
- Goods Receipting – Average time to goods receipt a PO line item.
- Invoice Processing – Manual versus Automated payments.
Cost of software
Total cost of software can be calculated from a transactional perspective. Calculating the cost is not simple, but worth the effort. It will give direction and focus to the Purchasing Team. The following link will help you on your journey but be careful of falling down a rabbit hole: Purchase order cost - Benchmarks and how to calculate your own (procuredesk.com)
The Perfect PO using Catalogued Materials
When I work with businesses to help them move down the purchasing cost curve, I will often refer to a metric that I call The Perfect PO %. The ensuing conversations help to paint the picture of what an automated purchasing environment looks like. Let me first define what a Perfect Order is.
Definitionof a Perfect PO: A Purchase Order that is automatically generated and transmitted to the Supplier where the goods are delivered to site, receipted into stock, and issued as per the delivery date with zero changes to the PO. The PO is processed through accounts payable and paid automatically.
Shown below is an example of the process.
- Demand is released into the Supply Chain for a material. The material has a buy-to-order stocking strategy.
- MRP runs and generates a purchase requisition. The material has a fixed source of supply that includes the supplier part number, lead time, and price. In SAP this comes from the Info Record or Outline Agreement and Source List.
- Req conversation program (ME59N in SAP) converts your req’s into POs. POs are electronically transmitted to the Supplier(s).
- Goods arrive on site and are inspected and receipted into stock.
- Invoice arrives and is auto processed and paid.
- Goods are issued to the work order when required.
NOTE: Within this process there are only three human touch points.
- The Demand Signal – the released work order from the maintenance team. If the WO is for a planned maintenance task, even this step is potentially automated!
- The goods receipt in the Warehouse.
- The goods issue out of the Warehouse.
The Not-so-Perfect PO process using catalogued materials will take longer and cost more (it is much worse when ordering free-text materials). The key reasonis that most purchasing processes are reactive to the demand coupled with an inefficient supply process.
So, how do you break out of the high cost purchasing cycle? Begin automating your POs. This will trigger a bunch of questions that will start you on a journey that is all good!
Please reach out if you have any questions or thoughts that you want to discuss.
Cheers,
Tim.
