Metric of the Month: Total Cost to Order Materials and Services per $1,000 Purchases

How do the process costs of ordering material and services break down for procurement leaders?

December 2016 Order materials and services 585821dbc6213

The process of ordering material and services includes planning, ordering, and executing the physical delivery of materials and services from suppliers to the points of need and use. Activities associated with this process typically include processing/reviewing requisitions, approving requisitions, soliciting/tracking vendor quotes, creating/distributing purchase orders, expediting orders and satisfying inquiries, recording receipt of goods, and researching/resolving expectations.

As shown in the graph, American Productivity and Quality Center’s (APQC’s) Open Standards Benchmarking in procurement shows that there is a significant difference between top performers and bottom performers with regards to the total cost to order materials and services. Top performers spend $10.30 less per $1,000 purchases for this process than bottom performers. For an organization making $1 billion in purchases annually, this would result in a difference of over $10 million in expenses associated with ordering materials and services. Given that a significant focus of the procurement function is on ordering materials or services from suppliers, this savings indicates an important opportunity for organizations to reduce operating costs.

Top-performing organizations spend less to order materials and services because they spend less on systems and personnel. Fewer full-time equivalents (FTEs) are needed for this process. Top-performing organizations make significant efforts to streamline their processes to enable efficiency.