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 the 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.
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