Processing Costs: What POs Cost You & How to Avoid It

You’ve decided what you need to buy. Now, what?

You madly process POs. One PO after the next. 1, 3, 150 POs sent, every day. This is all you do. Source, process, chase and repeat. It must get done, but…

Skylink, Processing Costs

Skylink, Processing Costs

Do you know how much processing a PO costs your operation?

Each time you “cut” a purchase order you spend between $50 - $200 in processing costs.

Calculating the cost of a purchase order gives you a high level look into your processing habits and how much they cost you. And it’s a great I-know-what-I’m-talking-about conversation starter with your CFO. Try it.

Once you no longer focus just on direct price, you’ll begin seeing that all of your actions have a reaction.

PO processing costs is one of them…

Start Calculating The Processing Cost Of An Aircraft Part Purchase Order

Each operation is different when it comes to calculating their PO costs. There’s a lot of best practice theories. Just like everything else. They’ll tell you to calculate all of the salaries who deal with processing POs and divide it by the amount of POs processed in the given period.

That’s not entirely true.

There are many ways to debunk this calculation. The best place to start is for you  to concentrate on how you can reduce duplication. Not just inside your company, but eliminate it throughout your entire supply chain.

Now this doesn’t mean ignore all variable costs. Some operations will want to factor those into their calculation as well.

When you begin to calculate your cost, take a dive into your fixed and variable costs. If it makes sense, add them into your calculation.

Fixed Overhead Costs

Here’s a list of some fixed costs to consider:

  • Procurement salaries and hourly wages

  • Administrative overhead

  • Infrastructure

  • Employee benefits

  • Office space

  • Technology

Variable Costs

Now, take a brief look at your variable costs:

  • How many times do you have to follow-up with a supplier?

  • Telephone and internet charges

  • Physical goods like paper, pens and other office supplies

Once you have your cost, it’s time to think of how you can reduce, or better yet, eliminate these costs.

eliminate costs

eliminate costs

And That’s What A Vendor Managed Inventory Does--Eliminates Processing Costs.  

You now know what your processing costs are. What are you going to do about it?

One of the single biggest strategies you can adopt is a vendor managed inventory for your high usage expendables and consumables.

We’ve covered VMIs exhaustively in these posts:

But let's shed some light into what this means for you.

  1. Depending on the volume of POs you cut, expect to cut your processing cost by at least 50%.

  2. Dramatically reduce your shipping costs.

  3. Lower your inventory burden and holding costs.

  4. Reduce your AOG occurrences.

  5. Increase your productivity and efficiency.

Getting started with a vendor managed inventory solution is really simple. Just read this post and begin compiling your high usage material list.

Then, let your supply partner do the rest. Simple. Right?

Are you bogged down with PO processing activities? Comment below and tell us your story.