Objective:
To maximize the productivity of supply chain staff associated with purchasing goods and services, including supplier management, contract management, order processing and problem resolution
Calculation:
| Purchasing labour costs |
| Number of purchase orders |
Target:
≤ $20/PO
Background Details
Rationale
Measuring the labour costs relative to the number of purchase orders (POs) provides insight into progress towards modernizing supply chain processes. Improvements in such areas as product sourcing, supplier development and contract management should result in a reduction in the cost to issue a PO.
This metric is a similar measure to metric 3.3 Number of Purchase Orders Placed per Full-Time Equivalent in One Month, but it is broader in scope, encompassing not only the processes involved in issuing a PO, but also the labour costs of the full range of sourcing and purchasing activities.
Benefits
Financial Stewardship
Savings achieved from reduced administrative costs can free up labour capacity to be redeployed into strategic value-add or other activities.
Process Efficiency
Creating efficiencies through redesign and automation of purchasing processes reduces manual transactional processing tasks. In addition, by centralizing sourcing and contracting activities and implementing a contract database, the number of active items under contract will increase and the time required to create POs will be reduced.
Employee Productivity/Satisfaction
Productivity will be increased by redesigning purchasing processes to eliminate duplicate and unnecessary tasks. In addition, assigning responsibility for specific types of activities or commodities under staff with specialized knowledge will allow staff to develop greater expertise in a specific area, resulting in staff being more productive and achieving greater work satisfaction.
Underlying Leading Practices
Contract Centre of Excellence
Establishing a contract centre of excellence with staff with specialized knowledge and focus enables an organization to negotiate strategic longer-term contracts with qualified suppliers efficiently and effectively.
Purchasing Cards
Use of purchasing cards and other alternative solutions for low dollar value transactions reduces the workload on purchasing and accounts payable staff, allowing time for more strategic, value-added activities.
“End to End” eSupply Chain
Electronic commerce (EDI/XML) transactions enable faster, more streamlined processing of POs.
Process Productivity Tools
On-line requisitioning and automation of POs and workflow approvals reduce errors and improve turnaround time for order fulfillment.
Target Considerations
Establishment
Currently, significant discrepancies exist among the members of the Working Group in measuring the cost of issuing POs. Many organizations include one or more secondary or peripheral elements, such as inventory management, shipping and receiving, central storeroom, printing and linen services in addition to core elements of the process. As a result, their calculations for the actual cost of issuing a PO range from $5 to $50. Based on their expert experience, the Working Group recommends an initial target cost of $20 per PO. The target should be re-evaluated in six to twelve months.
To arrive at an accurate cost of issuing a PO, organizations might have to break out these secondary and peripheral expenses. A common approach is necessary to enable consistent measurements and set appropriate targets across multiple organizations.
Future Opportunities
In the future, this metric could be expanded to include shipping and receiving and accounts payable. Inefficiencies and errors inherent to, or caused by, purchasing processes can have a profound negative impact on these downstream functional areas. Including the costs of the related function would help identify inefficiencies to drive improvements in the purchasing process that would have a resulting positive effect on the overall process.
Impact of Other Metrics
Hospitals will not become practice leaders in supply chain management through cost reduction initiatives alone; processes and service quality must also be improved. Accordingly, this metric should be considered in conjunction with metrics such as 1.2 Purchasing Response Time and 4.2 Fill Rates to Customers to ensure that cost efficiency is balanced with the delivery of high-quality service.
Related Metrics and Standards
| Related Metrics: | Related Standards: |
|---|---|
| 1.1 Percentage of Active Items under Contract 1.2 Purchasing Response Time 2.3 Operating Costs as a Percentage of Expenditures 3.1 Number of Purchase Orders in One Month 3.2 Percentage of Rush Purchase Orders 3.3 Number of Purchase Orders Placed per Full-Time Equivalent in One Month 3.4 Average Lines per Purchase Order 4.2 Fill Rates to Customers |
1.1 Purchasing Policies and Procedures 3.1 Contracts Database |
Implementation:
Calculation Parameters
Calculation:
| Purchasing labour costs |
| Number of purchase orders |
| Variable | Include | Exclude |
|---|---|---|
| Purchasing labour costs | Include all supply chain labour costs associated with purchasing, including:
|
Do not include non-purchasing-related labour costs including:
|
| Number of purchase orders (POs) | Include all orders released to suppliers in a one-month period that are both the following types of orders:
|
Do not include orders that are either the following types of orders:
|
Data Accessibility Rating
EASY - Data are available for computation
Possible Data Sources
Electronic
Financial Reporting Module:
The staff expenses portion of the Purchasing labour costs is available in the supply chain department’s monthly financial reports. Estimates may be required for managers and staff with jobs involving multiple responsibilities. Ontario hospitals submit this information to the Ontario Ministry of Health and Long-Term Care annually in their Ontario Hospital Reporting System (OHRS) submissions.
Procurement Module:
The Number of purchase orders would be tracked automatically by the healthcare organization’s electronic procurement system and can be retrieved in month-end standard reports. Some systems may be unable to break out data by the specified categories.
Manual
If electronic reporting is unavailable for the Number of purchase orders, the organization could consider conducting manual counts, using a logging method throughout the month or selecting a representative time period (one day, one week, etc.) to collect a subset of data to extrapolate for the month. Organizations should select the option that balances the cost of collecting the data and the associated accuracy with the benefit of reporting the metric.
The supply chain department’s monthly financial reports should provide data on staff expenses, but estimates may be required for managers and staff with jobs involving multiple responsibilities to determine the final Purchasing labour costs corresponding to the in-scope and out-of-scope costs described in the table above.
Implementation Challenges
Challenges:
- Supply chain modernization pays dividends in the long term through improved processes, better service and lower costs, but it does require upfront investment. These initiatives could temporarily raise the average cost of issuing POs. Organizations should not be deterred. For a broader picture of the costs and benefits of supply chain transformation, this metric should be viewed in conjunction with metrics such as 2.3 Operating Costs as a Percentage of Expenditures and 3.4 Average Lines per Purchase Order.
