Objective:
To reduce transactional costs by consolidating purchase order lines into fewer purchase orders
Calculation:
| Number of purchase order lines |
| Number of purchase orders |
Target:
≥ 4 lines/PO
Background Details
Rationale
This metric is important to better understand how well the supply chain department is utilizing its purchase orders (POs), which is a reflection of how effective the upfront planning and supply chain systems are. Consolidation of multiple lines into fewer POs will result in savings by reducing the number of PO transactions processed through purchasing, receiving and accounts payable.
Benefits
Financial Stewardship
Savings from fewer POs will result in:
- Reduced transactional processing costs for the organization; and
- Reduced processing costs for suppliers, providing the opportunity for the organization to negotiate shared partnership agreements into supplier contracts to share supplier savings.
Process Efficiency
Consolidation of purchase order lines into fewer POs will result in efficiencies from reduced workload for:
- Supply chain staff to issue POs;
- Suppliers to process POs, deliver items and issue invoices;
- Receiving staff handling packing slips and filling in header information; and
- Accounts payable to process fewer invoices.
Underlying Leading Practices
Identification of Product Standardization Opportunities
Standardizing the selection of products and suppliers reduces the number of single-line orders for infrequent products or infrequently used suppliers. This allows the supply chain department to convert from smaller orders from more suppliers to larger orders from fewer suppliers.
Contract Centre of Excellence
A single repository of contracts and contract knowledge enables the supply chain department to procure multiple products and services from a smaller number of strategic suppliers, resulting in increased number of lines per PO.
Automated Procurement Tools
For electronic requisitions for supplies and services, new technologies or enhancements to existing information systems are necessary to facilitate consolidating orders.
Transportation Planning & Delivery Frequency
To optimize the number of PO lines, organizations should consolidate POs to match scheduled delivery times and minimum lead times for ordering products (not including rush orders) for each vendor.
Logistics Process Automation
Electronic receiving capability reduces the burden on receiving staff and error rates associated with manually receiving POs with many lines. Because electronic receiving eliminates manual line-by-line matching of packing slips to POs, receiving staff can process POs with 10 or more lines with few errors.
Target Considerations
Establishment
The healthcare sector is gradually adopting automated technologies, such as bar coding, to significantly improve receiving efficiencies. While manual processes continue to dominate, the minimum target for this metric is an average of four lines per PO. Once organizations transition to more automated technologies, the target for this metric should be significantly increased.
Related Metrics and Standards
| Related Metrics: | Related Standards: |
|---|---|
| 2.1 Average Cost to Issue a Purchase Order 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 3.5 Average Number of Purchase Orders Placed to Top 10 Suppliers in One Month |
1.1 Purchasing Policies and Procedures 3.1 Contracts Database |
Implementation
Calculation Parameters
Calculation:
| Number of purchase order lines |
| Number of purchase orders |
| Variable | Include | Exclude |
|---|---|---|
| Number of purchase order lines | Include the number of lines on all of the POs as indicated below | Do not include lines from excluded orders as indicated below |
| Number of purchase orders (POs) | Include all orders released to suppliers in a one-month period that are both for the following types of orders:
|
Do not include orders that are either for the following types of orders:
|
Data Accessibility Rating
EASY – Data are available for computation
Possible Data Sources
Electronic
Procurement Module:
The Number of purchase orders and the Number of purchase order lines are typically tracked automatically by an electronic procurement system and can be retrieved in month-end standard reports. Many systems track the metric for average lines per PO as part of standard reporting. However, these systems might not break out the data by the specified categories.
Manual
If electronic reporting is unavailable, the organization could consider conducting manual counts, selecting a representative sample, or using a logging method throughout 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.
Implementation Challenges
Challenges:
- Some organizations have information systems that do not allow consolidation of stock and non-stock on the same PO. When reporting against their peers, these organizations should document their system’s limitations.
- Some organizations may have difficulty excluding POs for food and pharmacy. These organizations should document the resulting inconsistencies.
- Receivers using manual receiving processes generally begin having difficulty managing POs with 10 or more lines. Electronic receiving capability will allow organizations to increase receiving capacity while also enhancing accuracy.
- Scheduled ordering from suppliers must be adequately managed to maintain service levels to customers and avoid an increase in number of rush orders.
