Objective:
To consolidate and reduce the number of purchase orders issued to the top 10 most active suppliers
Calculation:
| Σ x = Top 10 suppliers |
Number of purchase orders issued to “supplier x” |
20 days |
||||||
| x | ||||||||
| 10 | Number of workdays in the month |
Target:
≤ 15 POs/month
Background Details
Rationale
Reducing the number of individual purchase orders (POs) issued to the most active suppliers represents a significant opportunity for savings. By scheduling and consolidating POs to the same supplier, the total number of transactions can be reduced. As a result, ordering and invoicing costs are reduced for both the organization and suppliers.
This metric may also be useful as an indicator for the number of rush orders processed outside of regular shipments. A high rate of POs per supplier may suggest a high incidence of rush orders issued to that supplier.
Benefits
Financial Stewardship
By consolidating purchase transactions into fewer POs for the top 10 suppliers, savings can be achieved through:
- Reduced transactional processing costs for the organization; and
- Reduced processing costs for suppliers, providing the opportunity for the organization to share the supplier savings by negotiating shared partnership agreements into supplier contracts.
Process Efficiency
Fewer POs result in efficiencies from reduced workload for:
- Supply chain staff to issue POs;
- Suppliers in areas such as processing, delivery and invoicing;
- Receiving staff to process packing slips and fill in header information; and
- Accounts payable staff to process the smaller number of invoices received.
Supplier Relationships
Reducing the number of POs sent to an organization’s top 10 suppliers not only has a positive effect on the supplier’s finances and efficiency, but also contributes to a strong supplier relationship. This demonstrates the organization’s focus on supply chain improvement and respect for their suppliers. It encourages communication and collaboration on further enhancements to the supply chain processes.
Underlying Leading Practices
Supplier Relationship Management
Collaboration with suppliers for mutual process improvements contributes to supplier relationship management. This sets the basis for future process improvements, technology incorporation, better scheduling of orders and deliveries, and easier conflict resolution. Strong relationships with key suppliers can have a profound impact on cost reductions, other savings and risk management.
Transportation Planning & Delivery Frequency
Organizations can consolidate their POs by scheduling specific times for ordering products (not including rush orders) from specific vendors. Scheduling of supplier order days and delivery days reduces order processing and transportation costs.
Logistics Process Automation
Implementation of electronic receiving capability permits a greater number of purchase order lines per PO to be processed. POs with many lines can be difficult for receiving to manage using manual matching of packing slip items to PO line items. Electronic receiving capability facilitates the receiving process, allowing hospitals to increase the number of purchase order lines per PO with minimal effect on the logistics process.
Process Productivity Tools
On-line requisitioning, automated requisition consolidation, electronic POs and automated scheduling processes can be implemented to help reduce the overall number of POs and labour resource requirements. Orders of supplies and services are typically communicated to supply chain staff through a mix of manual and electronic requisitions. For manual orders, consolidation targets can be reached readily through changes in practice. For electronic requisitions, implementing these tools or enhancements to existing information systems will assist in achieving these targets.
Target Considerations
Establishment
The Working Group has limited experience with measurements that focus on a designated group of suppliers. Leading practice suggests that the target should be three to five POs per week for top suppliers.
Impact of Other Metrics
Improvements to the number of POs issued to top 10 suppliers should support metric 3.4 Average Lines per Purchase Order. Benefits will also flow to accounts payable department and suppliers.
Adjustment Factor
Due to the different lengths of months and the presence of holidays, the number of working days per
month varies from 19 to 23. This could have an impact of over 20 per cent difference from month to month, making comparisons difficult. To avoid the issue, the calculation includes an adjustment factor (20 divided by the number of working days in the month) to normalize each month’s data to a 20-day month (four full work weeks).
Related Metrics and Standards
| Related Metrics: | Related Standards: |
|---|---|
| 3.1 Number of Purchase Orders in One Month 3.2 Percentage of Rush Purchase Orders 3.4 Average Lines per Purchase Order 3.8 Percentage of Low Dollar Value Purchase Orders |
1.1 Purchasing Policies and Procedures 2.2 Inventory Policy 5.1 Supplier Performance Management Process |
Implementation
Calculation Parameters
Calculation:
| Σ x = Top 10 suppliers |
Number of purchase orders issued to “supplier x” |
20 days |
||||||
| x | ||||||||
| 10 | Number of workdays in the month |
| Variable | Include | Exclude |
|---|---|---|
| Top 10 suppliers | Include the top 10 suppliers ranked by activity (i.e., highest number of POs issued in a month) for stock and non-stock items | Do not include all other suppliers |
| Number of purchase orders (POs) issued to “supplier x” | Include all POs issued in a month for each of the suppliers above that are both for the following types of orders:
|
Do not include POs issued to all other suppliers
OR
the following types of orders:
|
| Number of workdays in the month | Include all regularly scheduled working days in the month | Exclude:
|
| 20 days | Days in month adjustment factor |
Data Accessibility Rating
CHALLENGING – Data are available but require analysis and custom reporting
Possible Data Sources
Electronic
Procurement Module: For electronic reporting of Number of purchase orders issued to “supplier x”, the organization’s information systems must be able to report on the number of POs issued each week to individual suppliers. The information system must be able to sort these data by activity to determine the Top 10 suppliers. For most of the information systems currently in use, this would require custom reporting.
Manual
If organizations were unable to pull this information from their information systems, they could consider asking suppliers to provide the number of POs issued. However, caution is advised with this approach as suppliers would likely use different reporting methods, which would lead to inconsistencies in the data.
The organization could also 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 calculation for the Number of workdays in the month should be based only on standard workdays — exclude statutory holidays and other organization-wide acknowledged days off.
Implementation Challenges
Challenges:
- Severely reducing the number of POs per supplier may result in reduced and unacceptable service levels to customers. By monitoring the incidences of and reasons for rush orders and stock-outs, the organization can set appropriate targets for this metric.
- An organization’s information system and technological capacity will affect its ability to meet the target. Each hospital should examine and attempt to minimize the impact of the following issues:
- ability of the organization’s information system to consolidate requisitions;
- ability of the information system to manage combining stock and non-stock purchase lines on a single PO; and
- ability to receive deliveries with many PO lines on a single packing slip.
