Objective:
To reduce the number of invoices processed without a purchase order to properly control and manage organizational spending centrally through the supply chain department
Calculation:
| Number of invoices with purchase orders | ||
| x 100% | ||
| Total number of invoices |
Target:
To be determined after establishing a baseline
Background Details
Rationale
Purchasing activity not controlled by the supply chain department is often purchased inefficiently, carrying a higher cost and degree of risk to the organization. This excludes low dollar value purchases procured through established alternate methods. Potential issues and problems that may arise from departments managing their own spending without sufficient supply chain expertise include:
- Rogue buying, or buying off contract, which impedes contract compliance and undermines product standardization efforts — in turn increasing costs to the organization;
- Compromised patient safety — for instance, if orders are placed without providing sufficient information for device licences, recalls or Material Safety Data Sheets (MSDS) tracking;
- Inefficient processes and high error rates, which has downstream implications for accounts payable and receiving, which are responsible for verifying the accuracy of documented receipts and invoices without a purchase order (PO) to match against; and
- Unprofessional or unethical business practices — for instance, supplier kickbacks — if the department is unaware of and not compliant with the purchasing policies and procedures and the supply chain code of ethics.
Expanding the scope of goods and services issued centrally by the supply chain department and covered by a PO will provide greater opportunities for savings and process efficiencies throughout the organization.
Benefits
Financial Stewardship
Greater control by the supply chain department over the purchasing of goods and services will
increase purchasing power and standardization.
Process Efficiency
Accounts payable staff will spend less time obtaining approvals and verifying invoice information from individual departments for invoices that do not have a purchase order. This is a far more timeconsuming activity than simply conducting a three-way match with the PO and receiving slip.
Similar efficiencies can be expected in the receiving department, since delivery information on a non- PO packing slip can sometimes be inaccurate or missing departmental information typically found on the receiving document for an item purchased with a PO.
Risk Management
The risk to the hospital will be reduced by centralizing and increasing control of spending under trained supply chain professionals. The supply chain department should have processes in place to manage and track device licences, recalls and MSDS, which all directly affect patient and employee safety.
Underlying Leading Practices
Collaborative Planning
The supply chain department must work collaboratively with their customers to understand their
requirements and transition more goods and services under the supply chain department’s control,
thus reducing non-PO spending.
Strategic Sourcing
By rationalizing the supplier base through purchasing volumes and spend analysis, organizations can focus on selecting strategic suppliers and maximizing relationships. For this to be effective, purchases must be made by issuing purchase orders and be controlled centrally through the supply chain department.
Tight Supply Chain/Accounts Payable Organizational Relationship
Working collaboratively, the supply chain and accounts payable departments can implement processes to reduce the number of invoices received without a PO. Accounts payable can identify departments that are not compliant based on the non-PO invoices received, and the supply chain department can work with these areas to assume responsibility for purchases.
“End to End” eSupply Chain
Automation of procurement processes increases the ease of use for customers, which will support compliance with the standard PO process and reduce labour costs associated with purchasing, receiving, and accounts payable.
Target Considerations
Establishment: No members of the Working Group are currently tracking this metric in their organization. Consequently, setting an appropriate target is not possible at this time. The Working Group recommends that the metric be reviewed after six to twelve months once a baseline has been established to determine an appropriate target.
Related Metrics and Standards
| Related Metrics: | Related Standards: |
|---|---|
| 3.1 Number of Purchase Orders in One Month 4.3 Percentage of Items Activated in the Master File in One Month 5.1 Percentage of Invoices Paid within Due Date |
1.1 Purchasing Policies and Procedures 1.2 Audit Standards and Processes 2.1 Segregated Approval and Authority Schedules 3.2 Low Dollar Value Transactions Strategy |
Implementation
Calculation Parameters
Calculation:
| Number of invoices with purchase orders | ||
| x 100% | ||
| Total number of invoices |
| Variable | Include | Exclude |
|---|---|---|
| Number of invoices with purchase orders (POs) | Include total number of invoices entered into the accounts payable system in a one-month period that have a corresponding PO AND for the types of orders and categories below | Do not include invoices that do not have a PO OR the types of orders or categories below |
| Total number of invoices | Include total number of invoices entered into the accounts payable system in a one-month period (regardless of whether they have a corresponding PO or not) that are both for the following types of orders:
|
Do not include invoices that are either for the following types of orders:
|
Data Accessibility Rating
CHALLENGING – Data are available but require analysis and custom reporting
Possible Data Sources
Electronic
Accounts Payable Module:
Most financial reporting systems should be able to provide monthly reports on the Number of invoices with purchase orders and Total number of invoices received. Custom reporting could be required.
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:
- If supply chain staff are unable to absorb the extra workload from independently purchased nonpurchase order spend, the costs and benefits of the following options should be considered:
- Reviewing the supply chain department’s workload to assess spare capacity;
- Prioritizing categories of spend and departments’ ordering to be absorbed;
- Introducing new technology to automate processes;
- Implementing time-savings initiatives such as purchasing cards for low dollar value items; and
- Requesting additional staff to help manage workload.
- Organizations should review spending by all departments over the previous year to find out how much non-PO spending took place. This information will help the organization to prioritize which departments’ ordering should be absorbed into the supply chain department.
- Organizations might be hesitant to increase supply chain resources to centrally manage all purchasing activity. The cost of these additional resources should be compared to the savings achieved from process efficiencies, improved pricing and the reallocation of clinician time to patient care.
