Objective:
To increase the use of alternative, easy-to-use purchasing methods for low dollar value purchases
Calculation:
| Number of low dollar value purchase orders | ||
| x 100% | ||
| Number of purchase orders |
Target:
≤ 5% low dollar value purchase orders
Background Details
Rationale
Using alternative methods for placing low dollar value orders will reduce the number of low dollar value purchase orders (POs) being issued by the supply chain department. Low dollar value orders are generally low risk and require less control by the supply chain department. The supply chain department should retain central control of the process for low dollar value orders, but ordering can be decentralized and be made directly from customers. This improves efficiencies and reduces the workload for supply chain and accounts payable staff.
Benefits
Financial Stewardship
Reducing the number of POs, by using alternative methods for low dollar value orders, results in savings to the organization by:
- Establishing system contracts for low dollar item with more favourable pricing;
- Reducing PO transactional processing costs; and
- Reducing costs for suppliers to process POs, providing the opportunity for the organization to share the supplier savings by including mechanisms for shared partnership agreements with suppliers.
Process Efficiency
Processing fewer POs will reduce the 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.
Supplier Relationships
A focus on strong supplier relationships and encouraged communication and collaboration with suppliers will facilitate establishing alternative methods that are favourable for the organization and the supplier for placing low dollar value orders.
Underlying Leading Practices
Definition of Acquisition Strategy
Determining appropriate purchasing methods for low dollar, low risk items will result in freed-up capacity in the supply chain and accounts payable departments to focus on more strategic activities related to higher-risk purchases.
Strategic Sourcing
Reducing the number of suppliers and standardizing products encourages consolidation of orders to fewer suppliers and reduces the number of single-line, low dollar value orders.
Contract Centre of Excellence
Negotiating organization-wide contracts, or system contracts, for low dollar value items, such as paper and office supplies, is a useful tool for reducing low dollar value POs. Contract terms should provide favourable pricing and allow customers to place orders directly with the supplier.
The supplier sends a summary invoice periodically for all purchases made in that period by the organization. This significantly reduces both the number of POs issued, by allowing direct ordering, and the number of invoices received and processed by consolidating orders onto a summary invoice.
Purchasing Cards
Distributing purchasing cards for departments that have frequent low dollar value, one-off supply needs will dramatically reduce the number of low dollar value POs that the organization is issuing and the number of corresponding invoices it is processing.
Strategic iSCM Leadership
Policies that need to be executed across the organization, such as the implementation of systems contracts and purchasing cards, require senior management support to be universally adopted and achieve their intended outcomes.
Target Considerations
Establishment
The target of <5 per cent for this metric assumes that organizations implement a number of suitable solutions, such as purchasing cards and systems contracts, to reduce the number of low dollar value POs.
Impact of Other Metrics
Initiatives to reduce the number of low dollar value transactions will lower the overall number of POs. This will have a positive effect on a number of other metrics, including 3.1 Number of Purchase Orders in One Month, 3.4 Average Lines per Purchase Order and possibly 3.5 Average Number of Purchase Orders Placed to Top 10 Suppliers in One Month.
Related Metrics and Standards
| Related Metrics: | Related Standards: |
|---|---|
| 2.1 Average Cost to Issue a Purchase Order 2.3 Operating Costs as a Percentage of Expenditures 3.1 Number of Purchase Orders in One Month 3.3 Number of Purchase Orders Placed per Full Time Equivalent in One Month 3.4 Average Lines per Purchase Order 3.5 Average Number of Purchase Orders Placed to Top 10 Suppliers in One Month 4.4 Percentage of Items Inactivated in the Master File in One Month |
1.1 Purchasing Policies and Procedures 1.2 Audit Standards and Processes 3.2 Low Dollar Value Transactions Strategy |
Implementation
Calculation Parameters
Calculation:
| Number of low dollar value purchase orders | ||
| x 100% | ||
| Number of purchase orders |
| Variable | Include | Exclude |
|---|---|---|
| Number of low dollar value purchase orders | Include all POs that are both for low dollar value: total PO amount is less than $100 before tax and surcharges AND for the types of orders and categories below |
Do not include POs that are either for greater than $100 before tax and surcharges
OR the types of orders and categories below |
| Number of purchase orders | Include all orders released to suppliers in a one-month period that are both for the following types of orders:
for the following categories:
|
Do not include orders that are either for the following types of orders:
for the following categories:
|
Data Accessibility Rating
CHALLENGING – Data are available but require analysis and custom reporting
Possible Data Sources
Electronic
Procurement Module:
The information systems in most hospitals do not offer standard reporting for the Number of low dollar value purchase orders. Custom reporting may be required. E-commerce providers may be able to provide data on the value of POs sent electronically.
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, 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:
- Alternative low dollar value solutions could be used inappropriately if not adequately monitored. It is critical that appropriate controls are established and user training and periodic audits are conducted to ensure adherence to policies and procedures. Although fewer resources will be required to issue POs, resources must be assigned to manage the alternative solutions and ensure that these methods are not misused. See standard 3.2 Low Dollar Value Transactions Strategy for recommendations.
- To ensure that the low dollar value measures adopted by the organization have appropriate controls in place, ensure the financial department auditors are closely involved in initiatives to provide guidance.
