How to Calculate the Cost of a Purchase Order

Every time you place an order for parts, whether you’re buying a bulk lot of class C components or you just need a handful of fasteners and screws, some of your funds will go toward the purchase order (PO) itself. There are many factors that contribute to this cost, which can in some instances result in original equipment manufacturers (OEMs) spending more money on the order than the value of the parts being purchased.

“Just as all businesses are different, so the true cost of raising a

[PO] will vary,” Carl Kockelbergh, the practical development officer at the Chartered Institute of Purchasing & Supply, wrote on the CIPS Supply Management site.

However, there are ways by which OEMs can cut down on this expense, such as consolidating orders and establishing vendor managed inventory (VMI) programs. To determine the average cost of a PO, you first need to examine the various expenses you will incur for creating and submitting the document. There are both fixed and variable elements.

Fixed overhead costs
Overhead expenses like the salaries of those involved in procurement and their supervisors all contribute to the cost of creating a PO. This applies on both the OEM and supplier’s sides, but the cost is typically passed on to the customer. You also have to factor in things like administrative overhead, infrastructure and even employee benefits, as all of these expenses are incurred while an employee is generating purchase orders. To be able to do this job successfully, the employee will likely need to use a computer, which means he or she will also need a space to work from and electricity to run the equipment as well as lighting and heating or air conditioning. While this may seem to be a variable cost, the overhead is typically low on these factors, and can often be parsed out in set amounts.

Supply Management pointed out that some of these expenses, such as salaries, may not be included in the cost of the PO depending on how budgets are allocated. When workers are paid an annual salary, the cost of their time to complete POs may be negligible, while paying hourly workers will affect the cost of the PO much more. In the latter case, you can estimate how much time it takes employees to complete various tasks, from creating the PO to sending it off to the supplier to getting approval from a manager. Then you can get a ballpark idea of how much labor is being spent on the order.

Variable costs
These expenses are much harder to gauge when trying to figure out the cost of initiating a PO, because they are not going to be the same every time. For instance, a PO for class C components may require the staff involved to get on the phone with the supplier several times before everything is finalized, especially if ordering a custom part. Another PO might only involve two external phone calls. Other variable costs that can influence the total expense include things like postage and fax charges, time spent using computers, and any physical goods used to complete the task, such as paper, pens and other office supplies.

The Purchasing Certification Blog reported that, because of the variable costs, it can be very difficult to actually determine the cost of issuing a PO, and the cost of attempting to find out would likely not be worth the effort. However, there’s no doubt that creating POs costs money, so finding ways to reduce the amount of orders can take some pressure off your budget. One way to lighten to load can be to set up a VMI program, which allows the ordering process to be automated. In turn, you won’t need to fill out a PO for every shipment of parts that comes in, and a VMI partner will allow you to reduce the number of suppliers as well, further reducing the amount of paperwork needed.

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2018-03-16T07:46:25+00:00August 25th, 2014|Categories: Inventory Management|

About the Author:

Aaron is the Marketing Director at Falcon Fastening Solutions, Inc. He is focused on sharing Falcon's unique approach to fastening and class C production component supply chain solutions with equipment manufacturers.

Fasteners and Class C Component Supply

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