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Monitor and Reduce the Purchase Order Lifecycle for Financial Performance
Richard Wilhjelm, Compliance Networks (reprinted with permission)
In my previous article dated July 11th, we discussed how critical on-time and complete shipments are to the retailer's margin targets. In addition to not meeting margin targets, we also discussed the impact to the retailer's brand as a direct result of poor on-time/complete performance or out of stocks (OOS). A big part of ensuring on-time/complete performance is measuring and understanding the retailer's purchase order lifecycle and anticipating the risks before they occur. In part three of the five steps retailers can take to mitigate margin risk we will examine the importance of not only monitoring the retailer's purchase order lifecycle, but reducing it!
The Purchase Order Lifecycle
First, what is the purchase order lifecycle? Chronologically speaking, it is the amount of time it takes a retailer to create and receive a purchase order. While the calculation appears simple, the ramifications are enormous from not only an operational perspective, but a financial one as well. The purchase order lifecycle isn't just a calculation; it's a book that tells the story or even paints a picture of your supply chain's performance. And contained within this book are individual chapters, individual steps along your supply chain path that reveal not only areas of excellence, but more importantly, areas of opportunity for the supply chain professional.
Every Purchase Order Tells a Story
Taken individually, each purchase order describes an event and a timeframe. Purchase order #123 took 23 days and we received 7 widgets. Taken collectively, the purchase orders create a consistent pattern of performance that can be leveraged to make future buying, operational and financial decisions. Vendor ABC was on-time 98.9% of the time and had a fill rate of 96% during our peak season. What merchant would not like to have that information to mitigate vendor risk? Understanding your vendors past results is key to predicting their future performance. Understanding where your vendors are going to fail you can be just as important as when they will perform to your expectations. "So remember every picture tells a story don't it" goes the closing line of Rod Stewart's landmark 1971 song. (I'm hopelessly stuck in the late 60's/early 70's rock genre.) But more relevant to the supply chain professional, the closing line might read "every purchase order tells a story don't it." While the value of measuring purchase orders in aggregate to create the PO lifecycle may be apparent, how and what data elements to capture may not.
Data Elements of the Purchase Order Lifecycle
What are the key elements of the purchase order lifecycle? The more appropriate question may be, what data elements can you get? Obviously, the more we can capture, the clearer our picture of our vendor's overall performance becomes. Going back to our book analogy, if PO creation is the table of contents and receipts is the ending, the more chapters or PO milestones we have in between, the more vivid our story becomes. Common elements I see included in PO Lifecycle reports include PO create date, start date, stop date, ASN date, pick up date, ship date, arrival date, troubles and audits just to name a few. If retailers capture and aggregate this information, they can identify vendor performance patterns (and opportunities) such as average create to start, average create to stop, average create to ASN, average pick up to arrival and average arrival to first receipt. Once we see the vendor's overall performance we can easily identify the areas of opportunity to reduce the overall PO Lifecycle.
As a supply chain professional you may be asking yourself and saying, "Why should I measure the purchase order lifecycle?" It sounds tedious, time consuming and I have 10 other "high value" projects sitting on my desk. The answer is simple, albeit cliché, but simple. As the old Bonnie & Clyde saying goes, "that's where the money is." Retailers invest an inordinate sum of money in safety stock or additional supply chain days to ensure merchandise is available at the point of impact. Much of this safety stock could be eliminated if the retailer had a firm understanding of what their purchase order lifecycle is. By understanding the individual elements of the purchase order lifecycle and the time required to complete them, the retailer can leverage the information to reduce supply chain days. To get a high level example of what this would mean to your organization, take your total inventory value from the previous year and divide it by 365 days. As you can see, each incremental supply chain day represents a significant financial opportunity to your company. I had one VP of Supply Chain from a major sporting goods retailer confirm that he was able to take 2 weeks out of his supply chain by better understanding his purchase order lifecycle. To learn more about the impact of supply chain performance to operating cash flow, I highly recommend you revisit David Schneider's earlier post on SCD titled "The One Best Supply Chain Metric."
By identifying and then reducing the purchase order lifecycle, retailers can significantly impact their organizations' overall performance. Financial benefits a retailer can expect to receive include a reduction in overall working capital, a reduction in DC expenses and inventory carrying costs and an increase in return on invested capital (ROIC). An improvement in each of those key areas will put a smile on any CFO's face. For the supply chain professional looking to be viewed less as a cost center and more of a margin contributor, this is an excellent place to start.
For a sample of a purchase order lifecycle report drop me a line at firstname.lastname@example.org.
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Richard Wilhjelm currently serves as VP, Sales & Business Development for Compliance Networks, a supply chain performance improvement solution provider. Richard has over 25 years of sales and marketing experience in the supply chain software industry. His skills in sales management and field operations have yielded tangible results within recognized companies such as Logility, Inc., JD Edwards World Solutions Company and Prophet 21, Inc. Richard received his Bachelor of Science degree in Finance from the University of Florida and currently resides in Weston, FL with his wife and three daughters. For more information, please visit www.compliancenetworks.com.