The Hardings computed the burdened “administrative cost” of one purchase order in 2001 at $315.84:

                                     Time            Rate        Cost

Purchasing (12 steps)    1.98 HR    $80.77/HR   $159.92

Receiving (4 steps)         .62 HR     89.69/HR      55.61

Accounting (7 steps)     1.23 HR     81.55/HR     100.31

Total Process Costs       3.83 HR    $82.46/HR   $315.84

Every minute truly saved was $1.37 earned ten years ago. Does your vendor require more of those precious minutes than is absolutely necessary?

        If you think that Steps (1) through (8) sound like a lot of work, some of which may be hard to justify in a small dollar transaction, we certainly agree. And if you think this doesn’t sound like 3 hrs 50 min per order, maybe you’re right. But there are four common problems that have a huge impact on that average: Back-Orders, Returned Merchandise, Vendor Shipping Errors and Inventory.

The first HUGE PROBLEM is (A) BACK-ORDERS: the delivery (if there was one) that didn’t include one or more products. Your staff has to determine whether the vendor is aware the product didn’t arrive and maybe when it will arrive. At a MINIMUM, there will be an extra shipment (or two) to process in Steps (5), (6), (7) and (8). If it’s a surprise, your staff may engage in very expensive “panic purchasing” which requires all 8 Steps under time pressure PLUS the processing of the back-order (unless your vendor is competent to cancel the back-order) PLUS the processing of the return of the back-order on its arrival. Industry marketing expert Ralph Barnett estimated an average of 8 lines per hundred are back-ordered.

The second HUGE PROBLEM is (B) RETURNED MERCHANDISE: returning unwanted merchandise for credit. One or more of your employees has to determine who the vendor is (hopefully your system provides for this), the invoice number and date, and the return policy of this vendor. She has to contact the vendor, obtain “authorization to return” and arrange for shipping to pack the product and send it back to the vendor. It is not unusual to pay shipping charges or to have them deducted from the credit when you finally get it. Restocking charges are also not unusual.

Your vendor is processing a tsunami of these transactions every day and your bookkeeping and purchasing staff may have to nag. If you do not pay aggressive, systematic attention to these transactions, you will often fail to get credit (more than 100% loss). Your staff may decide not to return it rather than waste their time. Often the product desired must be re-ordered which requires all 8 Steps; often the re-order is a very expensive “panic purchase.” Industry marketing expert Ralph Barnett estimated an average of 9 lines per hundred are received damaged, defective or, more often, ordered wrong.

The third HUGE PROBLEM is (C) VENDOR SHIPPING ERRORS: your vendor shipped the wrong product or the wrong quantity or both. Industry warehousing and operations expert Robert R. Footlik estimated an average of 2 lines per hundred are shipped wrong. In one sense this is two more back-orders, necessitating all the work outlined in (A) above PLUS it’s two more returned merchandise transactions, necessitating all the work outlined in (B) above.

But it’s worse than that. It’s a morale-sapping one-two punch that leaves your employees wondering how they can be expected to perform at a high level when they can’t rely on the mailman or the office supplies vendor to perform the simplest of tasks. Your vendor is letting the whole team down.

The fourth HUGE PROBLEM is (D) INVENTORY: your inventory is a BLACK HOLE, not only for the labor wasted maintaining, distributing and replenishing it, but for the worthless merchandise hidden in it and for the ill-advised purchasing decisions it drives. The BLACK HOLE sucks in your employees’ time and the company’s money and returns almost nothing. An inventory is often built around products that were needed but not available; now they are available but not needed.