By Marisa Brown
Cycle time measures are an important category in a balanced set of process measures. Cycle time reduction efforts can improve the turnaround time of key activities and also improve staff productivity and the overall cost of the procurement function.
A key measure of procurement cycle time is the number of hours needed to place a purchase order (PO). PO cycle time is a critical key performance indicator of an organization’s ability to order materials and services effectively. As Figure 1 highlights, the need to measure this cycle time is driven by the reality that 49 percent of procurement labor is spent on ordering materials and services. Even a small improvement in the time it takes to place a PO could have a large impact on the overall procurement organization.
Figure 1 Source: APQC Open Standards Benchmarking in Procurement
By definition, PO cycle time is the total amount of time taken to process a PO. This measure is calculated based on the time in hours from the receipt of a purchase requisition line item to the purchase order’s transmission to the vendor or contractor. This calculation should include all activities associated with processing a PO, as well as data input, time taken to confirm receipt by supplier, and time taken to respond with confirmation of pricing and delivery.
APQC’s Open Standards Benchmarking® database in procurement reveals that top performers are able to place a purchase order in five hours (Figure 2). By comparison, bottom performers take 48 hours to place a purchase order—almost ten times as long as top performers.
Figure 2 Source: APQC Open Standards Benchmarking in Procurement
To reduce the time needed for procurement staff to place a purchase order, organizations can implement technologies such as an e-procurement system. APQC's research has shown that these systems enable procurement staff to process more purchase orders, which has a direct effect on cycle time and overall procurement costs. Organizations use e-procurement to leverage volume discounts, consolidate buying, and decrease costs and errors related to human labor.
When it comes to procurement, as the size of the organization and typically the complexity of the purchasing process increases, manual procedures are often inefficient, requiring excess paperwork, increasing the possibility of error and redundancies, and lengthening cycle times. Automation and technology are key drivers of increased efficiencies and productivity for organizations seeking to improve procurement process performance.
A benefit of reducing the cycle time to place a PO and making this tactical process more efficient, is that organizations can then devote more procurement staff time to value-added tasks such as enhancing supplier collaboration and building deeper supplier relationships.
In addition to leveraging technology, organizations can potentially achieve a faster cycle time by rationalizing the supplier base (i.e., optimizing and prioritizing suppliers). Organizations that rationalize their supply base use not only the right suppliers but also the right number of suppliers. Rationalization forces organizations to categorize their spend and identify critical suppliers for each category. This process is an important continuous improvement effort that helps organizations shrink the overall number of suppliers and achieve a lean supply chain that can help streamline processes, enable the organization to take advantage of volume discounts, and enhance service levels.
For more guidance about improving procurement, APQC's report Blueprint for Success: Procurement contains insights on procurement processes, measures, benchmarks, and performance drivers.
APQC helps organizations work smarter, faster, and with greater confidence. It is the world’s foremost authority in benchmarking, best practices, process and performance improvement, and knowledge management. APQC’s unique structure as a member-based nonprofit makes it a differentiator in the marketplace. APQC partners with more than 500 member organizations worldwide in all industries. With more than 40 years of experience, APQC remains the world’s leader in transforming organizations. Visit us at www.apqc.org, and learn how you can make best practices your practices.
Marisa Brown has more than 25 years of experience in business, research, writing, speaking, and consulting. Currently, she focuses on the in-depth needs of APQC’s members in supply chain management and product development as she develops and oversees APQC's supply chain management research agenda. She leads APQC’s supply chain team that conducts research to provide insights into benchmarks, best practices, and process improvements in supply chain planning, procurement, logistics, manufacturing, product development, and innovation.
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