Ah, this is an age-old question. The conventional wisdom states that a Purchase Order costs anywhere from 75-150 dollars. How can this be right? Are they written on the King's parchment in specially designed gold ink? Hardly. It's all due to what I call the Magic of Cost Accounting.
Cost Accounting is an interesting field. The goal is to take every possible cost associated with an item, process, or person and assign a definitive value to that item, process, or person.
For example, the cost of hiring or retaining a particular employee is not limited to his or her salary and benefits but encompasses his or her "portion" of the electricity, building maintenance, office supplies, etc.
That concept is where those huge cost-per-PO numbers come from in articles. They add up salary, benefits, and every other conceivable cost that can be attributed to an employee or department and then divide by the number of Purchase Orders completed. Voila - a Purchase Order costs 150 dollars!
When executives see these numbers, that leads to the logical conclusion that the number of PO's should be reduced - hence a "cost savings." Here's the funny thing. If only the number of actual PO's are reduced and everything else stays the same, the Magic of Cost Accounting will now show that the cost of each new Purchase Order INCREASED!
» Single Source Savings - Soft Costs from PurchaseRealm
Soft costs are the costs associated with a process or procedure that are not apparent when looking at just the price of an item. (This overlaps with, but is not the same as the Magic of Cost Accounting.) We tend to... [Read More]
Tracked on: March 1, 2006 10:54 PM | Permalink to Trackback