Purchase Order Cost
The cost per purchase order is a critical element in supply planning, effecting the size of order quantities and related inventories. The most familiar affect is in the economic order quantity where the greater the purchase order cost (POC), the greater economic order quantity (EOQ), and the greater the resulting average inventory levels. One of the keys to reducing inventory levels then, is to dramatically reduce the cost per purchase order. The overall cost per purchase order can be computed simply by dividing the total supply cost by the number of purchase orders placed. Ideally, the purchase order cost should be computed, maintained, and monitored for each vendor and purchase order type. The individual elements of the purchase order cost include the staff, space, communications, supplies, and overhead cost to plan, negotiate, check, execute, track, and pay a purchase order.
Supplier Return on Inventory
The supplier return on inventory (SROI) is computed as the total profit on SKUs provided by that vendor divided by the average inventory value for that vendor. It is an effective indicator of the efficiency of logistics transactions executed with that supplier. The logistics information system (LIS) should compute, monitor, and report the return on inventory for each vendor; providing rankings and segments accordingly.
Total Acquisition Cost
The total acquisition cost (TAC) of an item (sometimes referred to as total ownership cost or total logistics cost) for each supplier includes the cost of the item and the cost of purchase order placement, float, inventory carrying, lost sales, transportation, warehousing, and international logistics fees. Since the terms of payment, unit cost, logistics capabilities, and locations infrastructure vary widely by supplier, the total acquisition costs can vary greatly for the same SKU. Hence, the total acquisition cost is a critical metric upon which to base sourcing decisions. Since many of the costs included in TAC are typically either ignored or hidden; and since the unit cost is the most readily available indicator, and has historically been used as the sole basis for supplier selection, computing the total acquisition cost for the supply and SKU base is normally an eye opening experience.