The Hidden Costs of Transactional Work in Procurement

"The main thing is to keep the main thing the main thing." — Stephen Covey

You probably have a pretty good idea of what the main things are for your procurement role, and you probably don't get enough time to focus on them. The unrealized costs of not getting things done are called hidden costs. 

For example, if you don't have time to focus on an annual purchase agreement for $1 million and leave 2% on the table, the hidden cost is $20,000. 

Low-value transactional tasks can be a huge time sink that prevents focus on higher-value objectives. Here, we argue the true cost of transactional tasks is not just the wage cost; it is the wage cost plus the hidden costs. For electronics manufacturing, we show these costs can easily be as much as 5% of a product's annual revenue, easily justifying initiatives to reduce the time you spend on low-value-added transactional work.

The Main Thing: Top 3 Strategic Priorities in Procurement

Here are three common strategic priorities and ways to quantify their value so you can better assess the hidden costs of neglecting them.

1. Cost Management
   • Objective: The primary goal is to reduce costs while maximizing value throughout the supply chain. This involves negotiating favorable terms, securing bulk discounts, optimizing the total cost of ownership, and implementing cost-saving initiatives. Another critical aspect is cost avoidance, a metric too few companies track. Even if the prices paid this year are optimal, without diligent oversight, they will likely creep up next year.
   • Importance: Effective cost optimization not only improves profit margins but can also increase sales and market share by making your company's products more competitive.
   • Estimated Value: In the electronics industry, prices are generally accurate to within +/-5%, meaning prices can naturally vary by this amount. Given the highly trained and motivated sales teams for component suppliers and EMS companies—armed with vast amounts of market data—you can conservatively estimate that your component spend could creep up by 5% and your EMS spend by as much as 10% if you don't stay focused on cost control.
2. Supplier Relationship Management
   • Objective: Building strong, collaborative relationships with key suppliers is essential for ensuring consistent quality, reliability, and access to innovations. This includes developing long-term partnerships, joint development efforts, and continuous improvement initiatives.
   • Importance: Effective supplier relationship management is crucial for mitigating long lead times and availability problems, which directly affect your company's ability to maintain production schedules and meet customer demands. These relationships ensure that you can prioritize your orders and secure critical components even during periods of high demand or supply chain stress.
   • Estimated Value: There are 249 working days; each day of lost production is 4% of the year. A product line that produces $10 million in annual revenue will lose $40,000 per day when the line goes down. 
3. Supply Chain Resilience
   • Objective: Building a resilient supply chain involves not just managing your direct suppliers but also understanding the broader network, including your suppliers' suppliers and their suppliers, to anticipate and mitigate risks. This means developing contingency plans, diversifying sources, and gaining deeper visibility into your supply chain to ensure continuity in the face of disruptions.
   • Importance: Supply chain resilience is critical for quickly adapting to unexpected events, such as natural disasters, geopolitical changes, or market fluctuations. Globally, there are about 400 to 500 natural disasters each year, and these events are increasingly causing significant business disruptions. In fact, 45% of companies reported that recent natural disaster disruptions had a large impact on their sector. Ensuring that your supply chain can withstand these disruptions is crucial to maintaining operations and protecting your company's market position.
   • Estimated Value: Assuming a major natural disaster somewhere in your supply chain causes just two weeks of business disruption, this equates to approximately 4% of annual revenue. For a product with $10 million in annual revenue, this translates to a potential loss of $400,000. By investing in supply chain resilience, you can mitigate or even avoid these losses, protecting both your bottom line and your company's long-term viability.

Not the Main Thing: Transactional Work

Despite the importance of your strategic priorities, you might find yourself overwhelmed by common transactional tasks that consume a significant portion of your workday. Here are some of the common transactional tasks that can prevent you from focusing on strategic objectives:

1. Purchase Order (PO) Creation and Management
   • Task Description: Creating, reviewing, and managing purchase orders are routine tasks that require attention to detail. This includes gathering requisitions and approvals, entering order details into the procurement system, placing the order with suppliers, and communicating with them to confirm the order. Additionally, it involves tracking delivery schedules and ensuring that orders are fulfilled as expected.
   • Time Impact: On average, processing a single purchase order can take between 1 to 3 hours, depending on the complexity of the order. This includes 20 to 60 minutes for requisition and approval, 10 to 30 minutes for order placement, and 15 to 30 minutes for supplier communication.
2. Invoice Matching and Payment
   • Task Description: This involves the detailed work of matching invoices with purchase orders and goods received, resolving discrepancies, and ensuring timely payment to suppliers.
   • Time Impact: The process of invoice matching and payment can take an additional 20 to 60 minutes per purchase order, depending on the complexity of the order and the number of discrepancies that need to be resolved.
3. Shortage Meetings
   • Task Description: Sometimes also called Production Meetings, they are held to address shortages of critical components, coordinate with suppliers, and find immediate solutions to keep production lines running.
   • Time Impact: These meetings are particularly taxing on time because they detract from the time available to solve the underlying problems. Each meeting typically takes about 1 hour, and their frequency can quickly add up, consuming substantial time that could be better spent on strategic planning or long-term problem-solving.
4. Data Entry and Record-Keeping
   • Task Description: Maintaining accurate records in procurement and ERP systems includes updating supplier information, tracking order histories, and managing contract documentation. These tasks are essential for ensuring data accuracy but often require meticulous attention to detail.
   • Time Impact: Data entry and record-keeping activities can be surprisingly time-consuming, often taking up several hours each week. Each instance of manual data entry might take anywhere from a few minutes to over an hour, depending on its complexity. Studies suggest that procurement professionals may spend upwards of 20-30% of their time on such tasks.

Calculating the Hidden Costs

Now that we have some ways to value the strategic activities and measure the time devoted to low-value activities, we can quantify the hidden costs. 

Scenario: Mid-Size Electronics Company

• Company Profile:
  • Annual Revenue: $100 million
  • One product line produces $15 million in revenue
  • Product line spend on components: $500,000
  • Product line spend on EMS: $4.5
  • 1 Full-Time Equivalent (FTE) in procurement for this product line
• Value of Strategic Activities:
  • Cost Management
    • Calculation:
      • Value of cost management = 5% of component spend + 10% of EMS spend
      • 5% × $500,000 = $25,000 (from components)
      • 10% × $4.5 million = $450,000 (from EMS)
      • Value: $475k annually
  • Supplier Relationship Management
    • Assumptions:
      • Potential lost production due to limited availability and long lead times: 5 days per year (2% of the year)
    • Calculation:
      • Value of maintaining production and avoiding delays = 2% of annual product line revenue
      • 2% × $15 million = $300,000
      • Value: $300k annually 
  • Supply Chain Resilience
    • Assumptions:
      • Potential lost revenue due to supply chain disruptions: 2 weeks per year (3.9% of the year)
      • Serious disruptions could result in a loss of 1 month or more
    • Calculation:
      • Value of maintaining resilience and avoiding disruptions = 3.9% of annual product line revenue
      • 3.9% × $15 million = $585,000 
      • Value: $585k annually 
  • Total Hidden Value of Strategic Activities:
    • 475k + 300k + 585k
    • Value: $1,360,000
• Time Lost to Transactional Work
  • Purchase Order Management
    • Assuming 5 purchase orders per week @ 1 hour per PO
    • 5 hours is 12.5% of 40-hour week
    • Lost Time = 12.5%
  • Invoice Matching
    • Assuming 5 receipts per week with discrepancies, 20 minutes per receipt, 100 minutes is 1.6 hours
    • 1.6 hours is 4% of 40-hour week
    • Lost Time = 4%
  • Shortage Meetings
    • Assuming 2 meetings per week, 1 hour each
    • 2 hours is 5% of 40-hour week
    • Lost Time = 5%
  • Data Entry & Record Keeping
    • Assuming 5%, though studies suggest 20-30% is common
    • Lost Time = 5%
  • Total Time Lost to Transactional Work
    • 12.5% + 4% + 5% +5% 
    • Total Lost Time = 26.5%

• Hidden Cost Calculation
  • Assumptions:
    • The hidden value of strategic activities is reduced by the percentage of time lost to transactional work.
  • Calculation:
    • Hidden Value of Strategic Activities is $1.36 million multiplied by a Total Lost Time of 26.5%
    • Total Hidden Cost = $360,400 annually

In this scenario, the mid-size company could be losing out on $360,400 annually due to the time lost on transactional tasks for this one product line.

Clearly, these calculations are highly subjective, and you will need to adjust them for your company. Here's a super quick way to scope your situation:

• Use 25% of your spending for Hidden Value.
• Make your own estimate of the percentage of time you spend on low-value transactions.
• Multiply these to get a scope of your hidden cost.

These calculations are not gospel; they are just a way for you to scope. If you are responsible for $10 million in spend and 50% of your time is going into low-value transactional work, you may have a million-dollar problem ($10 million x 25% x 50%).

Reducing Transactional Work

While transactional work is unavoidable, you can adopt strategies to better manage these tasks and free up time for strategic activities.

In printed circuit board assemblies, the average BOM has 100 line items, and something like 70 of those will be low-value items like caps and resistors. Focus on these.

1. Vendor Managed Inventory: Let your suppliers be responsible for tracking inventory and bill you only for what you use. Distributors love these programs, so reach out to your preferred suppliers.
2. Automation: Implementing procurement software and automation tools can significantly reduce the time you spend on routine tasks like PO creation and invoice processing. You don't have to automate everything, start with low value purchase orders and go from there.
3. Outsourcing: The ultimate way to rid yourself of transactional tasks is to let someone else do them!

The key here is to consider hidden costs when evaluating these solutions. The value of PO automation is much more obvious when hidden costs are considered.

The Main Thing

Transactional work is an essential part of procurement, but it shouldn't overshadow the main thing: strategic initiatives that drive long-term value and competitive advantage. By understanding the hidden costs and adopting strategies to manage transactional tasks, you can reclaim the time and focus needed to succeed. Achieving the right balance between transactional and strategic work is key to your success, and your success is key to your company.