The procurement process for Omni Wholesale Company includes a series of activiti
ID: 2489969 • Letter: T
Question
The procurement process for Omni Wholesale Company includes a series of activities that transforms a materials requisition into a vendor check. The process begins with a request for materials. The requesting department prepares and sends a materials request form to the Purchasing Department. The Purchasing Department then places a request for a quote to vendors. Vendors prepare bids in response to the request for a quote. A vendor is selected based on the lowest bid. A purchase order to the low-bid vendor is prepared. The vendor delivers the materials to the company, whereupon a receiving ticket is prepared. Payment to the vendor is authorized if the materials request form, receiving ticket, and vendor invoice are in agreement. These three documents fail to agree 40% of the time, initiating effort to reconcile the differences. Once the three documents agree, a check is issued. The process can be diagrammed as follows:
An activity analysis indicated the following activity costs with this process:
1
Preparing materials request
$25,600.00
2
Requesting, receiving, and selecting vendor bids
73,600.00
3
Preparing purchase order
19,200.00
4
Preparing receiving ticket
22,400.00
5
Matching M/R, R/T, and invoice
38,400.00
6
Correcting reconciliation differences
115,200.00
7
Preparing and delivering vendor payment
25,600.00
8
Total process activity cost
$320,000.00
On average, the process handles 20,000 individual requests for materials that result in 20,000 individual payments to vendors.
Management proposes to improve this process in two ways. First, the Purchasing Department will develop a preapproved vendor list for which orders can be placed without a request for quote. It is expected that this will reduce the cost of requesting and receiving vendor bids by 65%. Second, additional training and standardization will be provided to reduce errors introduced into the materials requisition form and receiving tickets. It is expected that this will reduce the number of reconciliation differences from 45% to 10%, over an average of 20,000 payments.
1
Preparing materials request
$25,600.00
2
Requesting, receiving, and selecting vendor bids
73,600.00
3
Preparing purchase order
19,200.00
4
Preparing receiving ticket
22,400.00
5
Matching M/R, R/T, and invoice
38,400.00
6
Correcting reconciliation differences
115,200.00
7
Preparing and delivering vendor payment
25,600.00
8
Total process activity cost
$320,000.00
Explanation / Answer
1
Table showing the percent of individual activity cost to the total process cost
S.No.
Actvity Cost
Amount
Percent
A
A/320000
1
Preparing materials request
$ 25,600.00
8.00%
2
Requesting, receiving, and selecting vendor bids
$ 73,600.00
23.00%
3
Preparing purchase order
$ 19,200.00
6.00%
4
Preparing receiving ticket
$ 22,400.00
7.00%
5
Matching M/R, R/T, and invoice
$ 38,400.00
12.00%
6
Correcting reconciliation differences
$ 115,200.00
36.00%
7
Preparing and delivering vendor payment
$ 25,600.00
8.00%
8
Total process activity cost
$ 320,000.00
2
Calculation of average total process cost per vendor payment, assuming 20,000 payments:
S.No.
Actvity Cost
Amount
Number of Payments
Cost per vendor
A
B
A/B
1
Preparing materials request
$ 25,600.00
20,000
$ 1.28
2
Requesting, receiving, and selecting vendor bids
$ 73,600.00
20,000
$ 3.68
3
Preparing purchase order
$ 19,200.00
20,000
$ 0.96
4
Preparing receiving ticket
$ 22,400.00
20,000
$ 1.12
5
Matching M/R, R/T, and invoice
$ 38,400.00
20,000
$ 1.92
6
Correcting reconciliation differences
$ 115,200.00
20,000
$ 5.76
7
Preparing and delivering vendor payment
$ 25,600.00
20,000
$ 1.28
8
Total process activity cost
$ 320,000.00
20,000
$ 16.00
3
Table showing the improvements in the activity costs
S.No.
Actvity Cost
Amount
Improvement
A
Calculation
Amount
1
Preparing materials request
$ 25,600.00
-
$ -
2
Requesting, receiving, and selecting vendor bids
$ 73,600.00
73600* (1-65%)
$ 25,760.00
3
Preparing purchase order
$ 19,200.00
-
$ -
4
Preparing receiving ticket
$ 22,400.00
-
$ -
5
Matching M/R, R/T, and invoice
$ 38,400.00
-
$ -
6
Correcting reconciliation differences
$ 115,200.00
(115200/ 45%)*10%
$ 25,600.00
7
Preparing and delivering vendor payment
$ 25,600.00
-
$ -
8
Total process activity cost
$ 320,000.00
-
$ -
4
Calculation of average total process cost per vendor payment after improvement, assuming 20,000 payments:
S.No.
Actvity Cost
Amount
Number of Payments
Cost per vendor
A
B
A/B
1
Preparing materials request
$ 25,600.00
20,000
$ 1.28
2
Requesting, receiving, and selecting vendor bids
$ 25,760.00
20,000
$ 1.29
3
Preparing purchase order
$ 19,200.00
20,000
$ 0.96
4
Preparing receiving ticket
$ 22,400.00
20,000
$ 1.12
5
Matching M/R, R/T, and invoice
$ 38,400.00
20,000
$ 1.92
6
Correcting reconciliation differences
$ 25,600.00
20,000
$ 1.28
7
Preparing and delivering vendor payment
$ 25,600.00
20,000
$ 1.28
8
Total process activity cost
$ 182,560.00
20,000
$ 9.13
1
Table showing the percent of individual activity cost to the total process cost
S.No.
Actvity Cost
Amount
Percent
A
A/320000
1
Preparing materials request
$ 25,600.00
8.00%
2
Requesting, receiving, and selecting vendor bids
$ 73,600.00
23.00%
3
Preparing purchase order
$ 19,200.00
6.00%
4
Preparing receiving ticket
$ 22,400.00
7.00%
5
Matching M/R, R/T, and invoice
$ 38,400.00
12.00%
6
Correcting reconciliation differences
$ 115,200.00
36.00%
7
Preparing and delivering vendor payment
$ 25,600.00
8.00%
8
Total process activity cost
$ 320,000.00
2
Calculation of average total process cost per vendor payment, assuming 20,000 payments:
S.No.
Actvity Cost
Amount
Number of Payments
Cost per vendor
A
B
A/B
1
Preparing materials request
$ 25,600.00
20,000
$ 1.28
2
Requesting, receiving, and selecting vendor bids
$ 73,600.00
20,000
$ 3.68
3
Preparing purchase order
$ 19,200.00
20,000
$ 0.96
4
Preparing receiving ticket
$ 22,400.00
20,000
$ 1.12
5
Matching M/R, R/T, and invoice
$ 38,400.00
20,000
$ 1.92
6
Correcting reconciliation differences
$ 115,200.00
20,000
$ 5.76
7
Preparing and delivering vendor payment
$ 25,600.00
20,000
$ 1.28
8
Total process activity cost
$ 320,000.00
20,000
$ 16.00
3
Table showing the improvements in the activity costs
S.No.
Actvity Cost
Amount
Improvement
A
Calculation
Amount
1
Preparing materials request
$ 25,600.00
-
$ -
2
Requesting, receiving, and selecting vendor bids
$ 73,600.00
73600* (1-65%)
$ 25,760.00
3
Preparing purchase order
$ 19,200.00
-
$ -
4
Preparing receiving ticket
$ 22,400.00
-
$ -
5
Matching M/R, R/T, and invoice
$ 38,400.00
-
$ -
6
Correcting reconciliation differences
$ 115,200.00
(115200/ 45%)*10%
$ 25,600.00
7
Preparing and delivering vendor payment
$ 25,600.00
-
$ -
8
Total process activity cost
$ 320,000.00
-
$ -
4
Calculation of average total process cost per vendor payment after improvement, assuming 20,000 payments:
S.No.
Actvity Cost
Amount
Number of Payments
Cost per vendor
A
B
A/B
1
Preparing materials request
$ 25,600.00
20,000
$ 1.28
2
Requesting, receiving, and selecting vendor bids
$ 25,760.00
20,000
$ 1.29
3
Preparing purchase order
$ 19,200.00
20,000
$ 0.96
4
Preparing receiving ticket
$ 22,400.00
20,000
$ 1.12
5
Matching M/R, R/T, and invoice
$ 38,400.00
20,000
$ 1.92
6
Correcting reconciliation differences
$ 25,600.00
20,000
$ 1.28
7
Preparing and delivering vendor payment
$ 25,600.00
20,000
$ 1.28
8
Total process activity cost
$ 182,560.00
20,000
$ 9.13
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