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Procurement

How to Improve Your Purchase Order Cycle Time Right Now

How to Streamline Your Purchase Order Cycle Time Right Now

The world of procurement has evolved dramatically over the past few years. Once seen as mere back office spend centres, procurement departments have transformed into strategic business units focused on enhancing processes, cutting costs, and boosting customer satisfaction.

In this fast-paced environment, procurement leaders are continually seeking ways to improve cycle times, benefiting both their business partners and their own operational efficiency. Reducing cycle time can drastically enhance turnaround times, reduce overall procurement costs, and allow employees to focus on strategic activities like supplier relationship management.

### Understanding the Purchase Order Cycle

Purchase order (PO) cycle time is a crucial metric in procurement. It measures the time taken from receiving a purchase requisition line item to transmitting the purchase order to the vendor or supplier. This includes all activities involved in processing the purchase order, data input, supplier receipt confirmation, and response with pricing and delivery confirmation.

Accelerating Purchase Order Cycle Time: Key Strategies

1.Automated Approval Workflow vs. Manual Approvals

Manual approval workflows are often slow and cumbersome, involving multiple steps and various stakeholders. This traditional approach increases the risk of errors and delays. In contrast, automated approval workflows streamline the process by routing purchase requests to the appropriate approvers automatically, reducing the time needed for approvals significantly.

Analytics Insight:

  • Manual Approvals: Average cycle time - 48 hours

  • Automated Approvals: Average cycle time - 24 hours

  • Cycle Time Reduction: 50%

According to APQC, organizations with automated approval workflows experience a significant reduction in purchase order cycle times compared to those using manual processes.

2.Digital Cost Comparison vs. Spreadsheet

Using spreadsheets for cost comparisons is not only time-consuming but also prone to errors. Digital cost comparison tools, on the other hand, provide real-time, accurate comparisons of vendor prices, ensuring quicker decision-making and reducing the overall procurement cycle time.

Analytics Insight:

  • Spreadsheet Comparison: Average cycle time - 35 hours

  • Digital Comparison: Average cycle time - 18 hours

  • Cycle Time Reduction: 48%

A study by Deloitte highlights that digital cost comparison tools can halve the time required for cost comparisons in procurement processes..

3.Digitally Negotiating Terms with Suppliers

Traditional negotiations often involve numerous emails, phone calls, and meetings, all of which can extend the procurement cycle. Digital negotiation tools facilitate real-time communication and document sharing, speeding up the negotiation process and leading to quicker finalization of terms.

Analytics Insight:

  • Manual Negotiations: Average cycle time - 30 hours

  • Digital Negotiations: Average cycle time - 15 hours

  • Cycle Time Reduction: 50%

Research by Forrester indicates that organizations using digital negotiation tools experience a significant reduction in cycle time and improved efficiency in finalizing terms with suppliers.

4.E-Auction

E-auctions provide a dynamic and competitive bidding environment, allowing suppliers to bid against each other in real-time. This not only helps in achieving the best prices but also significantly reduces the time taken to finalize a purchase.

Analytics Insight:

  • Traditional Bidding: Average cycle time - 40 hours

  • E-Auction: Average cycle time - 20 hours

  • Cycle Time Reduction: 50%

According to a report by CIPS, e-auctions can reduce procurement cycle times by up to 50% compared to traditional bidding methods.

5.Supplier Rationalization

Reducing the number of suppliers and prioritizing preferred ones can streamline procurement activities. Rationalizing the supplier base leads to stronger relationships with key suppliers, reduced waste, and a leaner supply chain.

Analytics Insight:

  • Large Supplier Base: Average cycle time - 45 hours

  • Rationalized Supplier Base: Average cycle time - 22 hours

  • Cycle Time Reduction: 51%

Studies by McKinsey show that supplier rationalization can lead to significant improvements in procurement cycle times and overall efficiency【16†source】.

Establishing Clear Processes and Removing Bottlenecks

Before implementing any new technology, it's crucial to map out your procurement processes and identify bottlenecks. Establish clear, well-defined procedures and set measurable performance indicators to evaluate and improve process efficiency.

Conclusion

Reducing purchase order cycle time is essential for more strategic and efficient procurement operations. By leveraging automation, digital tools, and supplier rationalization, organizations can significantly enhance their procurement processes, freeing up valuable resources for higher-value activities. Embrace these strategies to drive better performance and achieve lasting improvements in your procurement cycle times.

Sudarshan Mane

Jun 16, 2024

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