Question

Process Activity Analysis

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 50% 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:

Preparing Materials Request (M/R) Requesting, Receiving, and Selecting Vendor Bids Preparing Purchase Order Preparing Receiving Ticket (R/T) Matching M/R, R/T, and Vendor Invoice Preparing and Delivering Vendor Check Correcting Reconciliation Differences

An activity analysis indicated the following activity costs with this process:

Preparing materials request	$31,200
Requesting, receiving, and selecting vendor bids	105,300
Preparing purchase order	19,500
Preparing receiving ticket	27,300
Matching M/R, R/T, and invoice	39,000
Correcting reconciliation differences	124,800
Preparing and delivering vendor payment	42,900
Total process activity cost	$390,000

On average, the process handles 30,000 individual requests for materials that result in 30,000 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 75%. 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 50% to 25%, over an average of 30,000 payments.

a. Develop a table showing the percent of individual activity cost to the total process cost. Round percentages to the nearest whole number, if required.

Omni Wholesale Company
Individual activity cost to the total process cost
Procurement Activities	Activity Cost	Percent of Total Process Cost
Preparing materials request	$	%
Requesting, receiving, and selecting vendor bids		%
Preparing purchase order		%
Preparing receiving ticket		%
Matching M/R, R/T, and invoice		%
Correcting reconciliation differences		%
Preparing and delivering vendor payment		%
Total process activity cost	$	%

b. Determine the average total process cost per vendor payment, assuming 30,000 payments. Round to the nearest cent, if required.
$ per vendor payment

c. Prepare a table showing the improvements in the activity costs as a result of the changes proposed by management. If an amount is zero, enter a "0".

Omni Wholesale Company
Changes activity costs
Procurement Activities	Activity Cost Prior to Improvement	Activity Cost After Improvement	Activity Cost Savings
Preparing materials request	$	$	$
Requesting, receiving, and selecting vendor bids
Preparing purchase order
Preparing receiving ticket
Matching M/R, R/T, and invoice
Correcting reconciliation differences
Preparing and delivering vendor payment
Total process activity cost	$	$	$

d. Estimate the average cost per vendor payment, assuming that the changes proposed by management are enacted for 30,000 total payments. Round to the nearest cent.
$ per vendor payment

Answer 1

a.

Omni Wholesale Company
Individual activity cost to the total process cost
Procurement Activities	Activity Cost	Percent of Total Process Cost
Preparing materials request	31200	8%
Requesting, receiving, and selecting vendor bids	105300	27%
Preparing purchase order	19500	5%
Preparing receiving ticket	27300	7%
Matching M/R, R/T, and invoice	39000	10%
Correcting reconciliation differences	124800	32%
Preparing and delivering vendor payment	42900	11%
Total process activity cost	390000	100%

b. Average total process cost = $390000/30000 = $13 per vendor payment

c.

Omni Wholesale Company
Changes activity costs
Procurement Activities	Activity Cost Prior to Improvement	Activity Cost After Improvement	Activity Cost Savings
Preparing materials request	31200	31200	0
Requesting, receiving, and selecting vendor bids [$105300 x (1 - 0.75)]	105300	26325	78975
Preparing purchase order	19500	19500	0
Preparing receiving ticket	27300	27300	0
Matching M/R, R/T, and invoice	39000	39000	0
Correcting reconciliation differences	124800	62400	62400
Preparing and delivering vendor payment	42900	42900	0
Total process activity cost	390000	248625	141375

d. Average total process cost = $248625/30000 = $8.2875 = $8.29 per vendor payment