Mastering Purchase Order Management: Tips & Strategies for Businesses

Purchase orders are essential for ensuring that your company has the supplies it needs to function and expand. However, while using a manual purchase order method may have been effective when your business was just getting off the ground, as it grows it becomes more time-consuming and stressful for all parties. It interferes with your capacity to complete work.

In addition to preserving a consistent workflow for purchase orders, automating the entire process can cut down on time spent on laborious chores and can lower the possibility of errors.

Let’s have a clearer outlook.

What is Purchase order management?

Purchase order management is an internal procurement process adopted by organizations to ensure that each and every purchase is necessary, justified and optimized for costs. Many organizations have well-established purchase order management policies to ensure that employees follow standard operating procedures before purchase orders are executed.

The purchase order management process is how businesses acquire goods and services. It includes the planning, coordination, and execution of purchase orders. The purchasing process begins with the identification of requirements. The purchasing staff then creates a purchase order (PO) specifying the required items and quantities. The PO is placed with suppliers or distributors who will provide the necessary goods or services. The PO may also be transmitted electronically.

Once all the necessary materials or services are received, the purchase order is verified and approved. It’s then tracked and accounted for during the procurement process. 

Overview of the purchase order process

• Identifying a need

The purchase order process begins when a buyer identifies a need for a specific product or service. This could be because of a lack of inventory, increased demand from customers, or a need to replace outdated equipment. Once the need is identified, the buyer can begin the process of finding a suitable supplier.

• Sourcing and supplier selection

The buyer will research potential suppliers and select the one that best meets their needs. This can involve evaluating factors such as the supplier's reputation, product quality, delivery times, and pricing. The buyer may also consider the supplier's location and their ability to scale up or down production as needed. Once the buyer has identified a suitable supplier, they will begin the process of negotiating terms.

• Negotiating terms

The buyer and supplier will negotiate the terms and conditions of the order, including the price, delivery date, and payment terms. The buyer may also negotiate for discounts, warranties, or other incentives. The supplier may also require a deposit or other form of payment before beginning production. Once the terms are agreed upon, the buyer can proceed to create the PO.

• Creating the PO

The PO is a legally binding document that outlines the specific goods or services that the buyer wants to purchase from the supplier. It typically includes details such as the item number, item description, quantity, unit price, and total cost. The PO also specifies the agreed-upon delivery date and payment terms. Once the PO is created, it is sent to the supplier for review.

• Approval and confirmation

The supplier reviews the PO to ensure that they can fulfil the order and that the terms and conditions are acceptable. If the supplier agrees to the terms, they will accept the PO and confirm the delivery date. If the supplier cannot fulfil the order or has any issues with the terms, they may reject the PO and negotiate with the buyer for a resolution.

• Tracking and updating 

Once the PO is confirmed, the buyer will track the order and monitor the delivery date. The buyer may also update the PO if there are any changes to the order such as additional items or a change in the delivery date. The supplier will also update the PO if there are any changes or delays in the order. This helps to ensure that both the buyer and supplier are aware of the status of the order at all times.

• Receiving and Payment

Once the goods or services are received, the buyer will inspect them to ensure they meet the specifications outlined in the PO. If the goods or services are accepted, the buyer will approve the invoice and pay the supplier for the order. The payment process may vary depending on the terms and conditions agreed upon in the PO.

• Closing the PO

After the goods or services have been received and the invoice has been paid, the PO is closed. This means that the order is complete and no further action is required. The buyer and supplier may then maintain records of the PO for future reference.

It's worth noting that the purchase order process can vary depending on the company's policies and procedures. Some companies may have additional steps in their process, such as obtaining approval from management before placing the order or having a formalized review process for supplier selection. Additionally, depending on the company's process, purchase order management systems may be used to automate the process, providing more efficiency and oversight.

Here is a list of benefits purchase order management offers for businesses

• Enhanced efficiency

Purchase order management systems automate the process of creating, tracking, and maintaining purchase orders, reducing errors and increasing visibility. This can help businesses save time and resources and make managing their inventory and cash flow easier.

• Better supplier management

Purchase order management systems provide real-time information on supplier performance, delivery times, and payment history. This can help businesses identify any issues and make informed decisions about which suppliers to use in the future.

• Increased visibility

Purchase order management systems provide businesses with real-time information on the status of orders, inventory levels, and delivery times. This can help enterprises to make better decisions about inventory management and customer service.

• Better compliance 

Purchase order management systems can help businesses comply with regulations and standards, such as financial reporting, inventory management and accounting.

• Improved communication 

Purchase order management systems facilitate communication between buyers and suppliers, ensuring that any issues or changes are addressed in a timely manner.

• Streamlining the approval process

Purchase order management systems can automate the approval process, ensuring that orders are approved and processed quickly, and reducing the risk of delays.

• Integration with other systems

Purchase order management systems can integrate with other business systems such as inventory management, accounting, and shipping. This can help businesses streamline their processes and gain a more comprehensive view of their operations.

Overall, purchase order management can help businesses improve their efficiency, supplier management, and communication, while also increasing their visibility into their operations and helping them comply with regulations and standards.

Let’s take a look at the industry’s best practices for preventing bottlenecks, optimizing the efficiency of your purchasing operations, and getting the most out of your procurement process.

Tips for effective purchase order management: Best Practices

Automated Processes for Purchase Orders

Manual procedures cost money and are ineffective. Even managing purchase orders with spreadsheets is problematic since they are prone to mistakes. It's worth noting that Purchase Order management systems can automate the whole process, and make it more efficient by reducing errors, increasing visibility, and providing real-time information. Automation can also help with compliance and regulatory requirements, as well as streamline the approval process, and integrate with other business systems.

• Implement automated approval workflows

Automated approval workflows allow purchase orders to be approved or rejected quickly and efficiently. This can be done by setting up a series of rules or triggers that determine when a purchase order needs to be reviewed and by whom. For example, purchase orders over a certain dollar amount may require approval from a manager or supervisor. Automated approval workflows can also be set up to notify the appropriate parties when a purchase order is ready for review, reducing the risk of delays.

• Integrate with your accounting software

Integrating your purchase order system with your accounting software can help you track expenses, manage vendor payments, and generate reports on purchase order data. This can help you better understand your spending patterns, identify opportunities for cost savings, and ensure that you are paying vendors on time.

• Establish clear communication with suppliers

Having clear communication with suppliers is key to effective purchase order management. It is important to establish a good working relationship with suppliers and to make sure that they understand your purchase order process. This includes providing them with detailed purchase orders that specify exactly what you need, when you need it, and any other relevant information. It is also important to keep suppliers informed about any changes to the purchase order, such as changes in delivery dates or quantities.

• Implement a three-way matching process

A three-way matching process is a key step in purchase order management. This process compares the purchase order, the supplier's invoice, and the receiving report to ensure that all three documents match and that the goods or services were received as expected. This step helps to prevent errors and to ensure that you are only paying for what you received.

• Monitor supplier performance

Monitoring supplier performance is an important aspect of purchase order management. Keep track of supplier performance by monitoring delivery times, quality of goods or services, and other metrics. Use this information to identify issues and make improvements. This can help you to build better relationships with suppliers and to identify potential issues before they become a problem.

• Keep a track of order history

Keeping a record of all purchase order history is important for purchase order management. This includes the supplier, the purchase order number, the items ordered, the quantities, and the cost. This information can be used to identify trends and make decisions about future orders. Additionally, it is important to keep a record of order history to be able to track spending and budgeting.

Common challenges in purchase order management include

Inefficient processes

Manual or paper-based processes can be time-consuming and prone to errors, leading to delays and increased costs.

Lack of visibility

Without a centralized system for tracking purchase orders, it can be difficult to gain visibility into the status of orders and identify potential issues.

Poor supplier management

Without proper supplier management, organizations can struggle to maintain reliable delivery schedules and may experience quality issues with products.

Lack of cost control

Without proper tracking and management of purchase order expenses, organizations can struggle to control costs and may overspend on goods and services.

Strategies for addressing these challenges include

Automating purchase order

By automating purchase order processes, organizations can reduce the risk of errors, improve efficiency, and gain visibility into the status of orders.

Implementing a centralized purchase order system

By using a centralized system to track purchase orders, organizations can gain visibility into the status of orders, identify potential issues, and manage suppliers more effectively.

Improving supplier management

Organizations can improve supplier management by regularly assessing supplier performance, setting clear expectations for delivery and quality, and implementing performance metrics.

Implementing cost control measures

Organizations can implement cost control measures by setting budgets, tracking expenses, and identifying opportunities for cost savings.

Improving Communication

Effective communication can help to reduce errors, prevent delays, and improve relationships with suppliers.

Auditing and reviewing 

Regularly reviewing and auditing purchase orders can help to identify and correct errors, keep expenses under control and ensure compliance with company policies.

By implementing these strategies, organizations can improve purchase order management and reduce the risk of errors, delays, and increased costs.

Takeaway

Your company's bottom line can be impacted by how you manage your purchase orders. You can fully automate the procedure and guarantee supplier and employee compliance by using technology. In this manner, you can be sure that every purchase order is well-planned and well-recorded, enabling your business to get the most out of each purchase.

GenieBooks 100% on-cloud accounting & inventory management software helps you keep a comprehensive record of all your purchase orders to avoid duplicate purchases and automates the entire process so that you can focus on your core competency.