Best Practices for Purchase Order Management
Best Practices for Purchase Order Management
Businesses often place thousands of orders for goods and services each year, relying on a vast network of vendors for the supplies and support they need to grow. The primary form of communicating these needs is the tried-and-true purchase order.
With so many orders flowing through companies' systems and such significant supply spending happening every month, keeping a handle on the purchase order (PO) process must remain a top priority. Simply placing an order and assuming everything will arrive as expected isn't enough. A structured, reliable purchase order management system is necessary to ensure accuracy, quality, and accountability across all purchases.
By understanding the benefits and best practices of creating and maintaining an effective PO management system—as well as how technology can help—you can save time and money while driving greater financial clarity and enabling better decision-making.
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What is the purchase order management process?
The purchase order management process is a system that ensures purchase orders are drafted correctly and accurately to reflect desired purchases. Purchase order management also monitors the progress of orders from placement through fulfillment and delivery, tracks the accuracy of delivered goods, and offers data insights into the procurement process over time.
The Complete Guide to Procurement Management KPIs
Dive deep into how your team can benefit from tracking procurement KPIs, the 15 most important KPIs to track, and a detailed worksheet to help you calculate which KPIs suit you!
Steps in the PO process
A purchase order is a formal document that indicates intent to purchase goods, raw materials, or services from a supplier. Issued after an initial purchase requisition has been submitted and approved, a purchase order is a legally binding document once executed by the seller. It outlines all the terms and conditions that govern the transaction, ensuring clarity and accountability for both parties.
From purchase request to payment, every purchase order must go through a series of basic steps. By following a repeatable PO process as part of procurement management, organizations ensure accurate ordering and recording, improve cash flow, and enable detailed spend analysis.
1. PO creation: Once the purchase requisition is approved, a purchase order is created. This document specifies the items or services to be purchased alongside corresponding quantities, prices, and terms.
2. Reviewal and approval: The PO is then reviewed for accuracy and compliance with company policies before being approved by authorized personnel. Departmental approvals ensure every purchase complies with security and legal requirements and meets the budget constraints for that project, department, category, or location.
3. Purchase order submission: After approval, accounting sends the purchase order to the supplier for confirmation and fulfillment.
4. Supplier confirmation: Upon receipt, the supplier verifies it can fulfill the order as specified or communicates discrepancies back to the buyer for adjustment.
5. Fulfillment: The supplier then prepares and ships the ordered goods or provides the services within agreed-upon timelines.
6. Receipt and inspection: When goods are received, they are inspected against the PO for quality and accuracy before being accepted into inventory.
7. Three-way matching: The purchase order, delivery receipt/invoice from the supplier, and inspection report are checked against one another to ensure everything aligns before payment processing.
8. Invoice approval and payment: Once verification is complete, the invoice is approved for payment according to the payment terms outlined in the PO.
9. Recording and reconciliation: All documents related to each purchase order are recorded in the general ledger (GL) and stored for future reference and compliance purposes.
10. Analysis and reporting: Regular spend analysis of purchase data takes place, helping accounting and finance teams identify trends, evaluate supplier performance, and optimize future spending.
Benefits of purchase order management
A solid purchase order management process provides actionable insights into spending, allowing increased focus on revenue-generating projects as well as numerous other benefits.
1. Clear expectations: Lack of visibility can be both frustrating and time-consuming. By clearly outlining the responsibilities and expectations of each party, a procurement strategy with an effective purchase order process reduces confusion and eliminates bottlenecks. For procurement teams in medium-sized or enterprise companies with hundreds or thousands of purchases annually, keeping everyone on the same page is vitally important.
2. Reduced errors: Purchase order management is largely a practice of double-checking. Creating secondary approval workflows for internal and external stakeholders helps prevent order and invoice discrepancies that waste time and money. Reducing exceptions on supplier invoices improves processing time and reduces unnecessary spending.
3. Fewer fulfillment delays: In a world that relies on just-in-time delivery and increasingly complex supply chain management, avoiding delays is essential. With a thoughtful approach to purchase order management, miscommunications and associated processing delays can be drastically reduced or eliminated.
4. Higher product quality: Finalizing details regarding ordering, shipment, and payments has the downstream effect of shortening the time to fulfillment. When everything is double-checked in advance, suppliers can get products out the door faster, and accounts payable can settle invoices without extra research.
5. Better spend management: Keeping a careful eye on POs is directly related to managing spending. When internal buyers and approving managers stay in contact about purchases, there is less room for maverick spending and unnecessary additions to orders. Maintaining communication on budgets and pricing keeps everyone focused on the important goal of optimizing spend.
Order.co helps unlock the many benefits of purchase order management. It creates an audit trail for every purchase, speeds and automates the purchase order approval process, maintains spend visibility for strategic spend management, provides automatic GL coding, and enables in-depth spend analysis and reporting.
Best practices for purchase order management
Keeping a few best practices in mind can help you build an effective purchase order management process or improve your current one.
1. Create a clear process: Effective purchase order management relies on having a repeatable process that applies to every purchase. The process doesn’t need to be complex, just reliable and straightforward.
2. Receive internal and external confirmation: Communicating needs and changes helps both parties achieve their objectives and ensures everyone understands their role and requirements. Confirming a PO's items, quantity, and pricing allows those involved to provide necessary updates to ensure correct and timely delivery.
3. Ensure quality at delivery: Checking and confirmation don’t end at PO transmittal. Communication regarding the quality and condition of goods and working with the supplier to remedy exceptions ensures issues are corrected and standards are maintained.
4. Track and report on spending: The primary objective of PO management is the accurate and timely delivery of goods, but it’s also important for analyzing purchase data for future use. Using the purchase order management system as a point of reference in lifecycle management helps you understand how effective your overall purchasing and procurement activities are and what improvements you can make.
5. Consider using technology: Using a purchase order system automates many of the checking and tracking activities within a successful purchase order management practice. Creating an audit trail to make reporting a touchless process reduces the effort necessary to track purchase orders and yields better results.
These best practices offer powerful process improvements for a relatively small time and financial investment. Improving your PO management system reduces some of the most costly outcomes of poor management, eliminating maverick spend, out-of-policy purchases, and siloed purchasing information.
The Complete Guide to Procurement Management KPIs
Dive deep into how your team can benefit from tracking procurement KPIs, the 15 most important KPIs to track, and a detailed worksheet to help you calculate which KPIs suit you!
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How does purchase order management software help?
Purchase order creation and management become much easier when you use the power of technology. The right software will help you build an easy approval process, track purchase progress, stay up-to-date on delivery estimates, and improve supplier management. With comprehensive PO management software, it's easy to improve your processes.
Streamlined approvals
A manual PO process can cause team members to waste time chasing approvals and completing follow-ups. Purchasing software minimizes this by automatically routing approvals to the right people, facilitating quick answers to questions, and preventing the log jams caused by email-based approvals.
Order.co streamlines the approval process with an automated workflow that routes each purchase to the appropriate approvers based on requestor, department, budget, and other parameters.
Real-time tracking
Automation allows stakeholders total visibility into the process—from initial approvals to fulfillment and delivery notifications. Everyone can access the information they need to perform their role and keep material orders in motion. This improves delivery outcomes and aids in inventory management.
Centralized data
No longer will users need to dig through paperwork in search of answers to their questions. Using procurement software to automate the purchase order process provides instant access to a database containing all available order and supplier information. Making data available through dynamic search reduces manual data entry and enables automatic contract management.
Order.co provides buyers with a centralized, curated catalog of preferred items from any vendor, making it easy to order what you need. It also provides guided purchasing experiences to ensure fast and simple replenishment.
Faster order processing
Processing speed greatly improves when approvals route automatically and answers are available in seconds. With Order.co, orders are fulfilled and shipped days or weeks earlier than with a manual process.
Enhanced reporting
Reporting is a central and automatic function of a purchase order management system. Built-in reporting tools can parse and visualize data with only a few keystrokes.
Order.co captures all purchase data for every transaction (even those that don’t happen in the system), creating total spend visibility and enhanced reporting functions.
Increased cost savings
The fundamental outcome of all the above process improvements is cost savings. Investing in a purchase order processing system improves the bottom line by reducing wasteful spending, human error, and payment issues.
How Order.co improves purchase order management
Order.co brings together the best features of a robust procure-to-purchase (P2P) platform into a user-friendly interface. Within the system, users can easily produce, track, and reconcile purchase orders for everything they need. With Order.co, many formerly manual processes are automated, giving users granular visibility, touchless monitoring and matching, efficient payment processes, and access to a wealth of data to improve outcomes and optimize purchasing.
To learn more about administering your purchase order management and other procurement processes with Order.co, schedule a live demo today.
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