Apr 14, 2022

What Is Purchase Order Management?

by Arielle Kushner

purchase order management

Maintaining efficiency, productivity, and profitability requires enforcing good inventory management standards. Whether that’s internal indirect procurement processes or managing physical goods and supply chains, businesses with purchasing inefficiencies have a more challenging time serving their consumers.

With direct procurement, stock management necessitates the use of productive purchase order processes. With indirect procurement, internal purchasing and approval processes require one; without a framework of measures that facilitate each step of the purchase order process, the entire system can break apart. As a result, the company will allocate resources poorly, mismanage money, and lose its competitive advantage.

There are a number of approaches and tips to assist you in arranging your purchase order activities. Here’s the definition of purchase order management and a quick rundown of the stages of managing purchase orders across the distribution network.

The Purchase Order Management Process

Whether you’re a small brand or a major corporation, your purchase order process is critical to your success. If you are unable to approve requests on time, vendors may take their business elsewhere – so procurement delays can cost your company a lot more money than you might think.

One of the easiest and most successful methods to develop your business is to optimize your purchase order process. Let’s dive into the basics.

What Is Procurement?

Procurement is the process of acquiring goods or services coming from external sources or vendors, and it is a component of business strategy. Clients consider numerous factors during this process, including quality, quantity, and timing.

Companies can avoid scams and fraud by using the procurement process, as it ensures that a product is purchased correctly.

The two types of procurement activities consist of:

Direct Procurement

This is procurement associated with the production of a final product, such as raw materials. It may have an impact on supply chain management.

Indirect Procurement

This is a non-production-related procurement that includes items like standardized office supplies, software solutions, and heavy equipment maintenance.

What Is a Purchase Order?

Purchase orders assist businesses in comprehending and accounting for the items and services they have requested. It’s a legally-binding document between the buyer and the seller. 

Managers can utilize purchase orders to maintain track of essential details such as quantity, delivery instructions, pricing, terms, and delivery dates. A purchase order is issued when the existing stock is about to run out, if additional supply is needed, or if a specific item is required.

The purchase order process encompasses all of the actions businesses take to produce, approve, validate, manage, and track purchase orders from the moment a necessity is identified through the point of delivery or sale.

What Is the Purchase Order Process?

The following are the steps in a standard purchase order cycle:

  • Identifying a need
  • Submitting a purchase request or request for purchase (RFP)
  • Selection of vendors
  • Term negotiation and purchase order issuance
  • Purchase order creation
  • Receipt of shipment and quality inspection
  • Closing the purchase order and matching the received items to the purchase order

What is Purchase Order Management?

Purchase order management is a collection of established standards and procedures that ensure that complete, up-to-date information about a single or multiple purchase order is always available.

These standards and procedures are critical for accomplishing procurement objectives while staying within budget constraints. They include establishing particular actions and privileges for all supply chain participants and acting on them by employing specialized tools and communication channels.

Many businesses have well-established purchase order management policies in place to guarantee that employees follow standard operating processes before completing procurement orders.

Spreadsheets and e-mails are standard methods for managing purchase orders, which are frequently preceded by phone calls; however, minor changes in information cause unnecessary problems in this scenario.

Repeated communication over the same purchase order may be enough for a small project, but it becomes unsustainable as the project grows.

Why Is Purchase Order Management Important?

A purchase order management system is crucial because it allows a business to track and manage inventory levels and the purchasing process. Such systems ensure that goods are ordered in a timely manner and are available when needed, while also making sure that the company does not over-purchase or order too late.

Additionally, purchase order management can help to improve supplier relationships by streamlining the ordering process and making it easier for suppliers to understand what is needed and when it is required. A sound purchase order management system will also help improve cash flow by reducing the amount of inventory held at any given time.

How Does Purchase Order Management Work?

A company can summarize the purchase order management process into five steps. The first step is to plan and design the purchase order. This step usually occurs in the purchasing department, where buyers create a requisition for goods or services.

The requisition is then sent to the following department, which is typically production or engineering. They will verify that they need the items on the requisition and that they have the capacity to produce them. The next step is for the accounting department to create and approve a purchase order.

Afterward, the purchasing department verifies that all of the necessary approvals have been obtained and forwards them to the supplier. The supplier will then ship the goods to the company, and upon receipt, the accounting department will post the invoice to the correct account.

This is a high-level view of purchase order management. Let’s now take a look at each step in more detail.

  1. Planning and designing purchase orders 

This step usually takes place in the purchasing department, where buyers create a requisition for goods or services. The requisition is then sent to the following department, which is typically production or engineering. They will verify that they need the items on the requisition and that they have the capacity to produce them. 

The next step is for the accounting department to create and approve a purchase order. Afterward, the purchasing department verifies that all necessary approvals have been obtained and forwards them to the supplier. 

The supplier will then ship the goods to the company, and upon receipt, the accounting department will post the invoice to the appropriate account.

  1. Receiving and inspecting goods 

The receiving department is responsible for verifying that the goods received match the purchase order. They will also inspect the goods for any damage or discrepancies. If there are any problems, they will contact the supplier immediately.

  1. Processing and paying invoices 

After the goods have been received, the accounting department will process the invoice and post it to the appropriate account. Depending on the company’s payment terms, they may be required to pay the supplier immediately or after a certain period of time.

  1. Tracking and managing inventory 

The inventory department is responsible for tracking the quantity and location of all items in the company’s stock. They will also update the inventory system whenever an item is received, shipped, or sold. This information is used to generate reports that help management make better decisions about allocating their resources.

  1. Continuous improvement 

This is an ongoing process that should be undertaken by all members of the organization. Businesses can improve their bottom line and become more competitive by identifying and addressing inefficiencies in the purchase order process.

Best Practices for Optimizing the Purchase Order Management Process

A company can achieve the benefits and optimization of the purchasing process by defining and implementing appropriate purchase order procedures, effectively reducing ineffective acts, and increasing productivity. Listed below are a few tips for improving purchase order management.

1. Simplify the system

Only ask pertinent questions to those who are in a position to answer them. Do not annoy the rest of the team by bringing up concerns that can and should be dealt with by specific team members.

When only one approval is necessary, it is wasteful to submit a purchase order to each procurement agent for confirmation.

Furthermore, the individual who issues purchase orders often has little experience dealing with invoicing; that is the finance team’s responsibility.

Remember that each person has a distinct function to play while developing a workflow. To avoid any extra movements, simplify.

2. Implement an ordering procedure that is tailored to your company’s needs 

Workflows can vary depending on the size and type of company, as well as within departments. It’s critical to assess current inventory management techniques and examine systemic issues.

Find inefficiencies in the current process and discuss them with qualified decision-makers and stakeholders. This will enable you to create a solution that is tailored to the department’s specific requirements.

3. Analyze KPIs

Collect reliable supplier performance information using procurement management software. Create unique indicators for each vendor and keep statistics on hand at all times, and choose the appropriate vendor for every transaction based on the information you have.

4. Utilize digital, automated, and integrated solutions

Avoid additional hassles caused by inefficient manual processes and excessive documentation by abandoning paper-based procurement strategies.

Procurement software enables smooth and reliable scaling without the need for a significant increase in the procurement team. Select a software solution that will enable you to go digital, streamline work procedures, and improve the purchasing process significantly.

Human error is unavoidable when dealing with dozens of purchase orders in numerous spreadsheets or attempting to track progress via e-mails or phone conversations, so automation can help in reducing said errors by taking care of low-level tasks.

5. Develop a system for tracking and reporting on purchase order activity 

Designing precise instructions and describing each role is always a good strategy. It can be a physical manual or a digital learning reference, as long as everyone in the supply chain has easy access to it.

To ensure smooth collaboration and avoid misunderstandings, help ensure that everyone taking part in the procurement process fulfills the same procedures.

For example, specifying an inventory threshold that triggers a purchase request is required. It should be obvious who has the right to request a purchase, who may issue a purchase order, and whether the team must validate the purchase.

This will provide management with information on how well the purchasing process functions and identify areas where improvement is needed.

The purchase order management process is a critical component of effective inventory management. By implementing the best practices listed above, businesses can optimize the purchasing process and improve their overall productivity and profitability.

How Your Company Can Benefit from Purchase Order Management

Purchase order management is an integral part of running a successful business – particularly for companies looking to expand. Every organization has limited resources at any given time, so it’s critical to make the most use of them, keep track of spending, and streamline procedures.

The lack of organization and standardization in the development and submission of purchase orders is still a problem. Stakeholders no longer have access to up-to-date purchase information due to a combination of paper documents and databases, e-mails, and even phone conversations.

Purchase order management provides a solution to these problems, as it aids in the prevention of errors and fraud and the reduction of excessive administrative levels. Managing purchase orders entails gaining a better grasp of spending and making well-informed purchases.

Put it to Practice

A purchase order is a legally binding official document issued by a company to an outside supplier that contains all of the information needed to purchase products or services. 

Companies implement and personalize purchase order management procedures to ensure that each purchase is relevant, timely, and cost-effective. It is critical to ensure that personnel adhere to a set of standard operating procedures and utilize the most advanced technological solutions available.

Purchase orders can be processed more efficiently thanks to automation. It gives managers and everyone else engaged in the procurement process a real-time status update, reduces errors, speeds up the process, and ensures that every payment is justified.

Careful inspection, including guidelines, establishing a central vendor database, developing an appropriate approval process, employing budget-based expense limitations, and making status updates accessible to employees are all recommendations for optimizing purchase order management.

Interested in implementing a spend management system that simplifies and streamlines your business’s existing process? Check out Approve.com and request a free demo today!

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