Having a robust purchase order management process in place is essential for organizations that wish to optimize procurement, build strong relationships with suppliers, and reduce the risk of harmful errors.
The purchase order management process makes up part of the larger procurement process, following on from identifying a need for goods or services and selecting a supplier and preceding making payment and taking delivery. It’s a central part of the procurement life cycle, meaning optimizing your approach to handling purchase order management can have benefits that extend throughout procurement and contribute to generating departmental efficiency.
We’re here to explain what exactly purchase order management is, how the process works, and what steps businesses can take in order to make the process more efficient and effective.
What is a purchase order?
A purchase order (PO) is a document created by the buyer and sent to the seller when placing an order for products or services. A PO includes details of the items the buyer intends to purchase, together with the relevant prices and quantities. As such, it precedes the issuance of an invoice in the procurement process and forms the basis of a commercial relationship between buyer and seller.
What is purchase order management?
Purchase order management (or PO management) is the term used to describe the set of internal processes and policies that companies use to manage their purchase orders, including creating, reviewing, and issuing purchase orders. PO management is important because it is used to ensure that the company’s purchases are necessary and justified, as well as optimizing the process and eliminating any inefficiencies.
Not all PO management processes are equal, however. Traditionally, purchase order management has involved a host of manual, paper-based processes which can be fraught with inefficiencies. Manual processes can also result in an increased chance of human error, which may cause knock-on delays in the purchasing process.
In contrast, the modern approach to PO management often revolves around utilizing a digital solution for partial or full automation, speeding up the process and reducing the risk of errors. Effective purchase order management can also lead to stronger supplier relationships and the ability to negotiate better prices.
The purchase order process
Different organizations will approach purchase order management in different ways – however, the process will usually include the following core steps:
- Creation of purchase order. A purchasing need is identified, and a purchase order is created, outlining the purchasing need. The PO should include details of the required goods, raw materials, or services, together with information about the quantity required and the price. The purchase order will need to be approved internally.
- Vendor approval. The PO is sent to the vendor, who approves its contents and confirms that they are able to deliver the order at the requested price. Alternatively, the vendor may request amendments to the purchase order, which will need to be resubmitted once the amendments have been made. In some cases, the PO may be used as the basis for a request for proposal (RfP) exercise, in which case the PO will be sent to the chosen supplier once the selection process is complete.
- Purchase recorded. After approval by the vendor, the purchaser can record the PO as accepted in their system and await delivery of the products or services.
- Delivery, approval, and payment. Once the goods or services have been provided, they will need to be checked by the purchaser to ensure that the terms of the PO have been fulfilled. The supplier’s invoice is then filed with accounts payable, where the accounts payable process starts.
Purchase order process example
Company A is setting up a new office and needs to purchase several desks. The office manager creates a purchase order specifying the number of desks needed. The PO is then sent to the company’s preferred supplier, who approves the PO and delivers the desks by the agreed date. After the order has been received, the number and quality of the desks is checked, and the PO is recorded as accepted. The supplier’s invoice is then passed to accounts payable for payment.
Improving purchase order management
The purchase order management process can often be unnecessarily time-consuming and manual, resulting in inefficiencies and delays that can have a knock-on effect on the company’s purchases. Fortunately, there are a number of steps that companies can take to improve the PO management process, such as the following:
Make use of automation
For companies with manual PO processes, purchase order automation can generate multiple benefits. As well as providing PO templates that speed up the process, an effective purchase order management system may be able to automate the PO workflow by automatically sending documents to the relevant people for approval.
Automation can also be harnessed to benefit suppliers during the invoicing process: Taulia’s electronic invoicing solution, for example, offers an eFlip tool which enables suppliers to turn a purchase order into an invoice automatically and submit it using the supplier portal.
With a centralized, digital system for purchase order information, companies will be better placed to generate purchase orders quickly and make sure they are readily accessible for the relevant people with minimal organizational friction.
Create robust policies
Having a clear and robust policy in place is essential when it comes to making sure people follow the right procedures for purchase order management. By documenting the company’s purchase order policies and procedures, and keeping everything up-to-date, companies can keep all stakeholders informed about what is expected and drive a consistent approach.
Maintain key vendor information
Businesses should maintain accurate and up-to-date information about their vendors. As well as minimizing the risk of errors and ensuring that POs can be produced easily when needed, this also enables companies to compare different vendors’ pricing quickly and easily. The information should be made readily available to the people who need to access it, which can be achieved with ease by using a vendor management system.
Build strong vendor relationships.
Last but not least, companies should take the time to build and maintain strong relationships with their chosen vendors. Communication with suppliers is an important part of the PO management process, both during the selection process and when sending the PO to the vendor for approval – so organizations should make sure that their supplier communications are both streamlined and effective.