Every time your business submits a purchase order (PO), it kicks off a chain of events involving your team and trade partner. Each touchpoint represents a potential friction point unless your organization has mastered the art of purchase order management.
Managing purchase orders effectively is crucial for maintaining smooth operations and ensuring adequate financial visibility. Our list of seven purchase order management best practices will help you streamline your purchase order process.
What is purchase order management?
Purchase order management involves creating, tracking, and fulfilling purchase orders within a business. It encompasses everything from requisitioning goods or services to receiving and paying for them.
Effective management ensures that orders are placed correctly, suppliers are notified, and inventory levels are maintained accurately.
PO management involves more than the procurement team. The purchasing process begins with the creation of a purchase requisition, meaning every department across all levels of the organization will impact the purchase order process.
Suppose your team members don't know the proper procedures for filling out a purchase request. In that case, you may experience delays in your procurement process, which could lead to vital equipment or inventory shortages.
Your purchase order management process must holistically address every facet of buying goods and services. The earlier you get involved in procurement, the easier it will be to optimize purchase order management.
Why is purchase order management important?
Purchase order management directly impacts several key areas of your business. Optimizing the way you manage purchase orders can help you exercise better budget control. By tracking commitments and expenditures, you can maintain spending within allocated budgets.
Purchase orders are legally binding documents. Once you and your supplier sign the form, the agreement can not be broken. If an incorrect purchase order accidentally gets executed, it is still a legally binding document, even if it has errors.
Your business would be legally obligated to adhere to the purchase order terms. If you have good supplier relationships, your trade partner may allow you to return the excess items. However, you will still have to pay hefty restocking and return shipping fees.
Good purchase order management helps prevent costly errors and promotes better supplier management. Automated solutions to help with PO management can also alleviate the burden of manual data entry and make it easier to catch errors.
7 best practices for managing purchase orders
Here are seven ways to improve your procurement process flow through PO management optimization.
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1. Standardize your process
A standardized purchase order process will promote better efficiency and reduce the risk of errors. Your team needs clear guidance regarding every step of the purchase order process, including:
- How to initiate the purchasing process
- What the approval process is for requisition forms and POs
- What details to include on purchase orders
- Who to send POs to
Your purchasing policy must thoroughly address both internal and external purchasing processes, including rules for submitting and approving POs.
Start by reviewing your current process and set of policies. Consider the scope of your policies and ensure they address any questions or concerns your team members may have. Spell out everything, including a list of details required for purchase orders.
Once you've created a standardized process and set of policies to govern all procurement activities, it will be much easier for your team to complete and submit purchase orders.
2. Use purchase order management software
With purchase order management software, you can automate various procurement processes, including sending multiple purchase order documents, obtaining necessary approvals, and more.
PO software centralizes all procurement activities and automates approvals. Real-time tracking for order statuses makes it easy to match invoices with corresponding purchase orders. Tracking POs and projected fulfillment times will help you stay within your inventory threshold and avoid critical product shortages.
A top purchase order system will also help with back-end aspects of inventory management and accounting. By integrating with your resource management technologies, leading procurement software can assist with shipment and quality inspection, reconciling invoices with POs, stock management, and supply chain optimization.
Consider technologies that readily integrate with your existing enterprise resource planning and accounting platforms when exploring PO software solutions. Integrating your technologies will provide a holistic view of your supply chain while modernizing your purchase order management capabilities.
3. Maintain accurate records
Detailed purchase order records are invaluable for tracking expenses and resolving any discrepancies that may arise. Accurate records help in auditing and providing a clear history of all transactions.
Relying on manual processes makes it incredibly difficult to maintain accurate records as manual data entry sets the stage for human errors.
Digitizing purchase order management will help you stay organized and automate redundant tasks while your team can use their talents for more strategic tasks that add value to your business.
By increasing your ability to maintain accurate records and mitigate mistakes, PO software can also drastically improve financial visibility.
4. Define approval hierarchies
Do you have a clear approval hierarchy for reviewing and signing off on purchase orders? If not, it's time to consider what an approval process might look like for your business.
Approval hierarchies ensure major purchases don't slip through the cracks. Make sure all relevant stakeholders are aware of your approval workflow. Your accounting department and all department heads must know what the PO process is and when they have to forward requests up the chain to the finance director.
For example, say a healthcare organization has a two-stage invoice approval process. Department heads can approve orders up to $5,000. If they receive a requisition higher than that, they must sign off on the request and then send it to the finance director for final approval.
5. Implement 3-way matching
Three-way matching is a critical step in your approval workflow. It compares the purchase order and delivery receipt to the supplier's invoice. This ensures the quantities and prices match all three documents before paying your suppliers. A thorough matching process helps prevent overpayments and fraud.
6. Monitor supplier performance
Purchase order management solutions provide a means of evaluating supplier performance to ensure quality and reliability. Track key performance indicators such as:
- Delivery timeliness
- Product quality
- Adherence to contract terms
You can identify underperforming suppliers and take corrective actions by monitoring these metrics.
For example, say that one of your trade partners consistently fulfills POs a few days late, which violates your contract terms. Your leadership team can evaluate this trend and determine whether it negatively impacts your company's operations.
During future contract negotiations, you can address the issue with your supplier and potentially implement a penalty system for violations of terms. For example, you may require them to offer a 5% discount on all late deliveries. Alternatively, you can explore different suppliers who can meet your performance needs.
7. Regularly review and update processes
Purchase order management isn't a "set it and forget it" process. You must continually assess and update your PO processes to maintain efficiency and compliance. This involves periodically reviewing workflows and conducting performance audits.
During your assessments, it's essential to evaluate your software's capabilities. Is your technology suite effectively meeting your organization's needs, or are you being hampered by redundant workflows?
If the latter is true, it may be time to replace legacy software with modern purchase order management technologies with automation capabilities.
How automation can help with your purchase order management
BILL Accounts Payable includes automatic three-way matching to detect discrepancies sooner and reduce the risk of fraud or other critical errors.
It has helped countless businesses gain valuable visibility into their purchase requisition process. For example, Myomo, a wearable medical robotics company, integrated BILL with NetSuite.
Our platform automatically syncs purchase orders and item receipt details from NetSuite to our workspace, providing Myomo with a unified view of POs and invoices.
Another BILL customer, aboutGOLF, relies on our three-way matching capabilities to prevent discrepancies and avoid costly billing errors.
Like Myomo, aboutGOLF also took advantage of BILL's ability to integrate with top solutions like NetSuite. The client can now review and analyze purchase orders alongside invoices in our user-friendly workspace.
Ready to learn more about BILL and how it can enhance your purchase order management process? Explore BILL Accounts Payable today!