Understanding Purchase Order Management and How to Optimize

understanding purchase order management and how to optimize

Enforcing effective inventory management policies is essential to maintain efficiency, productivity, and profitability. Businesses that have inefficiencies across the supply chain tend to have more difficulty satisfying their customers and completing orders.

Constructive purchase order processes are a necessary component of stock management. Without a set of policies to guide each step of the PO operation, the entire system can fall apart. As a result, the organization will misplace resources, waste money, and find themselves losing their competitive edge.

There are several techniques and tips to follow that help organize PO activities. Here is a comprehensive overview of the steps needed to manage purchase orders across the logistics network.

What is Purchase Order Management?

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Purchase order management is an in-house procurement process implemented by businesses to make certain that every purchase is required, accounted for, and augmented for costs. The purpose is to ensure workers are following all policies and procedures before fulfilling a purchase order.

The purchase process refers to any transaction associated with obtaining goods and invoice payment. The purchase requisition process begins when the potential buyer has identified which product he wants and ends when the final invoice is paid.

The most common PO processing steps include-

  • Order Creation A purchase order is created by the procurement team or administrative staff
  • Approval Flow Purchase orders are then sent to a sign-off authority in case there are any adjustments
  • PO Dispatch The PO is sent to a specific vendor through means of email, fax, or paper
  • Blinding Contract A contract is legally binding once the vendor accepts the purchase order. Included in the contract are buyer details, PO number, shipment date, pricing, and more
  • Goods Delivery The vendor management team sends the product to the warehouse manager who checks the item for quality. If there are any problems, supply chain management will notify the vendor
  • Three-Way Matching The warehouse management team will then perform three-way matching to verify the invoice and ensure everything is billed appropriately
  • PO Closure If no further discrepancies exist, the invoice is sent to the company's accounts payable department
Implementing an effective purchase order process is essential to streamline inventory management and organize all areas of the supply chain. A poorly executed purchase process can lead to overpayments, damaged goods, wasted time, and inefficiencies.

Best Practices to Optimize Purchase Order Management

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Implementing a workflow as part of PO management will help to monitor costs and fix problems that arise. It will make it easier to allocate resources properly and boost efficiency across all areas of the logistics network.

Here are the best practices to optimize the purchase order process-

1. Review the Current PO Process
Evaluate the way purchase orders are currently handled and the types of problems that typically arise from creation to closure and everything in between.

Talk to everyone in the procurement process across the warehouse to see which bottlenecks exist. Ask these stakeholders how they would address these problem areas as they are better equipped to have answers.

2. Write Easily Accessible Guidelines
When workers know the exact policies and procedures to fulfill a purchase order, everything will run more efficiently and consistently.

After speaking with the warehouse/supplier management team, implement a set of strict guidelines to follow. Make these easily accessible to all workers across the supply chain so everyone stays on the same page at all times.

3. Offer a Central Vendor Database
Provide an accessible, approved vendor database to all workers and stakeholders who are part of the purchase order process.

This will make it easier to complete orders in real-time because purchasers can look at the database to find a verified, previously used vendor they have experience with. It will also boost efficiency because workers can choose a vendor confidently in a timely fashion.

4. Have a Reasonable Approval Process
The purchase order approval process should be neither too inflexible nor lenient. If too bureaucratic and cumbersome to finalize approval on a PO, there will be a ripple effect that decreases efficiency and productivity across the entire supply chain.

If the PO process is too lenient, the company will lose money by over-ordering, inaccurate orders, or using an expensive vendor. Consider the size of the purchase order and the company's budget when implementing a set of PO approval policies and procedures.

5. Use Expense Constraints
Effective purchase order workflow management requires systemizing products into different categories, such as office supplies or raw materials.

This will help stay within a budget for every single category. Management can also set spending caps on certain categories or require auxiliary authorization to stay within a budget. This will streamline the entire ordering process and create less work for the warehouse management team.

6. Make Purchase Order Status Accessible to Workers
If a worker initiates a PO, he/she will want to have regular status updates on it. Allowing purchasers to check-in at any time to see the status of their orders will cut back on the number of queries and time attempting to field them. Status visibility will help to gauge workflow processes and find inefficient areas to fix.

Utilizing user-friendly procurement software to manage and automate purchase order processes will streamline and improve the entire inventory management system.

A purchase order management system has functionality that allows users to create customized workflows for POs. Software solutions typically give status updates so management will know exactly what's happening at each stage of the process. Implementing a management solution will also save time, money, and improve the accuracy of the collected inventory data.

Conclusion

Here are the key takeaways to remember about purchase order management-

  • Purchase order management ensures every order is accounted for and optimized for costs.
  • The purchase process encompasses order creation, approval flow, PO dispatch, blinding contracts, goods delivery, three-way matching, and PO closure.
  • An effective PO process workflow will save time, money, and improve efficiency across the supply chain.
  • Tips to improve purchase order management include careful review, incorporating guidelines, including a central vendor database, creating a reasonable approval process, using budget-based expense constraints, and making status updates available to workers.
  • Purchasing a customized cloud-based software solution will also help streamline workflow processes, improve accuracy, and increase productivity.