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Purchase order (PO) management is a critical tenet of accurate inventory management and maintaining supplier relationships.
Creating a time-efficient and low-cost process for managing purchase orders is key to growing any small-to-medium-sized business – yet many business owners overlook its importance.
Efficient purchase order management not only means having the right stock on hand at the right time, but also frees you up to focus on growing your business rather than getting bogged down in paperwork.
This guide covers the essentials of purchase order management – including how to streamline your PO management strategy to make life easier and drive operational excellence.
Before we get into the finer details of purchase order management, let’s take a step back and look at the foundations of order management and why it’s so important for businesses.
In a nutshell, order management is all about keeping track of orders and managing the people, processes, and suppliers required to fulfill them. This includes:
In a world of omnichannel sales, global markets, and increasing customer demands, moving a product smoothly from warehouse to customer is a challenge many businesses face. Complex logistics and customer care needs mean that businesses can’t afford to drop the ball.
With that in mind, most forward-thinking businesses use a dedicated order management system to deal with complex and changing orders as efficiently as possible, speeding up order processing times and reducing the likelihood of errors.
Purchase order management is just one (albeit very important) piece of the order management puzzle, ensuring the right goods are received from suppliers at the right time. Without effective purchase order management, the entire order management process – which includes customer satisfaction and sales – is at risk of failing.
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A purchase order is the contract between a buyer and seller that details the exact goods to be exchanged in a particular inventory purchase. It’s the document that details what merchandise is to be ordered and all the information surrounding that transaction.
Once you and the supplier both agree to the terms of the purchase order, it becomes a legally binding contract between the two parties. This is why it’s critical that the buyer is clear and explicit in communicating the details of the purchase order from the outset.
Typically, two copies of the PO are required, one externally and one internally. The external purchase order is sent to the supplier, while the identical internal purchase order is kept by the accounts payable department.
SMEs carry out purchase orders all the time, usually without thinking and generally without calling them “purchase orders”. To most small businesses it’s just a part of doing business, ordering more stock. But if we look at the purchase order in isolation, separate from other administrative tasks, we see there are a few common features and trends in the way they’re completed.
Purchase orders are always documents, comprised of payment dates, delivery dates, inventory price and quantity. They include stock identification numbers, shipment details and other basic information SMEs must manually extract from their inventory management system. Even if they’re exported from stock management software purchase orders always require time for some information entry or checking.
The major difference between a purchase order and an invoice is that a purchase order confirms that an order has been placed while an invoice is issued by a vendor/supplier, requesting payment for a purchase order.
Here are some of the key differences between the two:
There are a number of stages involved in the purchase order process, and every business’ process will be slightly different depending on factors such as supplier lead times and fulfillment requirements.
However, every purchase order process should start with effective inventory management and understanding customer demand patterns. Utilizing demand forecasting tools and analyzing stock on hand using an inventory management system will help give you a clear picture of where your inventory currently stands and how much you’ll need to order to meet future demand.
Once you know what needs to be ordered and when, the typical purchase order process is as follows:
Purchase requisition is created – This is a document created to notify the purchasing department of items that need to be ordered, their quantity, and the timeframe. Depending on the size of your business, this could simply be a document you create for your own records, or you may need to use it to request approval from another department or manager to create the purchase order.
Purchase order is sent – Assuming the requisition is approved, the purchase order is created and sent to the supplier, detailing what is wanted and providing the information the supplier will need when creating their invoice.
Supplier approves purchase order – Once the supplier has reviewed the PO they will either accept it, at which point it becomes a legally binding document, or request amendments (for example, if they aren’t able to fulfill part of the order).
Buyer records purchase order – When the binding contract has been agreed upon, the supplier should fulfill the order by the arranged date.
As we’ve touched upon, the purchase order process is a critical component of order management. Poor purchase order management can lead to having too little or too much stock (and increased holding costs), fractured supplier relationships, lost sales, and dissatisfied customers.
Here are just a handful of ways in which the purchase order process impacts businesses:
Purchase orders detail costs, and can be used to create more accurate business budgets. Businesses benefit from having clear records of exactly how much money is being spent and where it’s going.
Purchase orders help establish clear and straightforward expectations with suppliers about what’s required with order quantities, delivery times, payment terms, etc. Both the supplier and the buyer can use a purchase order as part of the quality assurance process to make sure orders are being fulfilled accurately.
In the case of being audited, purchase orders act as proof of where money is being spent, including details of incoming goods and outgoing payments.
A purchase order is a legally binding contract between supplier and buyer. In the absence of a formal business contract, a purchase order can offer contractual protection should anything go wrong with the order fulfillment process.
