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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.
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Purchase order management is the process by which businesses handle creating, sending, and recording purchase orders.
It’s common for new businesses to initially manage purchase orders manually using Excel or Word. However, various studies report that almost 90% of spreadsheets contain inaccuracies – most caused by human error. Despite these findings, 46% of SMBs still use manual inventory management methods or don’t track inventory at all.
As a business starts to grow, manual purchase order management leads to inefficiencies, inaccuracies, and the potential for negative consequences such as lost records, sales and poor customer experience. According to our 2019 Global Commerce Survey, SMBs spend approx 90 hours a month managing inventory, orders and sourcing.
With that in mind, many forward-thinking SMBs utilize purchase order management software to not only reduce the risk of errors in creating purchase orders, but also automate many components of the purchase order process.
Smart PO management is important because it helps businesses to do the following:
Poor cash flow is a scourge on many businesses, and without being rectified can lead to total business failure. Effective PO management gives businesses a clear picture of how and when money is being spent, allowing for better decision-making and expenditure planning.
Automating purchase order management enables faster processing and tracking of orders. This makes it easier for suppliers to verify your order, assemble your goods, and issue an invoice – helping you provide better service to your own customers.
Accurate purchase order management is all about ordering the right quantities of stock at the right time, and that means only storing what you need when you need it – so you can keep your warehousing costs as low as possible.
Suffering from out of stock problems is a major issue for small-to-medium-sized businesses, and it often happens as a result of poor order management processes. According to our survey, 37% of businesses with a revenue over $5M experience inventory management issues with accuracy/mismanagement. Having a strategic purchase order management process that is based on demand forecasting helps ensure the right products are in-stock when they need to be.
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Having to purchase more inventory certainly isn’t a bad thing, it means you’re making sales. But it is a bit of a pain. Having to constantly make up and fill out purchase orders is a time-consuming part of inventory management, especially for wholesalers that purchase inventory from several different suppliers.
As TradeGecko rolls out new functions that streamline the way users purchase inventory, we take a look at the current issue with purchase orders, why they are important and how TradeGecko can make this part of stock management easier.
The way TradeGecko helps with purchase orders is quite simple… it brings all the information together. As an inventory management system with a holistic and integrated approach to monitoring stock levels, TradeGecko makes creating and managing purchase orders super simple. You can quickly see all the outstanding purchase orders and bringing goods into stock is as easy as clicking the received button.
SMEs get back a great deal of their time and minimise the risk of human error as TradeGecko customizes the purchase order for the specific business using it. Pre-loaded suppliers are available for selection, current stock levels are outlined and prices are adjusted to different quantities. The simple and professional template allows users to easily navigate or modify the purchase order with all their inventory information right there in front of them.
TradeGecko’s inventory management software is designed to streamline the purchase order management process. TradeGecko’s purchase order features enable businesses to:
The draft stage is an optional status that you can apply to tentative purchase orders. At the draft stage, the order has not been made yet and there is no change to your stock level. You can also edit the PO and resave as needed.
Once you are ready to send your PO, you can approve the order and the status will change to ‘Active’.
The active stage is where you will begin to receive the goods in your purchase order. You can choose to partially receive purchase orders or receive all the goods. You can also add landed costs to your received delivery if required.
If your TradeGecko account is integrated with accounting software such as Xero or QuickBooks Online, your data will be synced at this stage. The PO will also be reflected in your stock reports as Incoming.
At this stage, you can edit all parts of the order, such as the quantity of stock received (partially or in full), add landed costs, or void the order.
At this stage, all your goods have been received and your stock levels will have increased. The PO is not editable in this final stage.With its integrated approach to inventory management, TradeGecko makes creating and managing purchase orders simple and easily referenceable. From the dashboard, you can easily create, review, and update all outstanding purchase orders, with stock levels and pre-loaded supplier information all in the one place. Prices are also automatically adjusted to match different quantities as needed.
As with all of TradeGecko’s functionality, the PO management dashboard enables growing businesses to work smarter, accurately plan for the future, and provide a better customer experience. TradeGecko provides not only effective purchase order management but also let’s you manage, connect and automate your entire business from one hub for inventory, orders, accounting, fulfillments and more. TradeGecko frees you from the operational challenges of building businesses and let’s you focus on what you love and do best - create amazing businesses.