Purchase Order Management

DEFINITION

What is Purchase Order Management?

A purchase order (PO) is a document that is sent from a buyer to a seller that details essential information for the purchase of products or services, including a list of desired items, the quantity of the order, and agreed-upon prices. Once the seller accepts a purchase order from a buyer, it becomes a legally binding document.

Purchase order management refers to a set of specific rules and standard operating procedures that are used by buyers to ensure that the procurement and purchasing process operates reliably and efficiently. This includes rules and practices that confirm that all relevant data is properly recorded and stored, that each purchase is justified, and that all purchases are as cost-effective as possible.

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What is the Purchase Order Management Process?

The specifics of the purchase order management process are likely to vary depending on your organization’s industry, size, and purchasing needs. Even so, there are some common steps every business’s procurement process should follow in order to manage purchase orders with maximum efficiency.

Creating purchase orders

The process of purchase order creation involves your procurement team drafting a detailed document including all necessary fields for accurately processing an order, such as:

  • PO number
  • Date of purchase
  • Address, contact information, and other key details about the buyer
  • Description of goods or services being ordered
  • Amount of goods or services being ordered
  • Agreed-upon payment terms
  • Address for delivery

For some businesses, this step may also involve creating a purchase requisition. This is a document that can be used by an employee to make purchases on behalf of their organization. This is similar to creating a purchase order, but the main difference between a purchase requisition and a purchase order is that the former is an internal request to begin the ordering process, while the latter is an external document detailing the specifics of that request. A purchase requisition is created first and then converted into a PO by your procurement team.

Purchase Orders vs Invoices: Discover the Difference

Routing purchase orders for approval

Once an organization issues a purchase order, it is time to begin the approval process. Every business will have its own approval workflow, but this essentially means sending the PO to a sequence of individuals or departments who need to sign off before the purchase becomes official. Once the PO is fully approved, it can be sent to the vendor or supplier.

Delivering goods or services

The vendor sends the agreed-upon goods or services. Your procurement team records all relevant details (such as date received, condition of product, etc.) into your order management system. If anything is missing or damaged, the order is flagged for resolution.

Managing invoices

After the supplier delivers on the purchase order, they will issue an invoice for the products or services being purchased. Each invoice is processed by your accounts payable (AP) team. For a business with an automated AP software system, this will likely incorporate optical character recognition (OCR) tools that can automatically extract important data from any kind of invoice. Three-way matching is used to compare data from each purchase order against a corresponding invoice and receipt of goods or services. Any errors or discrepancies will be flagged for correction and re-routing.

Paying and recording invoices

If an order clears the three-way matching process, your AP team can issue payment on the invoice. The process does not end when payment is sent, however. Keeping accurate and detailed records of each payment as well as tracking purchase orders and invoices is important for your data analysis efforts, and can be helpful in resolving any disputes that may arise later on.

PO vs. Non-PO Invoices: Discover the Differences

Improving Purchase Order Management with Automation

For most organizations, the complexities of managing purchase orders makes it too difficult a function to be left to outdated and inefficient manual processes. That is why businesses are increasingly turning to procurement software and purchase order management software to keep their workflows moving smoothly with minimal supply chain disruptions. A few areas where investing in an automated purchase order management system can truly pay off include:

Automatic purchase order creation

Creating a new purchase order by hand every time your business deals with a supplier is not only a time-consuming and tedious task, it also carries an increased risk of human error that can cost your team even more time and effort.

PO management software eliminates many of those risks and unpredictable variables with a selection of templates that can be reused. Depending on your business and your vendors’ needs, purchase orders can follow a standard template or adjusted to suit the specific needs of a wide range of suppliers. A software system that includes optical character recognition (OCR) functionality can also save a tremendous amount of time and prevent errors by automatically extracting necessary data from purchase orders and invoices submitted in nearly any format, eliminating the need for manual data entry.

Instant PO tracking

As a purchase order works its way through your system, automated software provides deep, real-time visibility into the process. Being able to track where an individual PO is in your system allows your team to identify bottlenecks, inefficiencies, and other potential issues that can slow down the purchasing process. That visibility also makes it much simpler for your team to correct mistakes and address those issues before they become bigger problems.

Easier invoice management

Being able to compare each purchase order against the corresponding invoice and receipt of goods and services is essential to keeping your PO workflow moving efficiently. An automated system is by far the easiest and most efficient way to keep track of invoices and take the tedious task of comparing that data out of your employees’ hands. Automated three-way checking makes sure that all of the necessary data matches up across all three formats. When errors and exceptions do arise, they are automatically flagged for review and re-routing if required.

Simplified supplier management

One of the biggest challenges for organizations dealing with a large volume of suppliers is keeping all of their data accessible and easy to find. An automated purchase order management software system eliminates that concern by integrating vendor information such as purchase histories, spending limits, scheduled delivery times, applicable discounts, and recent price changes directly into your system. That puts all of your valuable vendor data in one place where accessing and adjusting information is as simple as a few clicks of the mouse.

Helpful data analytics

Analyzing the data generated by an automated purchase order management system can play a major role in how your organization approaches PO management going forward. Real-time, at-a-glance data analytics not only help your team understand what is and is not working with your current system, they can also provide helpful leverage when it’s time to negotiate vendor contracts.

Streamline Purchase Order Management with MHC

Purchase order management can be a complicated process, but with the right tools it can be managed in a smooth and efficient way that improves your workflow and bolsters relationships with valued vendors. Ready to learn more about the many ways an automated software system from MHC can help to revitalize the way your organization approaches purchase order management? Contact us today to schedule a demonstration of our industry-leading workflow management software solutions!

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