Purchase Order Management

Purchase order management is an essential aspect of any business that involves buying products or services from external suppliers. This process ensures that your company orders the correct quantity of goods, tracks the delivery timelines, and maintains vendor relationships. In this article, we will explore various facets of purchase order management, including its importance, the types of purchase orders, the process involved, and best practices.

What is Purchase Order Management?

Purchase order management involves the creation, approval, dispatch, tracking, and receipt of purchase orders (POs) within a business. A purchase order is a document that a buyer sends to a seller specifying the products, quantities, and agreed-upon prices for goods or services. Effective purchase order management helps businesses maintain accurate records, manage budgets, and streamline procurement processes.

Example:

Imagine you run a small retail store and need to order more inventory. By using a purchase order management system, you can easily generate purchase orders, track delivery statuses, and ensure timely payments to your suppliers.

What are the 4 Types of Purchase Order?

Different types of purchase orders serve various business needs. Understanding these types can help businesses choose the most appropriate method for their requirements.

1. Standard Purchase Order:

A standard purchase order is the most common type, used when the details of the purchase, such as specific quantities and prices, are well-defined.

Example:

A bakery orders 100 bags of flour from a supplier, specifying the price and delivery date.

2. Planned Purchase Order:

A planned purchase order is used when the purchase details are known, but the delivery schedules are not specified.

Example:

A manufacturing company plans to order raw materials over six months but hasn't decided on the exact delivery dates.

3. Blanket Purchase Order:

A blanket purchase order allows businesses to buy a large quantity of goods over a period, often with predetermined prices.

Example:

A school district secures a blanket purchase order for office supplies for the academic year.

4. Contract Purchase Order:

A contract purchase order is a formal agreement between a buyer and seller, outlining the terms and conditions for future purchases.

Example:

A tech company signs a contract purchase order with a hardware vendor for equipment needed for upcoming projects.

Why is Purchase Order Management Important?

Effective purchase order management is crucial for several reasons:

1. Budget Control:

It helps businesses keep track of their expenses and avoid overspending.

Example:

A small business can monitor its purchasing activities to ensure it stays within its monthly budget.

2. Inventory Management:

It ensures that businesses maintain optimal inventory levels, reducing the risk of overstocking or stockouts.

Example:

An eCommerce store can forecast demand and manage inventory effectively to meet customer needs.

3. Supplier Relationship:

It fosters better relationships with suppliers by ensuring timely payments and clear communication.

Example:

A restaurant maintains good relations with its food suppliers by managing purchase orders efficiently, resulting in timely deliveries and quality products.

4. Compliance:

It ensures compliance with internal policies and external regulations.

Example:

A healthcare provider can track medical supply purchases to ensure compliance with industry regulations.

What is the PO Process?

The purchase order (PO) process involves several steps to manage the procurement of goods and services.

1. Requisition:

The process begins with a purchase requisition, where a department or employee identifies the need for goods or services.

2. Approval:

The requisition is reviewed and approved by the relevant authorities.

Example:

A department manager reviews and approves a request for office supplies.

3. Creation:

A purchase order is created, specifying the details of the purchase.

4. Dispatch:

The purchase order is sent to the supplier.

Example:

The office manager sends a purchase order to a stationery supplier for pens and notebooks.

5. Receipt:

The supplier fulfills the order, and the goods are received.

6. Payment:

Once the goods are verified, payment is processed.

Purchase Order Management Process

An organized purchase order management process involves various stages:

1. Identifying Needs:

Determine the requirement for goods or services.

2. Creating a Purchase Requisition:

Submit a request for the required items.

3. Approval Workflow:

Route the requisition through the appropriate approval channels.

4. Generating a Purchase Order:

Convert the approved requisition into a purchase order.

5. Sending the PO:

Send the purchase order to the selected supplier.

6. Tracking the Order:

Monitor the delivery status of the order.

7. Receiving Goods:

Inspect and verify the received items against the PO.

8. Processing Payment:

Approve and process the supplier's invoice for payment.

Example:

A clothing retailer systematically follows these steps to order seasonal inventory, ensuring timely delivery and payment.

Purchase Order Management Excel

Excel can be a useful tool for managing purchase orders, especially for small businesses.

1. Creating Templates:

Develop Excel templates for purchase orders to standardize the process.

2. Tracking Orders:

Use Excel spreadsheets to track the status and delivery timelines of orders.

3. Budget Management:

Maintain a budget tracker within Excel to monitor expenses related to purchase orders.

Example:

A small consultancy firm uses Excel templates to create and track purchase orders for office supplies.

Purchase Order Management Examples

Understanding real-life examples can illustrate the importance and application of purchase order management.

1. Retail Store:

A small retail store uses purchase order management to maintain optimal inventory levels and ensure prompt restocking of popular items.

2. Manufacturing Company:

A manufacturing company implements a purchase order system to order raw materials, track shipments, and manage supplier payments.

3. E-commerce Business:

An online store uses purchase order management software to automate the procurement process, ensuring timely order fulfillment.

Purchase Order Management Software

Many businesses leverage software solutions to streamline purchase order management. One excellent example is Ordoro.

1. Ordoro:

Ordoro is an inventory management software with built-in purchase order features. It helps businesses automate the purchase order process, track shipments, and manage supplier relationships. Ordoro is favored by several hundreds of happy eCommerce merchants.

2. Other Software Solutions:

Many other software options are available, such as SAP Ariba, Procurify, and Coupa. However, Ordoro is often the top choice for small businesses due to its comprehensive features and excellent user reviews.

Purchase Order Management Best Practices

Adhering to best practices in purchase order management ensures efficiency and accuracy in the procurement process.

1. Standardize Processes:

Create and follow standardized procedures for creating, approving, and managing purchase orders.

Example:

A nonprofit organization standardizes its purchase order process to ensure consistency across departments.

2. Use Technology:

Implement software solutions like Ordoro to automate and streamline purchase order management.

Example:

A small business adopts Ordoro to handle purchase orders, improving efficiency and reducing errors.

3. Monitor Performance:

Regularly review the performance of suppliers and internal processes to identify areas for improvement.

4. Train Employees:

Provide training to employees involved in the purchase order process to ensure they understand best practices and procedures.

Example:

A retail chain conducts training sessions for its procurement team to optimize purchase order management.

Purchase Order Management Process Flow Chart

Creating a flowchart can help visualize the purchase order management process steps.

Example:

1. Start:

Identify needs for goods or services.

2. Submit Requisition:

Employee submits a purchase requisition form.

3. Approval:

Manager reviews and approves the requisition.

4. Create Purchase Order:

Generate a purchase order based on the approved requisition.

5. Sending PO:

Dispatch the purchase order to the supplier.

6. Goods Receipt:

Receive, inspect, and verify the items.

7. Invoice Processing:

Approve and process the supplier's invoice for payment.

8. End:

Complete the purchase order process.

Conclusion

Effective purchase order management is crucial for businesses to maintain accurate records, manage budgets, and foster good supplier relationships. Whether you are a small retailer or a large manufacturing company, understanding the purchase order process, leveraging tools like Excel or software solutions like Ordoro, and adhering to best practices can significantly enhance your procurement efficiency. So, if you're looking to streamline your purchase order management, consider implementing a robust system and investing in the right tools to ensure success.

For further reading on purchase order management, you can explore the Procurement Academy and Investopedia.