Everything You Need to Know About Purchase Orders
In a procurement process, the purchase order (PO) is a critical component. Outlining the details of the goods or supplies a business needs, this document helps you control the purchase process. In fact, any delay in the purchase order process can significantly impact the supply of the materials, disrupting your business operations. On top of that, manual processing of the PO using emails and spreadsheets or the use of legacy systems can further complicate things. That is why adopting an effective purchase order system can help the team streamline and track pending and future POs to make informed monetary decisions.
In this article, we will dig deeper into purchase orders and how automating the purchase order process can help you overcome the common challenges.
What Is a Purchase Order?
A purchase order can be considered a legally binding agreement between the vendor and the seller. It is usually shared by the buyer with a vendor for requesting an order explicitly. It may appear that creating POs increase the number of steps in the purchase process, but they ensure smooth order fulfilment and transactions and reduce the risk of unfulfilled or incorrect orders. Moreover, it also protects the vendor in case payment is deferred or refused as it acts as a contract between the two parties.
Purchase Orders Versus Invoices
As discussed, purchase orders are created and sent by the buyer to the seller to keep the purchase process in check. Invoices, on the other hand, are payment requests sent by the seller to the buyer following order fulfilment. Both of these documents are legally binding, ensure visibility, act as a means of communication, and provide details of the purchase or commercial transaction taking place.
The key differences between the purchase orders and invoices are:
- Purpose: A PO can be considered as an order confirmation from the buyer’s end. An invoice is a payment request or reminder from the seller.
- Stage: A PO is created at the time of placing an order. Whereas an invoice is created after order fulfillment.
- Benefits: A PO helps define the terms of purchase and helps manage inventory. Invoice helps confirm the sale of goods or services, helps avoid transaction errors, and determines expenses and taxes.
What Does a Purchase Order Contain?
Here are some of the common components of a purchase order.
- Description of good or service being purchased including brand names, model numbers, or SKUs
- Price per unit
- Total price
- Delivery date and location
- PO number and date
- Terms of payment
- Shipping method
- Terms of shipment
- Vendor name and billing address
- Buyer name and shipping address
Purchase Order Process Flow
Purchase order undergoes scrutiny based on various checkpoints before approval from the procurement department. This ensures timely processing of the correct order.
Some common steps include the following. However, the purchase order process flow may vary depending on the organisation.
- Creating a purchase order
- Sending multiple requests for quotation(RFQ) to the vendors
- Assessing and selecting a vendor
- Negotiating terms and contract
- Creating and sending out the purchase order
- Receiving the goods or services as agreed in the PO
- Checking quality (three-way matching) and invoice
- Clearing the invoice and making payment to the vendor
- Keeping records
- Closing the purchase order
Challenges in Manual Purchase Order Process Flow
It can be costly and time-consuming to handle the purchase order process manually. From creating to getting approvals, there is always a risk of delays, or information being lost. No doubt, this process can become tedious. In fact, a recent APQC study demonstrated that manual processing of a single purchase order can cost up to USD 506.52.
Some of the common challenges involved in manual PO processing include the following.
- Delays in the PO processing cycle
- Lack of transparency or visibility
- Increase in costs
- Increase in chances of human errors and bias
- Departmental or compliance issues
- A barrage of the email exchange
This underlines the importance of automating this process.
Why Organisations Need a Procurement Management Solution
Organisations need to adopt a smart procurement management solution to help overcome the above-mentioned challenges. Automating this process can bring the following changes.
- Expedite PO processing process
- Improve overall PO process flow with increased efficiency and no delays
- Improve PO approval speed
- Optimise inventory management
- Prevent errors and fraudulent activities
- Improve the relationship between the buyer and the vendor
Induzbuy’s procurement management solution is the right fit for both small and large businesses. With the proven ability to manage inventory, vendors, contracts, and reconciliations, it makes your procurement process error-free and seamless. To know more about how you can easily integrate it with your existing ERP system, visit INDUZBUY.