How Purchase Order Management Helps Control Costs

Why should businesses care about purchase order management?

Purchase order management controls costs by streamlining order creation, approval, and tracking. It improves inventory control, strengthens supplier relationships, and enhances vendor management, leading to significant savings for both buyers and sellers. 

Sounds like something every business can benefit from. Right? 

Now that we understand how purchase order management can help any business, let's learn more, shall we? 

The basics:
Understanding purchase orders

A purchase order (or PO) serves as a formal document that a company sends to a supplier, detailing the types, quantities, and agreed-upon prices of products or services. This document plays a key role in order management because it helps the business (aka the buyer) and supplier (aka the seller) communicate.

When the seller acknowledges and agrees to the terms, the purchase order transforms - bibbidi-bobbidi-boo - into a legally binding agreement. This contract spells out the buyer's requirements and the seller's obligations, making sure both parties have a complete understanding of the agreement.

Key components of a purchase order

If we are going to create a purchase order, there are some essential components that need to be included:

• Buyer and seller information: Identifies both parties (the buyer and the seller) involved in the transaction.
  
  
• Purchase order dates and reference number: Helps track the date issued, date required, and the reference number.  
  
  
• Detailed description of goods or services: Includes the quantity, unit cost, unit of measurement (UoM), item, description, and amount due.
  
  
• Shipment details: Outlines the delivery method, account number, and terms of the shipment.
  
  
• Signatures and authorization: Validates the document legally. 
  
  
  

Example purchase order using Zenventory.

The purchase order process: 
A breakdown 

The process of creating and completing a purchase order has several stages. Here's a brief overview of how it works:

Step 1: Purchase requisition 

The purchase requisition kicks off the procurement process. This step involves identifying the need for a particular item or service. It entails collecting all the necessary information, like the quantity needed, specifications, and any budgetary constraints. 

Step 2: Creation and approval of the purchase order

After the purchase requisition gets the green light, the next step is creating and approving the purchase order. The purchase order document outlines all the nitty-gritty of the purchase, such as the item, quantity, cost, and shipment details. It makes sure both the buyer and seller are on the same page. 

Step 3: Acceptance by the seller

Once the purchase order is created and approved, it is sent to the seller for acceptance. The seller takes a look at the order and confirms if they can fulfill it.

This step plays a key role in making sure the buyer and seller are on the same page before proceeding with the transaction.

Step 4: The recording and tracking of the order 

The final step in the procurement process is to record and monitor the order. This means writing down all the key details, like the order number, the date the order was placed, and the current status of the order. Keeping track of this information makes it easier to check on the order and follow up, helping to ensure that it is processed and delivered promptly.

By following these four steps, companies can streamline their buying process for a faster and more efficient purchase experience.

The benefits and legal implications of purchase orders

Purchase orders offer a structured way to buy things, enhancing inventory management and holding vendors accountable. They help stop duplicate orders and make invoicing easier by matching invoices with the correct orders. In legal terms, they act as a safety net by cementing the details of the transaction, which can be key to resolving any disputes that pop up. Additionally, utilizing e-procurement tools can make purchase orders even better by giving real-time insight and control over the company’s spending.

Key advantages of implementing purchase order management

The key benefits you'll see when you start utilizing purchase order management fit into three main categories: 

Streamlined ordering and budget management

• Efficiency in ordering. Purchase orders simplify the procurement process by giving a step-by-step way to order, making sure that every order is documented and verified. This helps your team follow purchase orders' best practices, streamline procurement, and cut down on mistakes when ordering.
  
  
• Enhanced budget oversight. Purchase orders require calculating order amounts upfront, which allows for detailed budget planning. This knowledge helps with financial planning and managing costs, aligning with spending goals/budgets, and improving the whole process of handling purchase orders.

Improved inventory and vendor management

• Inventory accuracy. Purchase orders are crucial in tracking incoming products, and a purchase order inventory management system makes this easier. A PO inventory management system helps keep inventory counts accurate using methods like 3-way matching. And as a result, it stops overstocking or understocking, streamlines order management, and keeps your inventory at just the right level.
  
  
• Vendor relationships. Purchase orders are essential for managing suppliers effectively. They provide valuable information about vendor reliability and performance, which is crucial for maintaining strong business relationships and making informed decisions about future collaboration.

Automation and control

• Automated systems. Adopting automated purchase order management systems has a big impact on efficiency. These systems centralize all the purchasing info, provide real-time updates, and cut down on manual entries. When these systems run in the cloud, they make sure the procurement process goes smoothly. This gives businesses even more control over how they spend their money.
  
  
• Legal and financial safeguards. As legally binding documents, purchase orders help make sure that invoicing matches the agreed-upon terms. This alignment is key for legal protection  and effective management of accounts payable. Additionally, purchase orders provide clarity and foster trust in the process of purchasing goods or services.

Integrating purchase order management and procurement software can significantly boost the purchase order process. For example, Zenventory gives you customizable options you can tweak to fit your company's needs. This makes sure your buying processes match company policies and financial goals.

Common challenges and solutions in purchase order management

Let's go over the common challenges and how purchase order management solves them:

Challenge 1: Managing risks 

Solution: Using technology for real-time monitoring and analysis can minimize risks and broaden supplier options, enhancing sourcing strategies and supplier management. 

Challenge 2: Building strong supplier relationships 

Solution: Strengthening supplier relationships is crucial for boosting product quality and dependability. Successful strategies include fostering purchase order collaboration and implementing strong supplier management practices.

Challenge 3: Streamlining and optimizing the purchasing process 

Solution: Streamlining complex processes through automation can support informed decision-making. This can help make sure that the procurement process is as effective and efficient as possible. 

Challenge 4: Leveraging technology and vendor management

Solution: A centralized purchase order management system streamlines approvals and record-keeping, ensuring a seamless procurement process. Also, by providing real-time updates, you can be sure that procurement aligns with company policies. 

How a vendor management software can help

Vendor management software, like Zenventory, simplifies and streamlines the purchase order process. It does this by bringing together various automated and customizable features. Here's how: 

• Simplified receiving. Know what items are expected for delivery and receive immediate alerts if there are any irregularities. Accept goods based on purchase orders, whether in part or in full. If the purchase order is not received in its entirety, it remains open until it is either closed or fully received.
  
  
• Efficiently order goods. Only pay vendor invoices based on the actual quantities of items received. Enable warehouse operators to easily receive goods in accordance with the purchase order and accurately record the quantities received.
  
  
• Generate vendor catalogs. Easily create vendor catalogs by linking your item numbers or SKUs to the supplier's item numbers. Set specific costs for each vendor, establish order minimums, and factor in supplier lead times so you can make informed decisions every time.
  
  
• Streamlined directed put aways. Gain precise guidance on where to store items, taking into consideration the default settings or relying on existing locations. Identify the most suitable storage space for your inventory and eliminate time and effort spent on manual organization. 
  
  
• Automated workflows. Vendor management software automates the procurement process, ensuring that workflows and purchase order processing are efficiently managed.

Adding these functionalities makes buying easier and helps build better ties with suppliers while strengthening compliance.

Final thoughts

To wrap up, we have explored the importance of purchase orders and how they can control costs, streamline procurement, and enhance vendor relationships.

Also, using purchase orders in an organized way doesn't just make the purchasing process easier - it also helps build better relationships with suppliers, leading to a stable and reliable supply chain.

Additionally, we have also pointed out how Zenventory's tools for managing vendors and suppliers help address supply chain challenges. Therefore, demonstrating how useful the platform is in improving purchasing processes and strengthening ties with vendors. See it for yourself: Book a free consultation here.