How to implement an Electronic Purchase Order System (in 7.5 days)

Electronic purchase order

By implementing an Electronic purchase order, you can cut the time spent on processing purchase orders by up to 50%.

Here are the typical results of our clients who have moved from a paper-based purchase order process to an Electronic purchase order system:

  1. Reduced cycle time by up to 30%.
  2. Reduced cost per PO by up to 50%.
  3. Reduced product stockouts by 20%.

Manual vs Paper Based Purchase order

In this article, we are going to show you a step-by-step process on how to implement an electronic purchase order system. Specifically as a buyer:

  1. How to build the business case for the electronic purchase order process.
  2. How to define your key requirements and what to look for in a purchase order automation tool.
  3. A step-by-step walkthrough of a typical implementation process.

But before you get started

Download our purchase order system checklist and

Purchase_order_system_selection_checklist

And then follow along to see how to use this checklist to implement an electronic purchase order system.

What is an electronic purchase order system?

An electronic purchase order system automates the time-consuming purchasing process.

The purchasing process starts from a requisition or request for purchase to issuing the purchase order to the vendor.

A digital purchase order system automates your manual purchasing process. It provides you with a better process for purchase order management.

If you are using emails and spreadsheet templates to create purchase orders, then an electronic purchase order can significantly reduce the time it takes to issue a purchase order.

An electronic or digital purchase order system generally covers the following processes:

Electronic purchase order process

  1. Allow a requester to easily create a request for purchase.
  2. Route the request for approval to appropriate stakeholders based on Company’s policy.
  3. Convert the request into a purchase order document.
  4. Dispatch the purchase order to a vendor.
  5. Allow the employees to track purchase orders from acceptance or vendor acknowledgment to delivery of the product to the dock.
  6. Allow employees to mark a product as received.
  7. In some cases, offer an AP functionality to upload and match the invoices with the purchase orders.

Why do you need an electronic purchase order system?

Wondering why you need a purchase order system?

By investing in a purchase order system, our clients have seen the following benefits:

Benefits of an electronic purchase order system

Better cost control and reduced expenses

If you are concerned about controlling cost, then a purchase order system provides you with a mechanism to proactively control cost.

With a purchase order system:

  1. You can review the purchase request and decide if the purchase is really required.
  2. You can control the timing of the purchase to better match your cash flow/ cash in the bank.
  3. Ensure that the purchase request is authorized at the appropriate level in the organization. For example, all larger purchases are approved by a member of the senior management team.
  4. Avoid any surprise invoices, because the purchase orders are approved in advance of the purchase.

Reduced cycle time for your purchasing workflow

A purchase order system reduces the overall cycle time.

Our client achieves an average approval cycle time of 30 minutes.

This cycle time assumes the total time it takes to approve the requisition.

Because the purchase order system makes it easier to approve the purchase order request, the request gets approved faster.

We have worked with clients where it used to take days to get the request approved.

It was simply a case of employees getting too many emails in a day and the approval requests getting lost in the sea of emails.

Reduced Cost through automation of manual processes

The average cost of issuing a purchase order can easily go up to $500 per purchase order.

The cost generally includes the following

  1. The cost of the time it takes to create a requisition and send it for approval.
  2. The time spent by managers to review, ask questions and approve or reject the purchase request.
  3. The time it takes to review the requisition data and then convert that into a purchase order.
  4. The time it takes to send the purchase order to the vendor.

In our studies, we found the purchase order cost to be close to $60/purchase order.

So if you are sending 100 purchase orders a month, that is an average cost of $6,000 per month.

With an automated purchase order process, you can reduce this cost to $3,000/month.

Better cash flow planning

With a purchase order system, you can see all your committed spend in one single place and that leads to better cash flow planning.

Specifically:

  1. You can track all purchase orders so that you know the total committed value.
  2. You can track what has been invoiced against the purchase order and what is the remaining commitment.
  3. If you have credit terms with your vendors, you can review committed spend by payment terms and see what is due when.

The biggest benefit from a cash flow standpoint is the ability to review this data and then negotiate the terms with the vendor.

For example, if you are paying invoices on receipt, you could ask for payment terms like Net 30 or Net 60 and reduce the cash flow needed at any given point in time.

How to implement a purchase order system in 7.5 days

Ready to implement an electronic purchase order system?

Great, read on for a step-by-step process for purchase order automation.

And yes you can do that in 7.5 business days!

Step 1: Build your business case for the electronic PO process

There is no fun in finding an awesome product to automate the purchase order system and then later having it shot down by your Boss!

Unless you are the Boss 🙂

So we recommend that you build a business case for automation before you invest time in finding the best solution for your purchase order needs.

Here is a simple process to build a business case for implementing a purchasing order system:

Business case for purchase order

All you need to know is the average purchase order volume.

Let’s say you create around 100 purchase orders in a month, that is 1200 per year.

Total PO’s per year: 1200
Cost per PO: $60

If you want to calculate your own cost, here is the detailed process for calculating the purchase order cost.

Total annual cost for purchase orders: $60 x 1200 = $72,000.

Now let’s say that you are able to reduce the cost by half by implementing a purchase order

So the new annual cost is $36,000 or $36,000 annual savings.

Cost of the purchase order system:

Now let’s say the purchase order system costs $500/month or $6,000/year.

So with an investment of $6,000, you can save $36,000 per year.

Return on Investment = $36,000/$6,000 = 600%

You can make this more complicated but if you are a small company, that is all the math you need to build a business case for procurement automation.

Step 2: Select the vendor to automate your purchase requisition and procurement process

The next step is to find the best purchase order system for your organization.

You don’t need 10 demos from 10 different vendors. But make a list of the top 3-4 solutions you would like to see.

If you are curious if ProcureDesk is the right solution, Just click here to schedule the demo.

I would suggest documenting high-level use cases so that they easily screen solutions. Here are some sample use cases for an electronic purchase order system:

  1. Ability to have a configurable approval process so that you can configure the tool per your approval authority matrix.
  2. Ability to support catalogs, including punchout catalogs so that your employees can create requisitions easily.
  3. Ability to monitor and track the purchase order through its life cycle. For example, tracking vendor acknowledgment, shipment information, etc.
  4. Management dashboard so that you can easily track cash flow requirements.
  5. Detailed reporting for granular spend visibility.

If you need a list of key features, download the purchase order checklist:

Purchase_order_system_selection_checklist

Step 3: Setup your approval hierarchy and setup the approvals

Now you have selected a system, let’s talk about basic configurations. We will of course use ProcureDesk as an example, but you can follow this process with any system you choose.

Connect with the Accounting system

The first thing to do is to connect your purchase order system to your accounting system so that you can pull all the master data required while creating transactions.

For example: Let say you use QuickBooks as your accounting system and use ProcureDesk for an electronic purchase order system.

You can then connect to QuickBooks Online or QuickBooks Enterprise in a few clicks.

Here is an example of how easy it is to connect to QuickBooks:

Import data to get started

After you have connected the purchasing system, import the following or equivalent of the following data from your accounting system

  1. List of suppliers and their locations.
  2. Chart of accounts.
  3. Different job projects.
  4. Classes, department codes, locations, etc.

Once this data is available, you are ready to move to the next step.

Chart of accounts

Set up an approval matrix

For most organizations, a key objective for setting up an electronic purchase order system is to control spending.

To control spending, you need to define who can approve up to what amount in your organization.

Here is a sample approval matrix:

cost_control_approvals

There are two different strategies for setting up an approval matrix.

You either set it for maximum accountability or you set it up for maximum control. Here is what we mean here:

If the senior management wants to see every single purchase, then the approval matrix is set for maximum control.

On the other hand, if the mid-management layer has more authority then the approval matrix is set up for more accountability.

You basically have shifted the accountability down to the managers instead of control being with one person.

Our recommendation is always to shift the accountability to mid-management. Leverage the 80-20 principle to focus on only large transactions that contribute up to 80% of spend.

Set up approval workflows

Next, let’s set up the workflow.

Based on the combination of your approval matrix and other factors, you can now decide on how your approvals are going to work.

For example, if you want to send it to the manager for approval, then here is a simple workflow:

approval_workflow_with HR manager

However, if you want to set up approvals based on the amount and then route to different individuals, then workflow could look something like this:

approval_workflow_names user

Configure the PO template

Next, configure the PO template, so that you can control what gets printed on the purchase order and how the purchase order would look like.

The idea here is not to ensure that all data that you need to send to the supplier is printed on the purchase order.

For example Item name, description, Unit price, and so on.

Here is an example of a purchase order template:

purchase order template

This is one of many pre-configured templates available with ProcureDesk so that you can choose what templates work best for you.

Step 4: Setup basic catalogs and any internal catalogs

Catalogs make the purchasing process easier.

If you want to see the step-by-step process, read more vendor catalogs here.

When it comes to deciding on your catalog strategy, there are two things to consider:

  1. If the vendor has a large spread of items to choose from, then it makes sense to go with a catalog that is hosted by the vendor.
  2. On the other hand, if you only buy a handful of items from the vendor, it is probably best to set up an internal catalog.

Internal catalogs:

Internal catalogs are catalogs that are set up and managed by you.

Internal catalogs make sense when you are only purchasing a limited set of items from a vendor and the pricing is fixed for a certain amount of time. For example, the price is revised every 6 months.

Here is an example of how the internal catalog works:

Internal_catalog

Punchout catalogs

With a punchout catalog, the vendor provides you a link to their website. The website account is unique to you because that is how the vendor recognizes your special pricing and so on.

Make sure that your purchase order system partner is supporting you in getting these vendors onboarded, otherwise it could be a quite cumbersome process.
With a punchout catalog, your employees get the online shopping experience without the need for you to manage catalogs.

Here is an example of how an Amazon punchout would work:

Punchout-catalog

It is the same experience as you would use Amazon.com for your personal purchases. The only noticeable difference is that it now has a “Submit for Approval” button.

This allows the request to be approved before the purchase order is processed by Amazon.

Punchouts are very effective for large vendors because you don’t have to worry about managing the catalog and deal with pricing changes.

Step 5: Work with the A/P team [optional]

Even if you have automated the purchase order process, the Accounts payable team still needs to match the invoices with the purchase orders.

That could be quite a cumbersome process.

We will not detail the complete accounts payable process here, but if you would like to reduce the time spent on processing invoices, then you should look at implementing an integrated purchase order and invoice process.

With an integrated purchasing and invoicing system, you can automatically match the invoices with the purchase orders, identify any issues and then route it for approval.

3-way invoice matching

If you are interested in learning more about the invoice match process, you can read more about it here:

Accounts Payable solution

Implementing a paperless invoicing process.

By implementing an Accounts payable automation tool along with a purchase order system, you can reduce the time spent on processing invoices by up to 35%.

Step 6: Test Run the system and go live

You have set up the approvals and catalogs. The next step is to do a test of the system and then go live.

Here is what we recommend:

Test all possible scenarios

Before you roll out the product to the entire team, make sure to test the key scenarios.

For example:

Are all workflows scenarios configured properly?

Or Does all levels of the approval matrix are being triggered as per the defined conditions.

You also want to test if the pricing on punch-out catalogs is correct. If the vendor provides you with a discounted pricing, then that should be available on the punch out too.

In case you are building internal catalogs, check all the pricing and other relevant information.

And last but not the least, make sure that supplier contacts are correctly loaded in the system.

One of the advantages of a purchase order system is that it can automatically send the purchase orders to the vendors.

For that, you need to have correct supplier information.

Include a user champion

This step might only be applicable if you are rolling this to a large team. If you are only a team of 3-4 people then this step is not required.

The idea of a user champion is to ensure that you have representation of users in the design process.

That way, you don’t have to wait till go live to figure out user issues. You can get real-time feedback and that can help a lot with adoption.

Record training and conduct multiple training

Next, conduct the training for the users and go live with the product.

A few points on training:

  1. Keep training short – anything more than 30 minutes is generally a bad idea because your employees might not have all the information at the same time.
  2. Focus on the top 2-3 use cases they would use every day.
  3. Provide a cheat sheet of common functionality they would use.
  4. Record the training if possible so that the team can revisit the training as and when required.

Track adoption

The best purchase order system is not going to help you if you don’t track adoption.
By tracking adoption, you can figure out whether you would get the ROI from this solution or not.

Tracking metrics doesn’t need to be complicated, it can be as simple as the following:

  1. How many purchase orders are being created per week.
  2. How long does it take to approve a purchase order request?
  3. How well the vendors are adapting to the new process. Do they see any challenges and so on.

So there you have it, a complete step-by-step process for implementing an electronic purchase order system.

Now your turn!

By implementing an electronic purchase order system, our clients have seen the following benefits:

  1. 30% less time spent on processing purchase order requests.
  2. 20% improvement in lead times because they can better track their purchase orders.
  3. 50% improvement in the approval cycle time, PO’s takes less time to approve with more accurate information.

So get started by downloading the checklist and find what is the best solution for you.

Purchase_order_system_selection_checklist

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