Controllers and Financial Officers: do you understand your company’s inventory and how it’s distributed?

If not- you’re not alone.

Managing everyday inventory can be tricky, creating issues like stockouts or excess supplies.

The fix? Adopt an integrated purchase order and inventory process.

This article will explain how this approach improves inventory visibility, simplifies ordering, and boosts turnovers.

• Explore how integrated purchase orders and inventory give you a clear view.
• Learn the basics of straightforward inventory ordering.
• Discover tips to speed up inventory turnover using visibility across locations.

 

Let’s simplify inventory management – let’s dive in!

Does Purchase Order Affect Inventory?

Purchase orders can affect inventory.

A purchase order is a commercial document issued by a buyer to a seller that indicates the products or services to be purchased. When a purchase order is created and sent to your supplier, it initiates obtaining inventory for your business.

The relationship between purchase orders (PO) and inventory is important for your business to gain effective inventory management. Here’s how the two are interconnected:

• Initiating Inventory Procurement: A purchase order creation serves as an official purchase request a buyer makes to a supplier to acquire goods and services. In inventory management, your purchase order obtains the necessary items to stock your inventory.
• Documentation of Transaction:  Your purchase order acts as an official document within your purchase order process. It includes information such as the types and quantities of items ordered, agreed-upon prices, delivery dates, and any other payment terms and conditions.
• Inventory Tracking and Control: Your purchase orders play a vital role in inventory tracking within the purchase order process. POs provide a clear record of items ordered by the purchasing department, which helps monitor the movement of goods in and out of the inventory, which can prevent issues like overstocking or stockout for your supply chain.
• Cost Management: The purchase order includes pricing details for the acquired items. This information is important for cost management, allowing your business to track expenses related to inventory purchases. It helps in budgeting, analyzing costs, and making informed decisions about pricing strategies.
• Supplier Relationship Management: The creation and use of purchase orders contribute to effective communication between the buyer and the supplier. Clear specifications in the purchase order regarding product quality, delivery schedules, and other terms help establish and maintain positive relationships with suppliers.
• Order Fulfillment and Reconciliation: Once the supplier delivers the goods or services per the purchase order, the buyer can reconcile the received items with the details in the order. This step ensures a sound purchase and accuracy and completeness in the inventory, providing a basis for further actions such as payment processing.

Tips To Track Your Inventory

You must understand how an optimum approach for your inventory tracking can help your organization.

Here are a few tips to help you track your inventory better:

Integrate Your Inventory Management Process With Demand Planning

For example, what are our demand patterns when doing a comprehensive purchase?

Notice we didn’t say consumption patterns. If you are tracking what is being consumed, you might be missing the need driving that consumption.

To continue with the HVAC example, let’s say technicians use a widget for servicing HVAC equipment for the customers.

If you look at the service requests from your customers for the last 12 months, you should be able to identify the demand requirements and seasonality easily.

For example, the demand should be higher in the summer months than in the winter months.

With this approach, you would know the exact demand requirements vs. consumption.

That data should also give you an idea about the demand patterns. For example, you can calculate the average number of widgets per customer request.

Automate To Drive Real-Time Data Synchronization

Once your demand patterns are established, that should help define the optimum on-hand quantity.

Once you have established inventory levels, do the following.

a) Work with your vendors to establish lead times:

It is key that the vendors have established reliable lead times so that you know when you need to re-order the products to keep inventory at a healthy level.

With the lead times established, you should update lead times in your purchasing system so that purchase orders reflect correct lead times.

b) Automate systems for better visibility:

The next step is to automate wherever possible to update the data as items are ordered or consumed.

For example

• Update Inventory records when a widget is released for consumption.
• Increase the on-hand quantity when the item is received.
• We are having visibility into on-hand orders.

Integrated purchase order and Inventory experience

We will use ProcureDesk as an example to walk you through how an integrated purchasing and inventory can help you with your internal procurement process.

You could achieve this using any integrated purchasing and inventory management system.

Use Catalogs For Accurate Data

Catalogs help you reduce the data entry for repetitive orders. For example, if you are purchasing the same widget from the same supplier again and again, just put that in a catalog.

Catalogs are important for the following reasons:

• It provides accurate information on what is being purchased and at what price point. This avoids any delayed shipments because of missing information. For example, the wrong part number, etc.
• You can add additional data to make purchasing accurate, such as pictures of the purchased parts
• .You can keep track of accurate lead times to know when the part will be delivered.

For example, it doesn’t help anyone if you ask for a next-day shipment on an order when the vendor lead time is 2 weeks.

You can keep track of minimum and maximum levels on a catalog to know when an item needs to be ordered.

An item can be tagged to an inventory location so that you know inventory by location.

Following is an example of the kind of information you can maintain in a catalog

Apply Central Visibility Into Inventory

By central visibility into inventory, we mean knowing how much inventory you have at any given time.

Some things to consider while understanding current inventory levels

• Do you know the total inventory value? Yes, it is more for finance, but this number will help you understand the capital invested in inventory.
• You can compare this number with your peers and assess if you carry less or more inventory.
• You should know how much inventory exists at different locations to potentially use inventory from other locations in case of stock-outs.
• It is important to understand the inventory on hand and what is already on order. To avoid excessive inventory, carefully review what is being requested, what is on hand, and what is being shipped or already on its way.

A central inventory dashboard should look like this.

Requesting Inventory/ Inventory Orders

This is the most important piece of the integrated purchasing and inventory experience because this helps you to present the current inventory levels to the end-user.

When users enter an order, they should be able to see whether the item is in stock.

Additionally, if the item is in stockout, do you want a user to directly place the order with the vendor or wait for the inventory to be replenished?

For example, suppose you have an inventory planner responsible for placing inventory orders. In that case, please don’t allow end-users to place orders directly with the vendor.

So the system should be able to handle scenarios where the user can place the order even when the item is in stockout position.

An additional consideration is whether you need approval for inventory orders. This is important for two reasons.

• You can use the approval process to allocate the cost of Inventory to the consuming department accurately.
• Suppose you suspect misuse or excessive use of the inventory for certain individuals. In that case, a review process ensures a compliance check before the requested inventory can be issued to the end user.

Updating Inventory Records

It would be best to have a software solution that allows you to update the inventory records as and when inventory is consumed or new inventory is being purchased.

The most important benefit of an integrated purchase order and inventory system is that you always have an accurate record of how much inventory you carry.

Here are some touchpoints where the inventory record needs to be updated.

• When the user requests the inventory, you know what is being requested. You can probably use a different classification for this, for example – reserved inventory.
• When the item is finally issued to the user, so in that case it moves from reserved to issued inventory, and the on-hand inventory quantity is adjusted accordingly.
• When the items are ordered, the status of items should move to on order, and when the inventory items are received, the status should change to on-hand quantity.

Typical Challenges With Inventory Management

Siloed Systems

The first common challenge for managing inventory is companies have siloed systems. That could be because of a lack of automation or how the business has evolved.

Taking the example of an HVAC company, let’s see how siloed systems cause an issue for many companies.

Please note that this is generally an issue if you carry any inventory.

If you order on-demand to fulfill service orders, then, of course, you don’t have inventory issues, but you are probably leaving money on the table because you are unable to service clients on time.

Work Order Management

You probably have a work order management system to allocate work to your workforce.

That system houses the data for all the customer jobs, what materials are used for the service order, and so on.

Technicians are probably ordering parts as needed or calling someone at the warehouse to pick up the parts they need to service customers.

If they are picking more parts to reduce trips to the warehouse, you want to know how much inventory is in technicians’ trucks at any time.

However, since the systems are not integrated, that data is being manually keyed in or not synced at all.

Ordering Process

The other challenge is that if the purchasing system is not tied to your inventory system, you have to update the inventory usage information in the inventory system manually.

It generally leads to the following issues

• The ordering system doesn’t have the latest on-hand inventory information
• That leads to users purchasing more inventory even when you have on-hand inventory.
• If the order can’t be delivered on time, that leads to more stockouts.

So to take the HVAC company example, you cannot service customers on time because your technicians don’t have real-time visibility into the available inventory.

Too Much Or Too Less Inventory

When you have limited visibility into inventory due to a siloed system, your inventory is not optimized.

With the limited information, you land up in one of the following buckets

Too Much Inventory

If you are currently managing limited inventory and have stock-out scenarios or cannot fulfill customer orders, the natural tendency would be to carry more inventory.

Who wants to leave money on the table because you didn’t have the right parts to service the customer?

Let’s continue with our HVAC company example. In our experience, the following is likely to happen.

• Your technicians start carrying more stock in their trucks becuase they want to avoid stockouts.
• You build a monthly consumption model based on how much stock is issued to technicians.
• You start seeing fewer stock-outs, and everyone is happy.
• One day, you wake up to many inventory sitting on the books.

Since everyone carries a buffer to avoid stockouts, you land with more inventory than you need.

Too Less Inventory

The other scenario is the opposite of what we described above.

This generally happens when you have no inventory management program, or you have just implemented a Just in Time (JIT) inventory model.

The problem you are carrying less inventory is for the following reasons

• Your purchasing system is not linked to the Inventory system, so you have a lag in the information being updated back to the inventory system.
• When you update the inventory models, the consumption has changed again.
• If the lead times are not accurately added to the purchasing system, it could lead to delays.

What Are The Benefits Of Improved Inventory Management?

You should expect the following results if you have an integrated purchasing and inventory tool.

Improved Productivity Through Less Stockouts

What is the cost of the stock-outs for you?

Is that lost revenue, or is that delayed service for your customers?

Continuing with our HVAC company example – if technicians don’t have the right parts available at the time, then that could lead to the following issues.

The customer cancels the order.

If the customer can’t wait for the product to be available, that is a revenue loss for the company. This is most likely the case with emergency services.

It takes a long time to serve the customer.

If the customer decides to wait for the part, this might impact your SLAs over a long time. Let’s assume your client is a corporation with a long-term maintenance contract.

Most corporate agreements have service level agreements, and if you miss the SLA, you probably have to issue service credits for missing the SLAs.

Not only does it cost you money, but it also leads to lower customer satisfaction.

The technician waste time finding the part from a local store

What is the cost per hour for your technician?

Let’s say the cost is $100/hour.

Now assume that the technician has to go to a local store to find the part to complete the job.

Let’s say the total time adds an hour to the job.

You not only lost $100, but think about the opportunity cost because you could have used the same time for another job.

Reduced Inventory Carrying Cost

So, with all the above reasons, companies decide to maintain inventory.

Inventory is an investment, and there is a cost for carrying the inventory on the books, So your inventory levels must be optimum.

The steps mentioned in this article should help you carry optimum inventory levels and reduce your inventory carrying cost.

How much is inventory carrying cost?

Industry estimates 20-25% as the inventory carrying cost.

So if you are carrying $100,000 of inventory on your books, then the cost for carrying the inventory could be anywhere between $20,000 to $25,000

How is inventory carrying cost calculated?

• It includes the cost of the capital required to purchase the inventory. For example, if your WAC is 10%, that is the cost of carrying the inventory.
• Other costs like insurance and taxes.
• Warehouse cost or storage costs
• Cost of obsolescence or damage

You and your purchasing team can calculate your inventory cost by asking your finance team for these metrics.

Reduced Inventory Usage Through A Multi-Location Warehouse

The biggest benefit of having better visibility in the inventory process is increasing the cross-utilization of the inventory across multiple locations.

Let’s say you need a part that is unavailable at your location, but if you can easily check what other locations keep an inventory, that is very helpful.

For example, it might be easier and cheaper to have the product shipped from another location, depending on the lead times.

If the inventory system provides cross-plant/location visibility, it is very easy to deal with these situations.

This increases inventory turnarounds, and you need to invest less in the inventory.

Is Quickbooks Good For Inventory Management?

One of the common questions we get asked is if QuickBooks is a good system for inventory management.

If you are looking to just stock items for resale, then it makes sense to keep using QuickBooks.

However, if you want to purchase items for consumption, for example, supplies, then QuickBooks might not be the best option for the following reasons.

• The inventory and purchasing system remains different. Most of the companies don’t end up using QB for creating a purchase order. That primarily concerns the control issue rather than the system’s capability.
• Since the purchasing and inventory are not in sync in real-time, it leads to the same data mismatch issues discussed in the above sections.

You can still maintain inventory in QuickBooks if we have another system updating the inventory information in real-time so that you know the inventory value and the on-hand quantity at any time.

How Can Integrated Purchase Orders Systems Improve Inventory Visibility?

Having integrated purchase order systems can significantly enhance inventory visibility in your company.

Here’s how it does it:

Real-Time Tracking

A purchase order management system can offer real-time tracking of inventory levels.

When a purchase order is created and processed, the system updates inventory counts instantly. Since it’s automated, you don’t even need to worry about manual tasks.

This ensures stakeholders have access to the most current and accurate information regarding stock levels.

Centralized Data Management

A purchase order management system offers integration, consolidating all relevant data in a centralized system.

Information about purchase orders, inventory levels, and other related details are stored in one accessible location.

This centralized data management eliminates manual cross-referencing and promotes a comprehensive view of the entire inventory, which can benefit your procurement, purchasing, AP, finance, and procurement team.

Automated Updates

Most purchase order management systems offer key features that allow you to update inventory levels when purchase orders are fulfilled automatically.

This automation minimizes the risk of human error associated with manual data entry and ensures that the inventory visibility is always aligned with the stock on hand.

Visibility Into Order Status

A purchase order management system provides visibility into the status of purchase orders throughout the entire procurement process. What’s great is that you no longer have to worry about doing this with manual processes.

Visibility into orders includes information on orders that are pending, in transit or have been received. This visibility allows for better planning and helps prevent potential stockouts or overstock situations.

Forecasting Capabilities

A purchase order management system often comes equipped with forecasting tools.

These systems can help predict future demand and recommend optimal inventory levels by analyzing historical data and purchasing patterns. This forecasting capability improves visibility into future inventory needs.

Alerts And Notifications

Purchase order management software can be configured to send alerts and notifications for critical events, such as low inventory levels or delayed shipments.

These proactive alerts enable quick responses and prevent disruptions in operations, ensuring continuous visibility into inventory conditions.

Supplier Collaboration And Vendor Management

Most of the time, a purchase order management system facilitates seamless communication with suppliers during procurement activities. Suppliers providing real-time updates on order fulfillment and shipping status enhance visibility into the supply chain.

This transparency is crucial for anticipating delivery times and managing inventory accordingly.

User-Friendly Reporting

Many integrated systems and purchase order software offer user-friendly reporting tools. These tools generate detailed reports on inventory performance, purchase history, and other relevant metrics. These reports provide stakeholders with comprehensive insights, enabling data-driven decision-making.

Manage Your PO’s And Inventory With ProcureDesk

Did you know that ProcureDesk has essential features that can help you better manage your PO’s and inventory?

Here’s a list of what it can do to help your entire procurement process be more efficient:

Purchase Order Management

When going through your entire procurement process and having your purchase requisition approved, you can easily send over the purchase through the vendor since ProcureDesk automates this process.

You can quickly get quotes from different vendors with the supplier quote module.

Here is an example of comparing the cost of servers from 2 different vendors.

Once you have completed the quote process, you can convert the quote to a purchase order and issue the purchase order to the vendor.

Inventory Management

With inventory management, you can easily track the inventory of stocked items.

You must identify the items and set up key inventory control to track the inventory.

For each inventory item, you can manage the following information:

• Inventory location
• Min and max levels
• Re-order point

Once you have the basic configuration, the system tracks your inventory.

You can upload the inventory of your existing items or let the system update the inventory as and when you receive a new item.

Here is how you can track the inventory by location:

Once you start tracking information, you can set up automatic rules to re-order items once the item count falls below the set threshold.

Inventory Consumption

There are three ways to use ProcureDesk for tracking inventory consumption.

You can create a release every period of time you want to use the product. Creating a release reduces the on-hand inventory and tracks who is using the inventory.

Here is a screenshot of the release.

You can track when it was released, to whom, and for what purpose. You can also track other useful information, like how the employee picked up the inventory item.

The second option is to create a purchase requisition.

This process is very helpful when your employees need a single place to request items from the vendors or the inventory.

When the user searches for the product, she can see the available inventory and then order directly from the inventory.

The system creates an inventory order and sends it to a buyer to release the inventory.

When the inventory is released, the on-hand is updated.

The third option is to do a physical inventory count and then update the data in the system.

You are doing a physical inventory count at the end of every month. In that case, you can upload the inventory report and update the inventory count.

Inventory Valuation Report

An inventory valuation report gives you a snapshot of the total inventory and your stock records at any time.

Suppose you are using ProcureDesk to issue the inventory. In that case, you always have an accurate stock record of your on-hand inventory.

Here is an example of the inventory valuation report showing your stock records:

The price of the item can be an average price. You can also use other inventory valuation methods like LIFO (Last In, First Out) and FIFO (First in, First Out).

Doing this helps you prevent experiencing any stock wastage and even encourages your company to do better in stock maintenance.

FAQs

What Is Purchase Order Management?

Purchase Order Management is the systematic process of creating, tracking, and managing purchase orders within a business.

It involves the entire lifecycle of a purchase order, from its creation to approval, delivery, and reconciliation.

The goal is to streamline the procurement process, ensure accurate ordering of goods or services, and maintain visibility into inventory levels.

What Is The Difference Between Procurement And Inventory Management?

Procurement and Inventory Management are distinct yet interconnected processes.

Procurement involves the acquisition of goods or services needed by a business, from selecting suppliers to negotiating contracts.

On the other hand, Inventory Management is concerned with efficiently storing, tracking, and controlling the goods once they are acquired.

While procurement focuses on the purchasing process, inventory management deals with optimizing stock levels, reducing carrying costs, and ensuring items are readily available when needed.

What Are The Methods Of Purchasing Inventory?

There are various methods for purchasing inventory, and businesses may use one or a combination of these approaches:

• Just-In-Time (JIT): Ordering inventory to arrive just when it’s needed, minimizing storage costs.
• Bulk Shipments: Ordering large quantities at once to benefit from volume discounts.
• Dropshipping: Directly shipping goods from suppliers to customers without storing them.
• Consignment: Holding inventory on behalf of a supplier until it is sold.

The choice of method depends on factors like demand patterns, storage capacity, and cost considerations.

When To Order New Inventory?

Determining when to order new inventory involves balancing stock levels with demand to avoid stockouts or excess inventory. Key factors to consider include:

• Reorder Point: The inventory level at which a new order should be placed to prevent stockouts during the lead time.
• Lead Time: It takes time from placing a digital purchase to receiving the inventory.
• Safety Stock: Extra inventory held to mitigate uncertainties in demand or supply.

Regularly monitoring these factors, sales trends, and market conditions helps businesses decide when to initiate new inventory orders.

The Bottomline

The link between purchase orders and inventory is vital. Purchase orders not only initiate procurement but also serve as detailed transaction records.

They enable effective inventory tracking, preventing issues like overstocking or stockouts.

Moreover, purchase orders aid in cost management, foster positive supplier relationships and play a key role in order fulfillment and reconciliation.

To simplify inventory management and to maintain the ability to make a powerful purchase for your company, we suggest that you create a purchase order management process for your business.