You got tired of the manual purchasing process and decided to implement a purchase order software. You went to Google and typed purchase order management software and you get a list of options to choose from.
So you decided to check them out and view the features etc. Do all of them look the same?
So what purchase order system is right for you? And how to go about the vendor selection process. Confused?
If you are a small business, you have a limited budget and resources so not all solutions will fit the bill and you probably don’t have time to evaluate all available options.
In this article, we will provide a step by step process to help you select a purchase order software for your business. Read this before you start requesting demos from vendors.
This article is written for financial leaders at the small business so if you are an enterprise company (>500 employees), the principle applies to you too but the selection process would look very different.
Let’s get started
1. Key objectives for purchase order automation
Before we move forward with defining the scope of the automation of your purchasing process, let’s look at the key objectives for automation. It is important to identify the objectives because that would drive the requirements and also help you to justify the investment in automation.
ProcureDesk has worked with hundred’s of companies and the objectives for automation generally falls in 3 areas
As companies start growing, a common concern among CFO’s and owners is that is they lack a cost control framework. They are often concerned that the spending would be over the budgets.
To prevent going over budget, a common mechanism deployed is to have senior management approve all purchase requisitions. That is not feasible because it takes a lot of senior management time.
Nobody likes to spend a considerable amount of their daily hours in approving requisitions!
Another common scenario is that 80%+ of your purchases are on credit cards. There is no pre-authorization of spend and that leads to budget surprises.
So if you are struggling with cost control, your objective should be to implement a cost control framework that frees up management time and drives accountability for mid-management.
Better Spend Visibility
Spend visibility means having granular visibility into your spend. The idea is that if you have better spend visibility, you would be able to make better investment decisions.
For example, you did a quick General ledger analysis and noticed that you are spending $1M per month on marketing.
Is this $1M on ads, content creation, agency fees?
Let’s say if you knew that out of $1M, $200K is spent on online ads. Then you can ask specific questions on, for example – How many leads were generated by online ads.
Sometimes it is not a question of decision making, you probably don’t want to wait for the invoice to show up for accruing the expenses.
So if you have advance visibility into purchase requests, then that data can be used for accruing expenses.
This is probably the most common objective for the automation of the process. As companies grow, they realize the pain of disjointed purchase authorization and the invoice reconciliation process.
This results in a lot of back on forth in trying to understand who approved the purchase and who should approve the invoice.
So the objective should be the automation of the end to end purchase to pay process so that you have an integrated purchase and invoicing process.
2. Purchase order software or complete procure to pay automation.
Based on the objectives you have defined above, the purchase order software can be categorized into two categories.
Purchase order software or purchase to pay (a.k.a P2P) automation. Let’s look at a high-level difference between two categories.
Purchase order software
The purchase order software category is focussed on automating the purchasing process.
The basic assumption in this scenario is that the invoicing and matching process would be done in the ERP/ Accounting system.
So for example, if you are using QuickBooks for accounting, then purchase orders would be created in the purchasing system but the invoices would still be keyed in the A/P system.
What to expect?
With purchase order software, you end state would look something like this
1. Users are able to create requisitions with ease. They can either create requisitions by entering data or simply with a few clicks using catalogs (more on this later.)
2. You have complete spend control because all purchases are authorized at the right level. No more month-end surprises!
3. Your approvers are able to approve requisitions on the go using a mobile app. End users are not frustrated because they have to keep following up with the stakeholders to get their requisitions approved.
1. This approach is simple to implement, takes less time, and cost you less money.
2. You need to work with fewer stakeholders to get buy-in because the scope is limited to only purchasing.
3. The training is simpler because you are training fewer people.
1. Invoices still need to be entered manually in the ERP system.
2. You still need to match the invoices manually with the Purchase order system.
3. The invoice approval workflow still needs to be managed manually or you need to implement a different process for managing invoice exceptions and approvals.
Procure to Pay software
Procure to pay software allows you to not only automate the purchasing process, but it also helps you with streamlining the supplier invoice process.
With a procure to pay software, you get an integrated purchase order and invoicing process in one single system, thereby increasing the efficiency of the whole end to end the purchasing cycle.
The invoice would be then sent to the accounting system for booking the cost as well as paying the vendors.
What to expect?
In addition to the efficiency gains we mentioned above, you can expect the following additional benefits
1. The supplier invoices are automatically captured using different channels. You finally achieve the paperless invoicing goal!
2. The invoices are automatically matched with Purchase order and receipts. You have peace of mind because there is no compliance risk.
3. Invoice exceptions are automatically routed to the different stakeholders so that you don’t have to chase people to get invoices approved.
4. Bills are automatically created in your accounting so that you don’t have to spend time entering invoices in your accounting system.
1. You gain better efficiencies because the entire purchase to pay process is automated.
2. There is less chance of compliance risk because compliance is driven by an automated process.
3. You can process invoices faster and hence capture more early payment discounts.
1. Takes more time to implement since you need to automate the whole process.
2. The decision time might increase if the number of stakeholders involved in decision-making increases.
3. It could cost more because of the added features regarding procure to pay.
3. Key Features for Purchasing and Invoicing automation
You defined your key objectives, and you decided on whether you need to purchase order automation or procure to pay automation.
Now let’s look at some of the key features in each of these categories
Key features for purchase order software
1. Purchase requisitions
Purchase requisitions allow an employee to request the purchase of a product or service.
Employees create a request from catalogs, or just type in what they are looking for and then submit the request for approval.
The typical flow is that a requisition is routed for approval and once it is approved, a purchase order is created from that requisition.
In our experience, a purchase requisition only make sense in the following scenarios
- You have a procurement team that needs to review the requisition and decide whether to get additional quotes before purchase.
- The finance team needs to review the purchase for accounting and other budget details.
If you don’t have a procurement team, you are probably better off just implementing the purchase order process.
The main benefit of directly using purchase orders is that it significantly reduces the cycle time because you don’t have the additional step of converting a requisition into a purchase order.
2. Catalogs for repeat purchase
If you review your purchase transactions, you would notice that 40-50% of items are repeat purchases.
So instead of having the users enter the data, again and again, why not create a catalog of these items so that it is easier to create requisitions or purchase orders for repeat purchases.
Catalogs are not only helpful for reducing the time spent on creating requisitions, it also has some additional benefits.
- Since the items are in the catalog, it is easy for the users to find the product they are looking to purchase. So if you have a preferred vendor for certain categories, catalogs would help you route more spend through preferred vendors.
- Since the items are purchased from preferred vendors and at the preferred price, you could look at automating the workflow for certain small items. For example, all office supplies order $100 don’t need approval.
Catalogs are helpful but one of the biggest drawbacks is that you still need to maintain vendor catalogs.
Now if you have a large spread of items being purchased, this could be full-time work for buyers. Let’s say you want to build a catalog for Amazon.com purchases – first, the number of items is huge, and then the price keeps on changing.
That is where Punchout catalogs make more sense.
A punchout is a catalog which is managed by the supplier. So instead of maintaining the catalog yourself, the purchasing system links to the catalog and pulls the items and pricing as needed.
Let’s continue with the Amazon.com example. ProcureDesk supports integration with Amazon.com so that you don’t have to maintain the catalog yourself.
The added advantage is that all purchases are still routed for internal approvals before the order is placed with the supplier.
So you get the best of both worlds, an awesome purchasing experience, and an added compliance for purchases.
4. Purchase Approvals
If your main objective of purchasing automation is cost control, then purchase order approval is a key feature.
With purchase approval, you can easily route the requisitions for approval so that they are authorized before you place the order with the supplier.
For cost control, you want to design a purchase approval process so that you can control the majority of spend but you are not becoming a bottleneck for the process.
Common examples of the purchase approval process include.
- Purchase authorization based on the dollar amount.
- Purchase authorization based on the purchase category. For example, Information Technology.
- Purchase authorization based on the department and business units.
- Purchase authorization by the budget owner, in case the items are beyond a certain threshold.
Don’t worry about handling each and every scenario – Focus on 80% of the spend which should be covered by not more than 20% of the transactions.
5. Purchase orders
Once the requisition is approved, a purchase order needs to be sent to the supplier. So this functionality focuses on converting a requisition into a purchase order.
If you are using requisitions, then the purchase order doesn’t need any additional approvals.
You could have a fully automated process where the purchase requisition is automatically converted into a purchase order without any further review or approval.
Alternatively, you could have a review process whereby each requisition is reviewed and then manually converted into a purchase order.
Your purchasing system should support multiple PO transmission methods so that you can achieve maximum efficiency.
Each supplier might have a different PO process requirement based on the sophistication of their sales order process. Some of the common ways to send the PO to the supplier are
- EDI – Electronic Data Interchange
- cXML – Common Extensible Markup Language
As we mentioned earlier, if you are a small team then you might as well use purchase order functionality directly without creating requisitions.
6. Tracking orders
The most common question of employees to buyers is that when their order would be delivered.
So it essential to have order tracking capabilities within the purchasing tool so that the requesters can track their orders without calling people.
From an order tracking standpoint, the following functionality is important
1. Ability to see order acknowledgment from the vendors.
2. Of course, that means that the vendors should be able to self-acknowledge the order without calling the requester.
3. When the order ships, the user should be able to get a notification of the order along with tracking information.
7. Receipt tracking for purchase orders
Accounts payable teams spend considerable time chasing people to know whether the material has been received so that they can post the invoice. No one likes chasing invoice approvals.
The solution is easy, you can request a receipt to be created in the system so that you know when the product has been received and invoiced is ready to pay.
The challenge is most end users hate to create receipts, they receive the product and that is the end of the transaction for them.
So to ensure that the users are creating the receipts, the system should
- Generate a request for a receipt when the order is delivered. For example, if you have an order tracking number and the status of the order changed to “Delivered” then that could be a trigger to generate the receipt.
- Make it easy so that the receipts can be created by answering a simple confirmation email.
- Send reminder emails if the receipt is not created in the first request.
Reporting is important for two reasons
- It gives you visibility into the current process.
- It provides you with better spend information enabling better decision making.
Your purchasing system should be able to provide standard reports. Some of the common reports are discussed below
- Total spend broken down by a supplier, category, departments, etc.
- Ability to review line-level data and do a unit cost analysis.
- Reports for tracking orders which are not approved so that you can accrue the expenses correctly.
- Orders which are placed and have not been received so that you can follow up with the vendor.
Key features for procure to pay software
As we mentioned above that based on your objectives you could implement purchase order automation software or a procure to pay software. In Procure to Pay (P2P), we will cover the additional features you would need from an AP team perspective.
1. Invoice capture
The first thing you need is the ability to capture supplier invoices and have them imported into the system. Your goal should be to achieve a complete paperless invoicing environment.
To get the most of the invoice capture, you need to find your optimum Supplier-Channel fit.
In other words, find the method which works best for your supplier and then use that to accept electronic invoices from them.
Some of the common channels for capturing the invoices are as follows
- Supplier portal where suppliers can log in to a company web portal and submit the invoices against the purchase orders.
- Email invoice capture by setting up a centralized email, for example, email@example.com
- Electronic data interchange (EDI) or cXML. This method is ideal for large volume vendors like Amazon.com
2. Exception matching engine/ 3-way match
Accounts Payable (AP) teams spend a lot of time matching invoices with their respective purchase orders (assuming you have one).
So the next thing you would need is an exception matching process that identifies the exceptions, decides how to route the invoice for review, and routes it for approval.
There are two types of invoice matching process
3-way match – As the name suggests, in this process, you match the purchase order, invoice, and receipt to identify any discrepancies. If the invoice matches the quantity and price and it has been received then the system automatically marks the invoice as “Approved for Payment”.
2-way match – If you are purchasing a service, then you are not physically receiving a product. In this case, you are matching the purchase order and invoice and hence the process is called “2-way match”.
In both cases, you want to have the flexibility to define a range in which the invoice exception should be auto accepted by the system so that every exception is not routed for approval.
3. Approval workflow for exception management
Next, you would need the capability to route exceptions for approval. Most systems have the ability for the AP team to review the invoice and then send it to the right person for approval.
However, if this is a manual process, then you still spending time routing exceptions.
An alternative approach is to define a workflow and let the system automatically route the exceptions for approval.
Here are some examples of possible rules which can help you simplify the exception review process
- If the unit price doesn’t match, send it to the buyer for resolution.
- In case the quantity is over the receipt quantity, send it to the supplier for review.
- For cases where a receipt is not available, send it to the buyer to create the receipt.
Again, these are just examples of exception reviews. The goal should be to automate as much possible and reduce manual effort.
Your chosen system should be able to report on the invoices so that you understand the efficiency and effectiveness of the process.
Some common reports are as follows
1. A report which lists all invoices that are in exception review. You can then use this report to follow up with the respective individuals.
2. Received but not invoiced – this report is very helpful for accruals perspective.
3. Invoiced but not received – Similar to the above report, this report helps the accounting team in calculating the accruals for expenses. Generally, if a receipt is not available, the invoice is not posted and hence the need for accrual.
4. On-going changes and support
One of the important factors in selecting a purchasing or a procure to pay system is to understand the need for ongoing maintenance.
The ongoing maintenance and support considerations are as follows
1. How easy is the system for both end-users and administrators? Can users complete a standard requisition or purchase order without the need for a help manual?
2. Can you make the configuration changes on your own without raising a support ticket?
3. If you have to raise a support ticket, how responsive is the support team?
4. How long does it take for the support ticket to be resolved?
5. How the vendor gathers customer feedback and incorporates that into the product roadmap.
6. Is the vendor transparent about their product roadmap?
7. How often the vendor releases new features. Ask for the release schedule. Are the build monthly, weekly, or every quarter.
We recommend that you rate your shortlisted vendors based on the above parameters. A simple scale of 1-5 can be used where 1 is the lowest rating and 5 is the highest rating.
5. Integration with QuickBooks or any other system.
The next consideration is the evaluation process is the ease of integration with your accounting system.
Whether you use QuickBooks, Sage, or Netsuite – the system should be able to seamlessly connect with your accounting system.
We also see our customers use Bill.com or similar payment platforms for invoice payments. So your selected system should integrate with the payment platforms too.
Some considerations on integration
1. Does the system allow you to integrate both the purchase orders and invoices with the accounting system? That gives you the flexibility to implement just the purchase order automation or the entire purchase to pay process.
2. Is the integration process seamless or there is a manual setup or development process required? You don’t want to maintain custom integrations because that increases the workload for your team.
3. How well does the system integrate with other payment platforms? If it is easier to implement, then that gives you the flexibility to design your processes.
Even though there are multiple options available in the market, you can easily find the best purchase order management software by following these simple steps
1. Identify the objectives for automation. That drives scoping and features requirements.
2. Create a high-level scope for automation. For example, purchase order automation or purchase order and invoice automation.
3. Create a shortlist of features you would need based on the scope.
4. Shortlist 2-3 vendors and use the feature map to evaluate those vendors.
5. Finally, review support and ongoing innovation vendor is providing to ensure that the vendor remains viable in the long term.