by ProcureDeskLast Updated : Jan-12-2022
Bonus: Purchase Order System Features Checklist
A purchase order system is not for everyone, especially if you are a one-person company.
This strategy is for companies looking to reduce the time spent on issuing a purchase order using a purchase order system.
If you are issuing more than 10-20 purchase orders in a month, this strategy is for you.
In our experience, we have seen many companies follow this exact strategy to streamline their manual purchasing process and cut the time spent on purchase orders by at least 45%.
Here is what before and after looks like for companies who have automated their purchasing process:
By implementing a purchase order system, our clients have seen results like this:
This post will provide a step-by-step process to help you reduce the time spent on processing purchase orders by implementing a purchase order system for your small or medium-sized business.
If you want to implement a purchase order system, read more below. Or you can click on the button below to schedule a free product tour with one of our product specialists.
What Is a Purchase Order System?
A purchase order system is software that helps you create, issue, and track purchase orders. A purchase order system is an effective Spend management tool.
If you are not familiar with purchase orders, see the definition below.
At a very high level, it is a purchase order process system that allows you to do the following:
When an employee needs to purchase a product or service, they need to issue a purchase order to the vendor. This is not true for small purchases, but a purchase order is typically required for all major purchases.
Before you send the PO to the supplier, it needs to be approved by the management or finance team. This is to ensure that the purchase is authorized and you have a budget set for this purchase.
The final step is to send the purchase order to the supplier. Companies spend a lot of time on this step because they don’t have an easy way to generate a purchase order.
These three steps could cost companies anywhere from $60 – $500/ purchase order. That is the cost of the purchase order.
This is a huge range, and we recommend that you calculate your purchase order cost to get an accurate estimate of the cost of the purchase order process.
Let’s define what a purchase order is and the different components of the purchase order system.
If you are familiar with what is a purchase order, please feel free to skip this section.
The official Wikipedia definition of a purchase order is as follows
“A purchase order (PO) is a commercial document and first official offer issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services. It is used to control the purchasing of products and services from external suppliers.”
Like any other legal contract, PO has an offer and acceptance cycle.
A buyer sending the purchase order is just an offer to purchase from the supplier. The PO becomes legally binding when the vendor accepts the offer by acknowledging the purchase order. The vendor can accept the order as-is or ask for a change order. Having a purchase order simplifies this back and forth between buyer and supplier.
A sample purchase order is below:
Download free PO template in Microsoft Word
A purchase order has the following components:
A purchase order header consists of the following components
This section lists key terms, including shipping method, trading terms, and agreed or standard payment terms for your suppliers or any additional terms.
Order Line item details: this section contains line items that you are purchasing from the vendor. The key fields are the description of the item purchases, quantity, unit of measurement, unit price, and total. You might have additional fields to track whether it is an inventory or noninventory item.
This section lists the taxes related to the purchase and other charges like Freight etc.
Why do you need a purchase order system, or what is the purpose of the purchase order system?
If you are asking yourself this question, here are a couple of points to consider:
The apparent purpose of a purchase order system is to systemize your purchasing process.
But every automation project is also an opportunity for improving the process and making it more straightforward.
When you are looking at automating a purchasing process, see how you can improve upon the process and make it better.
Here are some things that you can improve upon:
A single place to track all purchase orders
With a purchase order system, you get a central place to track all purchase orders.
If you have been using spreadsheets for order tracking, then you know how painful that process could be.
It is hard to keep Spreadsheets updated because the information keeps on changing. For example, change orders and change in delivery dates, etc.
And if you have multiple people approving the purchase orders, that could be a nightmare to ensure that the changes are not getting updated.
Here a central dashboard looks like in a purchase order system:
With a purchase order system, you get better cost control.
With a purchase authorization process, the individual team or manager can control spending by evaluating the purchase request.
You can use this process for cost avoidance( not purchasing at all) or deferring the cost to better meet your cash flow goals.
Here is how simple it becomes to control cost with a purchase order approval process:
Bonus: Want to know what are the must-have features for a purchase order system? Download our free purchase order system checklist here.
Whether you should use purchase orders or not can be assessed by the following two factors.
If you have a low purchase volume or most of the purchases are non-repeatable, you probably won’t get the most value out of a purchase order process.
For example, if you purchase supplies from Walmart and Sam’s, you don’t need a purchase order process because the vendors don’t accept a purchase order.
You can still think about setting up an approval process to control your cost, but a purchase order process would not have much value.
If you have a simple purchase process – then you don’t need to use purchase orders.
For example: if you are a ten-person company, one person is responsible for ordering all products and services, and everything is paid by credit cards, you don’t need a purchase order process.
If you don’t have a need for inventory stock management, then you probably don’t need a purchase order system.
Considering that you have evaluated your situation and decided that a purchase order process makes sense. The obvious question is, who should create purchase orders?
There are two options:
In this case, an employee can themselves create a purchase order request, send it for approval.
After it is approved, the purchase order system should automatically dispatch the purchase order to the vendor.
A vendor might require a purchase order to be emailed or sent via EDI or other electronic methods.
A good purchasing system should be able to support these different methods.
Here is an example of auto-generated purchase order:
This method is recommended for smaller teams and those who purchase from well-known vendors so that catalogs can be set up.
This scenario is recommended when the purchasing team reviews the purchase requisition request before the order is sent to the vendor.
In this case, the employees can create a purchase requisition
This process gives you more flexibility on what can or can’t be ordered.
This also lets the procurement team review the orders, seek vendor quotes, and get better pricing if possible.
Here are the top benefits of a cloud-based purchase order system:
When it comes to the cost of processing a purchase order, there is no simple answer.
For example, the manufacturing industry has an average cost of $59, and the petroleum industry has an average cost of $741 (As per CAPS(Center for Advanced Procurement Strategy) research).
Such a broad range is due to the process complexity and the number of people involved in reviewing the purchase order before it is sent to the supplier.
The cost to process a PO = Total yearly cost/number of purchase orders issued.
So even if you have a single employee with an average annual loaded cost of $75,000 and the total PO processed is 60 a month or 720 a year. Then the average cost per PO is $104.
By implementing an automated purchase order system, you can eliminate the cost of processing the PO by 40-50%.
A side benefit of automating the purchasing process is an improved relationship with suppliers. Automated purchasing process leads to
Visibility into Spend at a granular level
If you have a manual purchase order process, chances are you have limited visibility into company Spend.
Most of the companies rely on reports like Spend by the supplier or spend by GL accounts. Beyond that, you must dig up the purchase order documents to find additional information.
With an automated purchase order system, you can get granular visibility at the line item level, which helps you better plan your budgets, understand cost trends. The granular visibility provides better spend data which you can use for negotiations with your suppliers. It is not uncommon for companies to find out that they pay different rates for the same product across different departments.
For more on cost savings, download our free guide on implementing a strategic cost reduction program.
You can ensure that the orders are authorized as per your purchasing policy by implementing automated approval workflows.
Most purchase order systems maintain an audit trail, and you can review the purchase approval history at any time.
With automation, you can build approval workflows so that employees don’t need to evaluate who should be approving the purchase. The purchase system automatically does that for you and helps in preventing procurement fraud.
Though it is ideal to have negotiated contracts for all the purchases, that is not always the case. In those cases, purchase order terms are a good substitute.
Every purchase order should list the standard buyer terms for the purchase, and that provides the general agreement on how both parties will conduct business.
Purchase order includes commercial terms like payment terms, product warranties, etc. It also includes legal terms like the limitation of liability, indemnification, etc.
If there is a dispute, these terms can help resolve that dispute rather than leaving it open-ended.
If a case ever goes to a court of law, the standard terms can provide the general agreement framework rather than standard commercial terms.
With the purchase order system, you can gain efficiencies in purchase approvals and productivity improvements and ultimately reduce the time spent processing purchase orders.
However, that is just one side of the equation.
Once the vendor delivers the order, the vendor sends an invoice for the products they have provided or the services rendered.
If you stop with a purchase order process, you leave a lot of efficiencies on the table.
Customers who have implemented an AP (Accounts Payable) automation solution along with a purchase order system see the following benefits.
Bonus: We have compiled a list of must-have features that can help you choose the best purchase order system. Click here to download it for free.
Once you have the purchase order number, you can automatically match the supplier invoice with the purchase order.
With an integrated purchasing and invoicing system, the Accounting team doesn’t have to spend time matching the purchase orders with the invoices.
The system can automatically match the purchase order and invoices, mark the invoices for payment, or route the invoice for exception approval.
Approval workflow / Exception routing engine
The automated matching process might result in one of the two scenarios:
Perfect match:
A perfect match is when the invoice document matches the quantity and price on the invoice, and there is a receipt for that order.
Exception:
That is an exception scenario when an invoice doesn’t match the purchase order or the receipt.
For example, the unit price on the order is $10, and the vendor invoiced you for $13 per unit.
An integrated purchasing and invoicing system can automatically route the document for approval to the concerned parties if there is an issue.
That saves a lot of time because Accounts payable is now not investing endless hours chasing down stakeholders.
There are different types of purchase order systems. So what is the best purchase order software for your business?
The answer is simple – ProcureDesk!
Enough with the shameless plug; let’s talk about how you decide the best purchase order software for your business. If you are interested in seeing a demo, click the link below to schedule a free demo!
So to help you decide for your business, we are presenting the critical features for a purchase order system and how it helps you in the business.
From there on, you can create a list of top features that are required to support your requirements and create a checklist for selecting a purchase order system.
Here is a template to get you started. Click on the button below to download the template.
Let’s review the key features of a purchase order system and how it helps streamline your purchasing process. In this section, we are covering the key features of a purchase order module.
What it is:
A requisition process allows employees to create a purchase requisition to have the spend authorized before the purchase.
Employees can create a requisition from a catalog (Internal or external), or employees can enter the data into the system.
How it helps:
Here is an example of how a purchase requisition works:
What it is:
The ability to route purchase approvals to different stakeholders so that the spending can be authorized.
With flexible workflows, you can easily route the request to department budget owners. That way, they have complete visibility into what is being purchased.
How it helps:
A flexible approvals process helps with the following
Here is an example of how a flexible workflow might look like:
What it is:
A Budget feature allows you to set up budgets for cost control. The finance team can set up the budgets at a department level, a project level, or any other structure.
With Budgets, you can not only control cost but provide budget visibility to the stakeholders.
How it helps:
Here is an example of how the Finance team can set up budgets for cost control:
What it is:
Catalogs help with improving the purchasing experience of the employees.
Catalogs provide an online purchase experience for the employees.
Instead of remembering what information to type, they can simply browse or search the catalogs and find the right product or service.
How it helps:
Here is how a catalog can simplify purchasing for you:
What it is:
The purchase order functionality allows you to create purchase orders and send the purchase orders to different vendors.
A purchase order is a legal document that is an offer from the buyer to the supplier. Once the supplier acknowledges the order, the purchase order becomes legally binding.
How it helps:
Here is an example of a system-generated purchase order:
What it is:
Purchase order tracking functionality allows you to track the status of the purchase order through its life cycle.
A purchase order tracking functionality allows you to answer the following questions:
How it helps:
Here is an example of a central purchase order tracker:
Though it is not a feature, a user-friendly purchase order system would help drive adoption and increase purchasing compliance.
So along with other features, you should also evaluate the ease of use. This can be done through a quick demo or a quick trial.
What it is:
An integrated system allows you to automatically sync the purchase order and invoice date with your accounting system.
Let’s say you use QuickBooks Online or Enterprise as your accounting system.
After creating purchase orders and Invoices in your cloud-based system, you need to sync that data with the accounting system to book the cost to the correct chart of accounts.
Without an integration interface with the accounting system, you have to enter the data in your accounting system manually.
How it helps:
What it is:
As your company grows, you need better access controls. This allows you to control individual users or user group access.
For example, You only want certain users to see all purchase orders in the company.
Or do you only want certain users to change the purchase order after an order is created?
How it helps:
Here is an example of what the granular access control looks like:
A purchase order system can help you reduce the time spent on purchase orders by at least 30%.
However, not all purchase order systems are equal, so here is what we suggest you should do:
What you should do now
Whenever you’re ready… here are 4 ways we can help you scale your purchasing and Accounts payable process.