How to Select a Purchase Order System – [Checklist Included]

Purchase_Order_System

A purchase order system is not for everyone, especially if you are a one-person company.

This strategy is for companies who are 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 same strategy to streamline their 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:

Before and After Purchase Order System

By using this strategy, our clients have seen the following results

  1. At least a 45% reduction in the time spent on creating purchase orders.
  2. Reduce the stockouts by 20% because the orders are shipped on time.
  3. Completely eliminate Spreadsheets for purchase order tracking.

In this post, we will provide a step-by-step process to help you reduce the time spent on processing purchase orders through purchase order automation.

  1. We will cover the top benefits of a purchase order system so that you can build a business case for automation.
  2. We will cover the top features you would need so that you don’t spend days selecting a purchase order system.
  3. We will cover one mistake that is costing companies at least 30% (guesstimates based on our Client’s feedback)  in productivity loss every year.

But before you go forward, download our purchase order system selection checklist


Purchase_order_system_selection_checklist

And then follow along these steps to find a purchase order system that works for your needs.

What Is a Purchase Order System?

A purchase order system is a software that helps you create, issue, and track purchase orders.

If you are not familiar with purchase orders, see the definition below.

At a very high level, a purchase order system allows you to do the following:

Purchase order process

Create a purchase order request:

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 for all major purchases, a purchase order is typically required.

Approval of purchase order:

Before the order is sent 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.

Send purchase order to the vendor:

The final step is to send the purchase order to the supplier. Companies spent a lot of time on this step because they don’t have an easy way to generate a purchase order.

These 3 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.

Definition of a Purchase Order

Let’s define what a purchase order is and what are 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

purchase_order_template

Download free PO template in Microsoft Word

A purchase order has the following components:

a) Purchase order header

A purchase order header consists of the following components

  1. Buyer details: This covers the basic information like company name, address, logo, etc.
  2. Shipping information: This section covers the order location for the supplier, where the order should be shipped to, and the Purchase order number.

b) Key terms

This section lists key terms including shipping method, trading terms, and agreed or standard payment terms for your suppliers.

c) Purchase order line items

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.

d) Taxes and other information

This section lists the taxes related to the purchase and other charges like Freight etc.

What Is the Purpose of a Purchase Order System?

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:

Automating your purchase order management

The obvious 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 simpler.

When you are looking at automating a purchasing process, see how it could be made better or improved upon.

Here are some things that can be improved upon

  1. Simplify the purchasing authorization matrix: For example, not every purchase requisition needs to be approved by the CFO of the company. You can read more about setting purchase order approvals here
  2. Set up catalogs for a better employee experience: If you are purchasing similar items, again and again, you can set up a catalog so that employees can create orders with one click. Vendor catalogs improve purchasing experience for your employees.

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, then 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:

Track_all_your_orders

Better cost control

With a purchase order system, you get better cost control.

When a purchase authorization process, the individual team or manager can really make an informed decision on whether a purchase is required or not.

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:

 

purchase_order_approval_workflow

 

Should I Use Purchase Orders?

Whether you should use purchase orders or not, can be assessed by the following two factors

Purchasing mix

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 all you do is 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 still can think about setting up an approval process so that your cost is under control but a purchase order process would not have much value.

The complexity of purchasing process

If you have a simple purchase process – then you don’t need to use purchase orders.

For example: if you are a 10 person company, 1 person is responsible for ordering all products and services and everything is paid by credit cards then you don’t need a purchase order process.

Who Creates a Purchase Order?

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

Employees create purchase order request

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:

purchase_order_sample

 

This method is recommended for smaller teams and who purchase from well-known vendors so that catalogs can be set up.

Buyers/Procurement team creates orders

This scenario is recommended when the purchasing team wants to review 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 gives the procurement team to review the orders and seek vendor quotes and get better pricing if possible.

 

Benefits of a Cloud-Based Purchase Order System

Here are the top benefits of a cloud-based purchase order system:

Benefits_of_a_purchasing_system

Reduce the average cost to process a purchase order

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).

The reason for such a broad range is due to the process complexity and the number of people who are 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%.

Better relationship with your suppliers

A side benefit of automating the purchasing process is an improved relationship with suppliers. Automated purchasing process leads to

  1. Reduced errors in the purchase orders, hence suppliers spend less time correcting errors and processing the purchase orders.
  2. It provides better visibility to the supplier. Since the process is automated, suppliers know how much time it takes to process orders.

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 are paying different rates for the same product across different departments.

For more on cost savings – Download our free guide on how to implement a strategic cost reduction program

Fraud prevention

By implementing automated approval workflows, you can ensure that the orders are authorized as per your purchasing policy.

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.

Legality

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.

In case 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 relying on standard commercial terms.

 

Purchase Order Software with Invoicing

With the purchase order system, you can gain efficiencies in purchase approvals, productivity improvements and ultimately reduce the time spent on processing purchase orders.

However, that is just one side of the equation.

Once the order is delivered by the vendor, the vendor sends an invoice so that they can be paid for the products they have provided or the services rendered.

If you just 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.

Matching purchase order and Invoice

Once you have the purchase order number, you can automatically match the 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 and 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:

When an invoice doesn’t match the purchase order or the receipt, then that is an exception scenario.

For example, the unit price on the order is $10 and the vendor invoiced you for $13 per unit.

If there is an issue, an integrated purchasing and invoicing system can automatically route the document for approval to the concerned parties.

That saves a  lot of time because Accounts payable is now not investing endless hours chains down stakeholders.

What Is the Best Purchase Order Software?

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 what is the best purchase order software for your business.

So to help you make a decision for your business, we are presenting the key 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

Purchase_order_system_selection_checklist
Features of Purchase Order Software

Let’s review the key features of a purchase order system and how it helps you with streamlining your purchasing process.

Purchase request

What it is:

A requisition process allows employees to create a purchase requisition so that they have the spend authorized before the purchase.

A requisition can be created from a catalog (Internal or external) or employees can enter the data into the system.

How it helps:

  1. A requisition process provides a mechanism for employees to purchase products or services they need for running the business.
  2. It eliminates the need for manual purchase requisitions and back and forth emails.
  3. It helps you with cost control because all purchases are pre-approved and the management has the opportunity to review and approve or reject the purchase.

Here is an example of how a purchase requisition works:

purchase_requisition

 

Flexible Approvals

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 so that they have complete visibility into what is being purchased.

How it helps:

A flexible approvals process helps with the following

  1. No more emails for approvals as approvals are managed in one system.
  2. With the help of flexible purchase approvals, you can route the request to different stakeholders. For example, a spend over $100,000 needs to be approved by the CEO or CFO.
  3. You can set up different approval processes for Opex and Capex budgets.
  4. With a mobile app, you can approve the requisitions on the go so that speeds up the approvals and reduce the purchase order process.

Here is an example of how a flexible workflow might look like:

Approval_workflow

 

Budgets

What it is:

A Budget feature allows you to set up budgets for cost control. The budgets can be set up 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:

  1. With Budgets, you can see the real-time consumption. So no more surprises at month-end regarding exceeding set budgets.
  2. Your stakeholders can approve the purchase requisitions with confidence because they always have complete visibility into how much budget is available.
  3. It helps you build a cost-conscious culture because everyone knows how much budget is set up and how much is remaining.

Here is an example of how Budgets can be set up for cost control:

budget_approvals

Catalogs

What it is:

Catalogs help with improving the purchasing experience of 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:

  1. With catalogs, you can significantly reduce the time spent on creating purchase requisitions.
  2. It helps you save costs because you can route the employees to your preferred vendors.
  3. It helps you consolidate vendors because, with catalogs, employees already know who your top vendors are. So they don’t create additional vendors for similar product or services

Here is how a catalog can simplify purchasing for you:

Purchase order

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:

  1. The purchase order feature eliminates the need for manual purchase orders. No more manual Purchase order creation!
  2. It provides you with a central place to track all your purchase orders. Instead of keeping purchase orders in your computer folders, you can track that in a system.
  3. With a purchase order process, you can get better control over your cash flow because now you know what is already committed for purchase.

Here is an example of a system-generated purchase order:

 

purchase_order_sample

Purchase order tracking

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:

  1. Is the order acknowledged by the vendor?
  2. Has the product shipped and where it is in transit?
  3. Is the product delivered to the end-user?

How it helps:

  1. The biggest benefit of purchase order tracking is that you always have the latest information available about purchase orders at one single place.
  2. No more spreadsheets for tracking vendor purchase orders.
  3. No more worries about orders not being delivered because you can see whether the order is shipped or not.

Here is an example of a central purchase order tracker:

purchase_order_tracking_dashboard

 

Integration with the Accounting system

What it is:

Having an integrated system allows you to automatically sync the purchase order and invoice date with your accounting system.

Let’s say you use QuickBooks as your purchasing system, then after you have created purchase orders and Invoices, you need to sync that data with the accounting system so that you can book the cost to the right chart of accounts.

Without integration with the accounting system, you have to manually enter the data in your accounting system.

How it helps:

  1. No more manual data entry into your accounting system. That not only saves time but also eliminates any data entry errors.
  2. With a purchase order system, the purchase orders are automatically created and synced with your accounting system.  So there is no need to have a dedicated resource for data entry into your accounting system.

Granular access control

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 you only want certain users to change the purchase orders after an order has been created

How it helps:

  1. With granular access controls, you can meet the requirements of segregation of duties and other compliance requirements like SOX (Sarbanes Oxley).
  2. You can control the information flow and decide who can do what in the system.
  3. You don’t have to open up your purchasing system to all users. For example, you can control that only a few employees can issue purchase orders and commit the spend to the supplier.

Here is an example of what the granular access control looks like:

Access Control

Now your turn!

A purchase order system can help you reduce the time spent on purchase orders by at least 30%.


Purchase_order_system_selection_checklist

However, not all purchase order systems are equal, so here is what we suggest you should do:

  1. Download the purchase order system checklist.
  2. Go through the individual feature list and rate the importance of each feature based on your requirements. We use the two categories to keep it simple: “Important” and “Nice to have”.
  3. After you have identified your requirements, set up the demo for 2-3 vendors and pick the best option for your business.
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