A purchase order (PO) is a document issued from a buyer to a seller that communicates a request for procurement of goods or services. PO’s also form part of an organisations inventory control practices; they help to increase purchase efficiency and serve as a legally binding contract, enforcing the deal between purchaser and supplier.
Getting your purchase orders right is important as a means of reducing overspending and helping you to monitor and manage all procurement related expenses. A good purchase order system enables the identification and elimination of any instance of order duplication.
Best practice purchase ordering
Organisations have their own distinct approach to procurement activities but can benefit from implementing proven strategies and best practices to achieve more efficient purchase ordering. The first step is to develop best practice purchase ordering is to create written guidelines with clearly stated policies and practices for procurement staff to follow.
PO guidelines establish the rules and expectations for your team when they are making purchasing decisions on behalf of your company. They should address areas such as whether the lowest-priced goods should be selected to cut back on business expenses or if more expensive goods are chosen for better quality inventory stock.
Guidelines will serve as a useful reference to outline procedures for more specific purchasing scenarios and can also be used to train new employees in vendor selection and negotiation.
In addition to having well-documented policies and guidelines the following steps are also necessary to ensure best practice purchase ordering:
- Create and maintain a vendor database of all the suppliers your business has ever ordered from. Clear and accessible vendor records help to streamline procurement activities making is quicker and easier to select a vendor. A vendor database enables you to create POs much faster.
- Develop budget-related expense restrictions by classifying the products and services necessary for inventory stock replenishment, segregating purchases into categories such as office supplies, manufacturing components or equipment. Category classifications help to enforce budget-related restrictions because you can set caps by expense category and they help to improve cashflow tracking.
- Implement a purchase approval system to control costs and prevent financial mismanagement. By enforcing an approval workflow, you help to prevent purchases from getting out of hand particularly if a duplicate order is placed for the same product.
- A series of quality assurance checks help maintain accurate data of purchase orders to reduce errors and ensure that all details have been accurately filled. Including important information such as purchase quantity, price, shipping details and any taxation on the goods.
- Have well-maintained documentation and records for auditing purposes, records should be held and filed so that all documents related to a purchase order are filed together correctly, providing a clear backstory of the transaction. Data security is important to avoid documentation being intentionally or unintentionally altered, misplaced, deleted or destroyed.
- Best practice purchase ordering needs to have a clear cancellation process. When a PO is cancelled it should be a correctly formatted written, communication authorised by an approved signatory. Cancelled orders must be filed with the other documentation pertaining to the order.
Automating purchase order activities
The first and most important step you can take toward efficient purchase ordering is to implement a centralised, automated systemso that purchasing and stock information are managed from one place, instead of having to double up on systems.
Streamline and leverage technology to realise greater savings from every dollar spent. A cloud-based procurement solution is simple to install and provides easy access to every element of the PO, including the quantity of the purchase, available budget and seller contract and service level agreements.
Automation improves transparency, inventory control, saves on time, paperwork and reduces errors and resource waste. In addition, automated systems help with approval routing, making the approval process simpler and quicker without the need for back-to-forth email requests, archiving every approval request once a PO is approved.
Orders are tracked in real-time from production and shipment with all relevant updates recorded automatically. On receipt of purchases, shipping documents are automatically compared to the original PO and supplier invoice and flagging any errors or discrepancies that are found.
Finally, automation considerably reducing payment times. It provides triplicated cross-checking to verify invoices against the PO and packing slip, issuing payment and closing the order if no errors are found.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.