Purchase orders are the documents sent from the buyer to the supplier requesting goods or services that when accepted by the vendor forms a legal contract between the two parties. It also serves as a form of security for the supplier.
Typically, purchase orders will provide detail of the items the buyer agrees to purchase and the agreed price per unit. In addition, a purchase order outlines delivery dates and terms of payment for the buyer.
The most effective way to streamline procurement activities is to include a well-considered purchase order cycle as part of your purchasing processes, one that allows you to plan for expenses and budget for the costs of doing business.
A purchase order cycle
The purchase order life cycle is the set of steps taken to process a purchase order to procure goods for your business and it includes the following steps:
1. Vendor qualification and selection
The purchasing department or procurement team will seek quotes from a list of prospective vendors with the intention to elicit a product or service for the business.
Once received, the team will review and compare the vendor quote with their business needs and the most qualified bid is agreed by all stakeholders, the winning bidder is then selected.
2. Negotiation with suppliers
Once a vendor is chosen, the next step is to negotiate the terms, price, and quality of goods with the supplier. Typically, purchasing negotiations will cover such things as quality, time constraints, delivery expectations and payment terms.
Once negotiations are complete, the procurement team forwards the purchase order to the supplier for approval. At this stage, the purchase order becomes a legally binding contract between the vendor and the buyer.
3. Creating the purchase order
The third step is creating the purchase order. A procurement request is made and approved by the relevant authorised approver then it is customised as a purchase order.
Once approved, staff then create or raise a purchase order. While purchase requests can be raised by the organisation’s employees, purchase orders are generally produced by the procurement team, or in the case of SMEs, this authorisation may need approval from the business owner.
4. Budget review
When a purchase order is created, the finance team carries out a budget check to ensure that the necessary funds are available. A search is then undertaken to determine if an existing purchase contract exists. If one does exist, the purchase order is sent to the respective vendor.
5. Receipt of goods and quality check
Vendors will usually send an advance shipment notice to the buyer once the order is shipped. A shipping notice will include dispatch date, shipping agency details, a tracking number and a copy of the purchase order and suppliers’ invoice.
After the product or service is received, the purchaser checks the packaging slip and information, acknowledges receipt then performs a quality check. If there is damage or defect in a delivered item, the purchaser notifies the vendor or rejects goods.
6. Matching up
The final step is to match-up the purchase requisition, purchase order and vendor invoice documents to ensure there are no discrepancies and to verify the accuracy of information. Any discrepancies are addressed according to the dispute resolutions agreed in the purchasing contract.
Once this document match is complete, the invoice is approved and forwarded to the finance department or relevant processing area for payment. The purchase order is then closed, and documentation filed for bookkeeping or audit purposes.
Reducing purchase order cycle times
Reducing your purchase order cycle time is a necessary step to streamline procurement activities and optimise inventory control. Improving internal processes will support reductions in cycle time but two of the most effective ways of streamlining purchase order cycle time is through automation and improved supply chain management.
As a business grows purchase order cycle times can become increasingly complex, so by transferring purchasing to an automated procurement solution you can reduce time, expenses and a lot of the resources needed. This will reduce human error and increase efficiency by transferring low-level, repetitive tasks into a centralised inventory control system.
A cloud-based solution offers greater transparency and ease of access, simultaneously connecting all users. It provides hierarchies of access, review, approval and payment, resulting in a significant decrease in your PO cycle time. Ensuring all data relative to the transaction is cross-connected to its corresponding PO, invoice, shipping documents and any additional correspondence.
Streamlined purchase order cycles
In addition to leveraging the capability of automation, purchase order cycles can be enhanced through strategic supply chain controls. Creating productive and mutually beneficial supplier relationships through review, reduction and partnering with preferred suppliers.
- A supplier review will track vendor performance with ease and enables contract terms to be adjusted as capabilities change or incentives and penalties are applied.
- Reducing vendors allows you to cut underperforming suppliers, however, it is a balancing act to ensure critical purchase needs are met directly and via contingency plans. By reducing suppliers, you are also able to negotiate more favourable terms and pricing as you identify growth and mutually beneficial partnership opportunities.
- Partnering with preferred suppliers allows you to expand access and support for shared initiatives. It encourages a stronger bargaining position with suppliers who want preferred status and provides additional value in the form of financial forecasting data and strategic initiatives.
Purchase order cycle time is a key performance indicator that helps you measure the efficiency of your procurement function and inventory control activities, helping to identify waste reduction opportunities and lower costs.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. When not writing about inventory management, you can find her eating her way through Auckland.