Purchase Order Management Guide for Growing Businesses

Purchase order management is a core function within any supply chain. Having an effective PO management and tracking process in place helps you improve purchasing, inventory, and supplier relationships—and keep an eye on your expenses.

What is purchase order management?

Purchase order management is a key part of the procurement process that ensures efficient handling and monitoring of purchases. It involves creating and approving purchase requisitions, generating purchase orders, coordinating with suppliers, tracking orders, and ensuring timely payments for the orders.

Why is purchase order management important?

Effective PO management optimizes the procurement process, supports inventory management, and improves spend control within the supply chain. Here is how:

1. Overview of purchases. Properly tracking each PO provides you with a clear overview of your purchases and the related expenses. In addition, this allows you to avoid purchasing errors such as double orders.
2. Better cost control. Tracking your costs per PO enables you to keep your expenses at bay and identify cost-saving opportunities.
3. Better inventory and supply chain management. Efficient PO management ensures timely deliveries, thereby preventing stockouts and overstocking.
4. Improved supplier relationships. PO management fosters better relationships with suppliers through clear communication and timely payments.
5. Better approval process. PO management establishes a structured approval workflow, ensuring all purchase requisitions are reviewed and authorized by the right stakeholders. This reduces the risk of unauthorized spending and accelerates decision-making within the procurement process.

Therefore, effective PO management streamlines procurement and increases transparency through accurate tracking and better control over your purchasing process.

Purchase order management process

Slow purchasing processes can bring your entire operation to a grinding halt as goods can run out of stock before they are replenished. That is why an efficient purchase order management process is critical for the success of your business. Here are the basic steps of a smooth PO management process:

1. Determining requirements and creating a purchase requisition (PR).

Before starting to order goods, make sure you know what you actually need and what you already have in stock. Check your inventory records (and, if using spreadsheets or other manual methods, hope that they are accurate), or take a walk in the stockroom to see what you’re running out of. Then, create a purchase requisition detailing the necessary goods.

2. Creating and issuing the purchase order (PO)

After approving the PR, copy its contents to an official purchase order. If your company policy requires POs to be authorized before sending them out, route the PO for approval, and then send it to your preferred supplier. Include details such as item description, quantity, price, delivery terms, and payment conditions. 

3. PO processing by the supplier

Once the supplier has confirmed that they can fulflill the order and agreed on the specifics, the supplier starts the order fulfillment process. They prepare, pack, and ship the goods according to the agreed terms. Regular communication with the supplier ensures timely delivery and helps you resolve any potential issues early.

4. Invoicing and payment

Usually, the supplier issues an invoice based on the PO terms after the order has been shipped. The buyer must then conduct a three-way match, comparing the purchase order, the invoice, and the goods receipt to ensure accuracy. Any discrepancies should be resolved before processing the payment. Timely payments not only maintain strong supplier relationships but also ensure continuous supply.

5. Order tracking

Throughout the process, communicate with the supplier and monitor the status of shipments and deliveries. This helps identify any delays or issues and ensures that the goods arrive as expected. Proactive tracking supports better inventory management and minimizes disruptions in operations.

6. Receiving and inspecting the goods

Upon delivery, inspect the goods to ensure they match the specifications and quantities listed in the PO. Check for damages, incorrect items, or wrong quantities. Record the receipt of goods and document any discrepancies to follow up with the supplier. This step is crucial for maintaining accurate inventory levels and ensuring prompt action by the supplier.

Record keeping and performance analysis

Store all records, including the PR, PO, delivery receipts, and invoices, for future audits and spend management analysis. Evaluate supplier performance regularly to discover cost-saving and supply chain efficiency boosting opportunities.

Purchase order management best practices

Best practices for effective purchase order management include:

1. Standardize your processes

• Create templates for purchase requisitions and purchase orders to ensure consistency.
• Draft a step-by-step guide outlining how purchase requests are submitted, reviewed, and approved.
• Assign clear roles and responsibilities for each step of the procurement process.

2. Track supplier performance

• Schedule regular supplier reviews to evaluate performance, delivery accuracy, and product quality.
• Create a supplier scorecard to rate and compare vendors for future decision-making.
• Maintain clear and open communication with suppliers, especially regarding your expectations and their performance. But don’t forget that on-time payments play a major part in good supplier relationships!

3. Establish approval workflows

• Set up an approval process that minimizes purchasing disruptions but ensures that key stakeholders are on the same page.
• Ensure high-value purchases require multiple levels of approval.
• Review and optimize approval workflows to minimize bottlenecks.

4. Control spend

• Define spending limits and approval thresholds to control costs.
• Regularly review PO history to identify unnecessary or duplicate purchases.
• Run spend analysis reports to identify opportunities for negotiation or cost reduction.

5. Maintain accurate records

• Store all purchase documentation, including requisitions, POs, invoices, and delivery receipts, in a centralized digital system.
• Ensure that documents and important pieces of data are easily accessible to select team members.
• Schedule regular audits to ensure records are up-to-date and compliant with requirements.

6. Implement automation

• Choose a procurement software or ERP system that fits your business size and needs.
• Set up automated alerts for when inventory levels are low, triggering automatic purchase requisitions.
• Use digital approval workflows to reduce delays and eliminate paper-based processes.

7. Track purchase orders

• Use software to get real-time status updates for purchase orders.
• Create standard operating procedures for following up on delayed orders.
• Keep track of partial deliveries and backorders to ensure nothing falls through the cracks.

8. Review and optimize

• Conduct periodic reviews of the PO process to identify inefficiencies.
• Gather feedback from team members involved in procurement to pinpoint bottlenecks.
• Use KPIs such as order cycle time, cost savings, and supplier performance to guide improvements.

Using ERP software for PO management

An integrated purchase order management system such as ERP can significantly improve your PO management efficiency, reducing errors and streamlining various aspects of purchasing by:

1. Standardizing purchasing processes. ERP systems establish uniform purchasing procedures by setting predefined workflows for purchase requisitions, approvals, and purchase order creation. This ensures consistency, compliance with company policies, and reduces the risk of unauthorized or duplicate purchases.
2. Automating purchase requisitioning. ERP software uses functionalities like reorder point and critical on-hand inventory lists to provide the purchasing department with real-time information about what is needed.
3. Creating pre-filled POs. When checking the purchasing requirements list, users can raise pre-filled POs to put in orders for required goods in just a few clicks.
4. Tracking order statuses and costs. ERP solutions provide real-time tracking of purchase orders, allowing users to monitor order status, delivery timelines, and associated costs. This visibility helps identify delays early, manage supplier follow-ups, and optimize overall spend management by ensuring budgets are being followed.
5. Tracking supplier performance. ERP systems enable you to track and analyze supplier performance by monitoring delivery times, product quality, and fulfillment accuracy. This data helps you take action when a supplier’s performance is declining by either communicating their shortcomings and pushing them to improve, or to switch suppliers. 
6. Maintaining an accurate record of everything. An ERP system collects and maintains POs, invoices, delivery receipts, inventory movements, etc. in a way that makes every piece of data easily accessible.

In addition, an ERP system like MRPeasy integrates purchasing with inventory, sales, production, and accounting to ensure real-time data exchange between different departments. This centralized data along with automated tracking processes ensures a chaos-free, easily manageable operation.

Key takeaways

• Effective purchase order management streamlines procurement, improves inventory control, and strengthens supplier relationships, ensuring smooth operations and cost savings.
• A structured PO process provides full visibility into purchases, prevents double orders, and enhances cost control by tracking expenses per order.
• Creating clear approval workflows and setting spending limits minimizes unauthorized purchases and improves decision-making speed.
• Regular supplier performance reviews and timely payments help maintain strong partnerships and ensure reliable deliveries.
• Automating PO management with ERP software reduces manual errors, speeds up order processing, and provides real-time tracking of orders and costs.
• Accurate record-keeping and regular analysis of procurement data support audits, boost supply chain efficiency, and uncover cost-saving opportunities.
• Integrating purchasing with inventory, sales, production, and accounting systems ensures seamless data flow and prevents costly stockouts or overstocking.

Frequently asked questions (FAQ)

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