There’s no doubt that purchase orders are the backbone of the direct-spend procurement process and that the success of an organization depends on the purchase order process running smoothly. A supply chain with effective purchase order management means that buyers and suppliers are communicating, PO changes are being acknowledged, and shipments arrive on time and are correctly filled.
Despite the success of companies depending on the PO process operating smoothly, most companies still manage their POs manually. This means that purchase orders are sent as PDFs over email, (hopefully) acknowledged by email, and all changes are managed in, you guessed it! Email and spreadsheets. This process is rife with costly errors. Emails are easily buried in inboxes. Phone calls between buyers and suppliers aren’t recorded. Significant data is in too many different places. Managing purchase orders through a manual process makes it nearly impossible to have complete visibility into your supply chain. This leads to missed acknowledgements, late shipments, and expensive fees.
While purchase orders are a critical component of the supply chain, managing those purchase orders can be a source of constant headaches for procurement teams. A clear understanding of the PO lifecycle and an automated purchase order management system are key to the overall success of any supply chain. An efficient PO management system should unite people across teams and systems, streamlining workflows and seamlessly getting all stakeholders on the same page.
In order to improve purchase order management let’s review the PO lifecycle:
What is the Lifecycle of a PO?
In direct spend (the money that is spent on raw materials and goods to create products), the purchase order lifecycle is standard, regardless if you’re operating a small business or a large corporation. Broadly speaking, it follows these six steps:
1. Create a purchase order
Most POs are generated from the buyer’s ERP. This only happens after the planning engine determines what materials a company needs to deliver products to customers. The purchase order is the document that specifies what the buyer needs from the vendor and the time they need it by. Purchase orders can become very complicated, very quickly. If a buyer needs multiple parts from a vendor (which they often do) POs can be hundreds of lines long.
2. Supplier Acknowledges and Approves Issued PO
Once the supplier acknowledges the purchase order from the buyer, the supplier needs to confirm that they can meet the quantity, price, and delivery date requested by the buyer. If the supplier can’t meet these terms, they have to respond to the buyer with their changes. Then they have to wait for the buyer to approve their requested changes to price, dates, and/or quantities and the process begins all over again.
Because most companies rely on email communication to track PO acknowledgments, it’s easy for these changes to get lost in the shuffle. Unacknowledged POs result in late orders from suppliers, making it hard for companies to meet production schedules on-time. Automating PO management means that purchase orders are acknowledged instantaneously. Any changes after the fact are managed with just a few clicks. These changes then immediately show up in the shared dashboard, waiting to be acknowledged and approved. Team members that use a digital supplier platform, like SourceDay, find themselves only managing by exception, instead of having to manage every single PO that crosses their desk.
3. Manage and Negotiate Changes
The majority of supply chain misses stem from this part of the PO process. Managing changes in pricing, quantities, and delivery dates requires constant emails and faxes back and forth between buyers and suppliers. This quickly gets confusing! And it’s impossible to track! Current research shows that 50% of all purchase orders change during the PO lifecycle. During times of disruption (due to pandemics, severe weather, etc.) that change rate rate jumps to 60%. These changes, whether during calm or crisis, can lead to excess safety stock, operational waste, and ultimately, revenue loss. To avoid loss revenue, buyers need to replace email and spreadsheets with collaborative software solutions like a digital supplier portal.
Digital supplier portals are the modern way of tracking and recording changes to POs. By having all the information in one place, visible to both buyers and suppliers, both parties can pinpoint disruption and respond efficiently. Remember, an efficient supply chain is an agile supply chain. Supplier collaboration software saves precious time spent manually tracking and updating POs—time that can be better spent ensuring that demands are being met in a timely manner. Late fees are avoided and customers are happy.
4. Shipment of Parts and Materials
Once changes are agreed upon and the purchase order is finalized, the parts are ready to ship. Some organizations request that suppliers send ASNs (Advanced Shipping Notices). ASNs let buyers know that the parts or materials are on their way. While this does grant some visibility into the process, it’s yet another stage where paper, email, and spreadsheets fail to provide enough visibility. Most companies receive dozens, if not hundreds, of shipments every day. All of these shipments are in transit for varying lengths of time. Using a cloud-based software means buyers can see ASNs organized historically, eliminating arrival date and shipping time confusion.
5. Receipt Parts and Materials
When everything goes according to plan, the company receives its parts on the expected day, on-time and in full! The purchase order is then closed in the ERP. The parts are received, and they are now ready to be used by the scheduling and production teams. This is also the moment when finance teams begin the process of paying the supplier.
6. Paying Supplier Invoices
Most suppliers send invoices to their customer as soon as they ship the parts that were ordered in the PO. However, before the company pays an invoice, parties need to be sure the invoices match the terms (quantity and price) in the final PO and that the parts that are being billed match what was received. Since POs change so frequently and parts are constantly being received, reconciling changes requires reams and reams of paper, lots of time, and inevitably leads to hundreds or thousands of discrepancies. All of these discrepancies need to be resolved before payment can be sent to the supplier. This is time consuming and ultimately leads to costly errors.
Streamline Your Purchase Order Process
Without an automated purchase management system, companies are forced to try and track purchase orders manually. Manual, paper-driven processes are not only time-consuming, they leave a lot of room for human error. This means endless phone calls to suppliers to pin down pricing and delivery dates, as well as endless emails and spreadsheets to record information. Lastly, someone needs to manually update all of this information and changes in the ERP and then notify all stakeholders of the changes. It is inevitable that things will be overlooked and these mistakes will have expensive ripple effects.
These errors can really add up. Companies like Napoleon were having to scramble to make sure their parts arrived on time. Canceled orders and unhappy customers were costing Napoleon upwards of $100,000’s a year. A lack of clear communication between Napoleon and their suppliers meant missed acknowledgments and mismatched invoices. Switching to SourceDays’ supplier collaboration platform gave Napoleon the ability to track POs through every step in the process. It also meant a drastic drop in canceled orders. This allowed Napoleon to thrive through COVID-19 disruption. Napoleon’s on-time deliveries increased by 35% in the first year of implementation and incorrect invoices have dropped by 90%. All of this translates into increased profits and efficiency, allowing Napoleon to run smoothly and pinpoint (and solve) hot spots in their process.
In a perfect world, the PO lifecycle is managed from a single source of truth that makes it easy for buyers, suppliers, and finance teams to collaborate in real-time. This modern approach saves people time and protects your organization’s revenue. We’ve listed the biggest improvements to adapting an automated PO system below:
Visibility and Tracking
To decide if now is the time to digitize your PO process, ask yourself: Do you know where your parts are in any point of the process? What % of your PO’s are being acknowledged by suppliers? Have these changes been recorded and saved? Do you know, with just a quick glance where a purchase order is or which parts are going to arrive late from your suppliers ahead of time? Or do you discover they’re late after the fact? An automated process creates visibility that allows teams to be proactive and hold each other accountable when it comes to tracking and monitoring purchase orders.
When you use software to manage the PO lifecycle, supplier scorecarding is also incredibly simple. Knowing and setting Key Performance Indicators (KPIs) to hold your suppliers accountable is the first step in measuring supplier performance. The most common KPIs are: quality, on-time delivery, responsiveness, and price variance. While you should be scoring on KPIs that are the most important to your company, being able to automate the process is an essential component of effective scorecarding. If you are trying to track any of the above KPIs through email and spreadsheets, it’s going to be impossible. The good news is that an automated purchase order process is not only possible, it’s simple.
Automate Your Purchase Order Process
Even though manual processes have ruled purchase order management for decades, there is a solution! Automated PO management solves the issues inherent in the manual process. While the direct-spend PO lifecycle is similar industry-wide, what sets companies apart is adopting procurement software and automating the process. Automation allows for more precise tracking and customization. Full visibility into your purchase order management process means teams can pinpoint and negotiate obstacles before they become expensive headaches. Heading issues off at the source allows for better inventory management and a protected cash flow.
Automating the purchasing process grants team members the flexibility to monitor and respond to changes in real-time. Missed acknowledgments and surprise late shipments become a thing of the past. It’s easy to hold buyers and suppliers accountable when you can easily view and manage multiple-line item POs, tracking purchase orders throughout the purchasing process in real time. No more missed emails, no more scanning line-by-line through spreadsheets, and no more “day-of” surprises.
Each company needs to be able to customize their process to fit their specific needs. This is only possible with automation. If POs are being tracked through emails, spreadsheets, and phone calls, it’s impossible to have a holistic view of your purchasing process. Time-consuming, paper-driven processes make it impossible to fully track POs. This means a high rate of human error, cutting into company’s revenue. Managing workflows and multiple approval processes in email is impractical. Integrating purchase order management software is user-friendly and means real-time information, improved communication with team members, less data entry and no more bothersome impossible-to-track emails. This culminates in a simplified procurement process, allowing your company to operate at a higher level of efficiency, meaning a more manageable and dependable supply chain, and higher revenue.
SourceDay and Managing Your Purchase Orders
SourceDay’s collaboration software integrates with your ERP to simplify managing purchase orders. SourceDay’s dashboard acts as a single source of truth for every active purchase order. All of the purchase orders are in one place and can be organized by multiple criteria so you are seeing the information you want, when you want it. Checking up on acknowledgments is now as simple as a few clicks and a glance. No more scrolling through a full email inbox looking for crucial data. SourceDay even has a request for quote function making creating and sending RFQs easy and straightforward. Our dashboard acts as your one-stop spot or all the information you need about your supply chain.
Learn more about how SourceDay can help your team improve supply chain performance and strengthen supplier relationships.
