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Supply Chain Performance

Understanding Why Purchase Order Management Is Crucial to Supply Chain Success

There are lots of moving pieces to managing the whole shebang of our supply chains. They stretch, sometimes literally around the globe, from raw material extraction and creation, through multiple transportation and manufacturing steps, all the way through to a finished product getting into the final user’s hands. There are countless places where things can go wrong.

In our corner of the business, the supply chain gets kicked into motion when we issue a purchase order (PO) to any of the suppliers who provide us with the things we need to make or obtain our products. That seems pretty simple, right? It’s anything but simple most of the time.

It’s important to realize how critical that step is to having the whole rest of your supply chain work right.

When things go wrong with POs, two things happen. First, that early error puts you immediately behind in your overall supply chain process, which means that from the very start you’re constantly trying to make up ground in the later steps, which have their own inherent difficulties. That’s a bad way to start off. Second, having those problems early on usually means they add up as things move through the systems and time goes on, so that one problem becomes several, which then become many–the snowball effect.

Because of all that, it’s imperative to have effective PO management systems in place.

But what should that look like?

RFQs

It actually starts before any POs are issued. The first step in the process is usually getting quotes for given materials or services from several suppliers so you can take advantage of the pricing power of competition. Because the request for quote (RFQ) process is one where you can waste a lot of time and start off behind schedule, it’s critical to manage that process effectively.

Central to RFQ management is to eliminate repetitive work, and ensure that the steps of the process occur simultaneously with all potential suppliers, keeping the timeline to a minimum. That means sending RFQs, once they’re fully developed, to all suppliers at once. It means having effective methods of comparing the quotes side-by-side when they’re received, with easy methods to either ensure it’s an apples-to-apples comparison, or to quickly and effectively iron out any differences between them. That includes a number of details–not just about what’s being ordered and how much it will cost, but other important elements like delivery schedule, payment terms, and the like.

All of that adds up to enabling the quickest placement of needed POs. Difficulties caused by not having those kinds of effective RFQ management systems in place mean inevitable delays, with knock-on effects to your overall supply chain timing.

Purchase Orders

Once you’ve selected a supplier at the completion of your RFQ process, other tools are needed to make sure things go smoothly with the PO process.

Placing the PO effectively should be easy enough if the RFQ process went smoothly, since it’s really just confirming details that have already been set and communicated. How the PO is placed is pretty important too. You may remember the days of snail-mailed paper POs. You may even be using something just one step away from that–emailed Word or PDF files (yikes!) Those are almost guaranteed to cause problems down the road, because they require everything from then on to be pretty manual. That means wasted time that all too easily becomes a delay that affects your whole supply chain. So an effective digital solution for placing POs is pretty important.

And it’s not important just for the initial PO itself. Research shows that over 52% of POs will be changed at least once, and many of them multiple times. If you’re relying on PDFs and manual processes like phone calls and individual emails to track those changes, you’re in for some pain.

The problems from that will go beyond schedule impacts, which themselves are bad enough. Ineffective change order management means that in the short term you may not wind up getting what you think you ordered. Your ability to even deliver products to your customers may be hampered, and that’s not good for anyone.

In the long term, repeated problems with change order management can cause some less-than-optimum (if fully understandable) behaviors from your team. They might get way too comfortable ordering extra safety stock, or paying extra to get what they need. Your margins may suffer. (Heck, they may disappear entirely.)

There’s a morale impact to your team too. Think of all those endless phone calls to try to manage things where your systems aren’t up to the task, the hand-written notes in the margins of printed copies of POs or on sticky notes stuck to a computer monitor–that all adds up to stress and inefficiencies that make people unhappy with their work and ineffective at what they’re trying their best to do. None of that helps your overall supply chain either.

Shipping

The rise of ecommerce has changed the whole game on what people expect when it comes to shipping. If you’re still using the same sort of antiquated methods like the bad PO management systems mentioned above, PDFs or spreadsheets or emails or some combination of all of those, that’s a pretty bad place to be these days.

That’s true even when it’s you who’s the customer. Why shouldn’t you expect the same notice of shipment and ease of tracking for stuff for your business that you do when you order something from an online retailer?

You should. But all those manual methods won’t get you there. Digital tools and solutions are paramount here too, because having that kind of knowledge about and visibility into where your supplies are is critical to managing your supply chain too.

Payments

For the kinds of partnerships with your suppliers that make for good, sustainable long-term business relationships, making sure they get paid right and on time is critical. That makes your accounts payable (AP) management another core element of overall purchasing management.

Pieces of that go right back up to RFQ and PO management, because it’s there that prices and payment terms are set, and any changes are agreed to and managed. Getting those wrong may not cause short-term supply chain woes, but it will strain those business relationships with your suppliers, and that can cause long-term supply chain stresses and breakdowns. So it’s not only important to have effective tools for those purchasing functions, but also to have them integrated properly with equally effective digital AP management systems.

That way you pay the right amount, on time. And your suppliers are happy. Happy suppliers are a big part of supply chain success!

You’ve got a long and complex supply chain to manage to make your business a success. The “first mile” is a critical piece of it. If you put the right technologies in place to manage the PO end of things, you’ll start out ahead of the game.