What is purchase order management?

The key benefits of a Purchase Order Management System

Purchase Order Management (POM) plays a crucial role in the efficient operation of businesses, particularly those scaling up and wanting to take control of costs in a more structured way. At its core, Purchase Order Management involves the systematic handling and tracking of purchase orders, from creation to approval, to ensure timely and accurate procurement of goods and services. In this short article, we will quickly review the key components of Purchase Order Management, including purchase approval workflows, sign-off limits, vendor control and selection, and the return on investment (ROI) it brings to organisations.

Purchase Approval Workflows

Purchase approval workflows are predefined processes that dictate the steps and individuals involved in approving purchase orders within an organisation, crucially, before spend is committed. These workflows typically encompass multiple stages, starting from the request for the purchase of something required for the business, and ending with its final approval and perhaps a purchase order being sent to a supplier.  Each stage may involve various stakeholders, such as department heads, finance teams, and procurement managers, who assess the purchase request based on predefined criteria such as budget availability, supplier credibility, and compliance with procurement or buying policies. By streamlining the approval process, businesses can ensure accountability, transparency, and compliance with regulatory requirements.

Sign-off Limits

Sign-off limits refer to the predefined monetary thresholds or authority levels that determine who has the authority to approve purchase orders up to a certain amount. These limits are established based on factors such as organisational hierarchy, budget constraints, and risk management considerations. For example, low-value purchase orders may only require approval from department heads or team leaders, while high-value orders may necessitate approval from senior management or executives. By setting sign-off limits, organizations can prevent unauthorised spending, mitigate financial risks, and maintain cost control. If you see the term multi-step approvals on this website anywhere, this refers to more than one person being involved in the sign off. 

Choosing the correct suppliers

Effective Purchase Order Management involves robust supplier control mechanisms aimed at ensuring that organisations engage with reputable and reliable suppliers. Vendor control encompasses activities such as supplier selection, evaluation, and performance monitoring. Organisations may conduct due diligence assessments to evaluate vendors based on criteria such as financial stability, product quality, delivery capabilities, and compliance with ethical and regulatory standards. Additionally, ongoing supplier performance reviews help identify areas for improvement and strengthen supplier relationships, ultimately contributing to better procurement outcomes and customer satisfaction.

Return on Investment (ROI):

Investing in a comprehensive Purchase Order Management system offers numerous benefits and can yield a significant return on investment for organisations, especially those that are experiencing high-growth or are about to undertake a specific project that needs robust cost controls. By automating and optimising buying processes, businesses can reduce manual errors, streamline workflows, and accelerate order processing times. This efficiency leads to cost savings through better negotiation with suppliers, reduced inventory holding costs, and minimised procurement cycle times. Moreover, enhanced visibility into spending patterns and supplier performance enables organisations to make data-driven decisions, optimise resource allocation, and drive continuous improvement initiatives. Ultimately, the ROI from implementing robust POM practices extends beyond financial gains to include improved operational efficiency, regulatory compliance, and stakeholder satisfaction.

In conclusion, Purchase Order Management is a critical component of modern business operations, facilitating the efficient and effective procurement of goods and services. By implementing purchase approval workflows, setting sign-off limits, exercising vendor control, and realising the associated return on investment, organisations can optimise their procurement processes, mitigate risks, and achieve sustainable growth in today's competitive marketplace.

Key Elements of a Purchase Order Management System

  • Records management and audit trail  - every purchase request is archived 
  • Multi-step approval workflows - complete control of the buying process
  • Unthreatening interface - your buyers may be occasional and won't want to be trained to use this software 
  • Easy methods for sending Purchase Orders to suppliers
  • Support for EDI methods of Purchase Order data - like JSON / CSV 
  • Supplier management - ability to manage suppliers, contracts and payments
  • Delivery receipting - regardless of services or physical products, it's good to see what's been delivered or received. 
  • Integrations - ability to access PO data with tools like Zapier / PowerAutomate or PowerBI
  • Ease of use - above all - it needs to be easy to use. 

 

What types of organisations need a POM System? 

Our experience is with non-stock, services based organisations. Those that buy stock or raw materials tend to use and "all-in-one" ERP or finance system that has a Purchase Order module and allows PO's to be created and dispatched to suppliers, deliveries receipted and stock updated. These modules tend to be "clunky" at best. 

Our experience is with service based businesses that are experiencing high-growth and want to control the buying process and have a better visibility of the purchases being made inside the organisation. Typically these organisations tend to buy a lot of things so this includes: 

  • Construction - huge amount of buying of materials, renting of plant and machinery and managing sub contractors
  • Care Homes - buying consumables, medical equipments and capital items for the homes
  • Events & Festivals - short term bursts of buying, sticking strictly within budgets 
  • Charities - Wanting a full audit trail behind every purchase to uphold scrutiny from trustees and higher authorities 
  • Sports Teams - Team movements and logistics as well as catering, welfare and equipment 
  • Energy Companies - whether building the next solar or wind farm or managing the established assets, all buying can be controlled with a POM. 

Conclusion 

There are many benefits to adopting a purchase order management system but it's not for everyone. We feel those with more than 20 employees, expanding and gaining traction are the perfect fits to establish buying procedures early-on and to gain control ahead of the next wave of employees joining. But any organisation that has experienced some form of buying pain - duplicate purchases, wrong supplier, wrong price scenarios should get in control with a POM sooner, rather than later. 

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