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When it comes to making purchases, getting the right approvals, and working with suppliers, a proper purchase order management system (PO system) should be in place. Without one, the lifeline of a procurement or finance team can get clogged up with bottlenecks, choking a purchasing process and starving it of smooth and timely approval flows that are essential to the health and resilience of the organization.
Both large and small businesses operate to keep order and organization. Ensuring they can see the full picture in purchase order management for procurement and accounts payable helps finance leaders and the purchasing department analyze data accurately, make informed decisions, and budget accordingly.
Smaller organizations can usually get away with a paper-based, manual system requiring users to enter data into spreadsheets or open tickets when purchasing. Still, as an organization grows, these practices become more time-consuming, harder to track, and more error-prone. More teams are moving to automated PO systems, allowing them greater real-time visibility—not to mention fewer mistakes and faster purchasing cycles.
What is a PO System?
A PO system is an automated software solution that manages an organization’s purchase order process and forms. It automatically creates purchase orders (POs) for suppliers based on approved purchase requests.
Types of POs
Several different types of purchase orders can exist within a standard purchasing process. Understanding the difference and which should be used for what purchases will help you better manage your procurement and purchase order processes.
Standard PO
Standard purchase orders are the most commonly used in the purchasing process. They are typically very detailed, include payment terms, and are used for individual, one-off purchases.
A standard purchase order form is based on a purchase order template that includes fields for the sequential purchase order number, company name, contact information, billing address, shipping address, supplier name and contact information, payment terms, order details by line item with the quantity, unit price, extended price, SKU or part number and item description, with the purchase order total amount.
Planned PO
Planned purchase orders are similar to standard purchase orders. Still, they either do not include expected delivery date and other delivery information or include tentative delivery information subject to change.
Blanket PO
Blanket purchase orders are agreements to purchase goods or services from a specific supplier but do not necessarily specify a quantity or price. This purchase order type is typically used for repetitive purchases from a trusted supplier.
Contract PO
Contract purchase orders are quite different from the rest. They don’t include very much detail and instead work to outline the negotiated terms and conditions of a buyer-supplier relationship. Contract purchase orders include supplier information and are used as a basis for an ongoing relationship and the foundation on which all future POs with this supplier can be based.
How Does a PO System Work?
A purchase order system can be very simple. The purchase order is just an official document the buyer sends to the supplier outlining what the purchase entails and what/how much needs to be fulfilled. Upon the supplier’s acceptance of the PO, the purchase order becomes a legally binding contract.
The steps before and after this PO document is created, beginning with the purchase request, make up the PO system and can be as straightforward or involved as the organization wishes. Through these step definitions, you’ll understand the difference between purchase requisitions and purchase orders. Typically, a standard PO system will look like this:
Purchase request
- A purchase request (PR) or a request for a certain purchase of goods or services is placed and waits for the right approver. Purchase requests can also be referred to as purchase requisitions or PO requests.
Purchase order
- A PO is then created upon approval and sent to the selected supplier
Order fulfilled
- After PO acceptance, the supplier uses the PO to fulfill the order and sends goods (or services) to the buyer
Goods received
- The buyer receives the order
Invoice sent
- The supplier invoices the order, including the PO number
3-way match
- The Accounts Payable team will perform invoice matching by checking the PO against the invoice and the received order to ensure everything aligns
Payment
- Payment can then be issued
Closure
- The order is closed
The above steps can be carried out manually in smaller businesses or automated through add-on automation software integration, working with different types of ERP systems. As companies scale and purchases become more complex, the PO system may be adapted to accommodate more involved purchasing processes. This is where automated purchase order software makes all the difference in visibility, organization, and speed.
Digitization is key to an efficient PO system
Get modern technology in a PO system that simplifies purchase requisition intake and approvals and automatically creates purchase orders.
How Do You Set Up a PO System?
Each organization will have its policies and purchasing procedures that dictate how an effective purchase order system should be constructed. Before setting up an official PO system with your business processes, your team must decide how to customize purchase request and purchase order forms. Relying on a prepackaged system can create more bottlenecks in the long run, while customized processes ensure that the specific needs of the procurement and finance teams are met upfront.
Outline exactly what information related to line items, prices, and more are required to open a purchase order and trigger the correct approval process flow. Once the purchase order is created based on the purchase request, it will require certain vendor or supplier information. These are the types of decisions that can be made when customizing a process during set-up. Starting off on the right foot will help maintain a smooth purchase order process system as organizations and purchasing frequencies grow.
How to Create and Customize Your Own PO System
Steps to customize your own purchase order system include:
- Define PO system goals, desired features, and automation through a key user and stakeholder task force.
- Compare and identify automated purchase order system software with your PO system goals and select the ideal system that fits your company’s budget.
- Flowchart purchase requisition and purchase order processes and triggers, including PO approval processes, and identify authorized approvers.
- Customize PR and PO forms from purchase requisition and purchase order templates.
- Communicate the new PO system’s planned adoption and start date to all employees.
- Identify users, set up role permissions, and train employees using the system.
- Write a post-adoption PO system review to document system implementation insights, benefits gained, and lessons learned.
Benefits of an Automated Purchase Order System
Migrating to an automated process is not as difficult or time-consuming as one might imagine. With a bit of foresight and planning, implementation can be smooth and provide many benefits from automated functionality compared to a manual process.
Greater Visibility
An automated PO or purchasing system provides the full, real-time visibility needed to understand the status of each purchase order at every stage in the process. This type of system can help you see where things get stuck or bottlenecks occur. It also allows you to easily identify and nudge the appropriate stakeholder to keep the ball moving.
Having complete visibility will help teams avoid duplicate purchases, understand the need for inventory management, and always ensure the right approver oversees the approval process.
Simplified Internal Approval
Speaking of the right approver, an automated PO system makes it much easier to get approvals fast. When users don’t have to manually input data or worry about following up and checking in with approvers via email, the approval flow becomes simpler, faster, and more manageable.
More Control Over Company Spending
Because automated PO processing helps to greatly reduce human error, procurement and purchasing teams get an accurate picture of business spend. They can make informed decisions to control company spending, easily manage spending, and save money.
Moving Parts Become Streamlined
There are so many moving pieces to a procurement process. Having a proper, implemented online purchase order system creates order, lets every stakeholder know where they fit in, and helps teams eliminate unnecessary steps or practices within manual purchase order processing that may simply be clogging the pipes.
Greater Flexibility
With an automated PO system’s added visibility and control, key stakeholders can easily get involved at any stage in the purchase order process without interrupting the approval flow or causing bottlenecks. Finance teams can get a clearer view earlier, affecting decision-making and reducing their accounts payable workload.
When implementing an automated PO system, remember that the best purchase order systems rely on cloud-based purchasing software. Consider the current status of your PO process to strengthen it, and take the steps needed to establish and carry out a PO system that truly contributes to your organization’s health.
What is the Best PO System?
Now that we’ve explored why implementing a PO system is so useful and beneficial to your organization, you might be wondering – what core features should a PO system have? When you research the best purchase order software, pay attention to the following.
Core Features to Look For
- An intuitive and user-friendly interface. Simplicity helps ensure all users can easily achieve their needs and drives and maintains user adoption.
- A mobile interface is also an important bonus for some.
- Easy integration with other billing and invoicing systems. Integration and syncing with existing systems is necessary as it prevents users from moving back and forth between platforms and reduces the risk of losing or mishandling important information.
- Straightforward digital purchase order and PR forms. Easy-to-use forms equate to a more accurate and consistent collection of information.
- Customization. It’s a huge plus to be able to create and tailor your team’s custom approval workflows as your work changes or your business grows.
- Supplier management. A system that assists with a searchable vendor or supplier catalog and contract management will not only save time but also help ensure you continue to work with reliable vendors and maintain healthy relationships.
The value of each depends on your specific business needs, but all the features mentioned above can be hugely beneficial to an organization’s entire procurement process. A strong cloud-based solution will help streamline and manage approvals, capture more relevant data, and automatically generate the reports needed for better spending analysis.
FAQs
What is an electronic purchase order?
An electronic purchase order is a purchase order filled out and submitted digitally through an automated procurement solution or purchasing software.
What is the difference between a purchase order vs. invoice?
To differentiate purchase order vs. invoice: a customer issues a purchase order to purchase goods or services from a supplier. In contrast, the supplier or vendor issues an invoice after the goods or services are provided to the customer.
What are the major steps in the purchase order process?
The major steps in the purchase order process include:
- A purchase request is submitted.
- A purchase order is generated for the approved request.
- The order is accepted and fulfilled by the supplier.
- The goods or services are received.
- The invoice is sent to the buyer.
- A three-way match by line item is performed by AP.
- Payment is issued, and the order is closed.
The three-way match, performed by the accounts payable department or automatically, includes PO matching and goods received matching.
What is the best PO system?
The best PO system depends on your organization’s needs. However, a great PO system will always be intuitive and easy to use, which is important for driving user adoption company-wide. You should also look for a PO system that is automated, customizable, and easy to integrate with existing systems.
Summing It Up
A purchase order is a standard form with a sequential PO number issued by a customer to a selected supplier or vendor after the customer’s business approves an internally generated purchase requisition (PR) form submitted by a requestor. Once the purchase order is approved by your business and received and accepted by the supplier, it becomes a legal document considered a contract.
A purchase order system handles purchase requisitions intake and approval, purchase order creation and issuance to suppliers, managing related contracts and documents for legal protection and invoice matching, and spend management.
Your business can use automated PO management workflow steps in a modern PO system instead of using a time-consuming, error-prone manual system that relies solely on your ERP system for processing and recording and Google or Excel spreadsheets for analysis.
Process automation in a PO system integrated with your ERP or accounting management software provides benefits that include digitization, improved financial controls with an audit trail, visibility for cash flow management and spend control and better efficiency that saves your business money. Explore more to get started with Tipalti Procurement automation software as your ERP-integrated PO system.
