7 Purchase Order Management Best Practices for 2024

A purchase order is a buyer-generated document that authorizes a purchase transaction. The contract becomes legally binding once the seller accepts the document's descriptions, quantities, prices, discounts, payment terms, date of performance or shipment, and other associated terms and conditions. Since it is written proof of what the buyer requested, it can be compared to what was delivered. In cases where the two do not match, the buyer can take action against the seller using the purchase order as evidence. The finance department can also use purchase orders for budgeting and forecasting.

Managing these documents is vital for businesses dealing with large purchase orders. Failure to do so will have an impact on all the stakeholders including the procurement department and the finance department. In these days of e-procurement and application-based processing, much can be done to control the flow and accuracy of purchase orders. Some best practices still need to be followed, whether purchase orders are controlled manually or technically.

In this blog, we talk about the best practices to make purchase order management more efficient and effective in 2024.

Best Practices of Purchase Order Management

Here are some of the purchase order management best practices to follow in your business:

1. Deploy ERP System:

The procurement team should ensure purchase orders are assigned numbers by an Enterprise Resource Planning (ERP) system. It is one the purchase order management best practcies to streamline the process. This ensures consistency, prevents duplication, enhances tracking, and integrates procurement with financial and inventory management There are many reputed platforms available in the market. These systems can be used to confirm purchase orders and file them.

2. Validate Changes:

Changes to purchase orders are quite common. When the changes are made, the same must be made through change orders. These changes must be confirmed, and the change order and the hard copy of the purchase order must be filed together. This practice enhances transparency, ensures all modifications are documented, and provides a clear audit trail. It also facilitates easier retrieval and review of the complete transaction history.

3. Source of Purchase Order:

‍The source of a purchase order (PO) is crucial because it ensures that all orders are legitimate and necessary. Purchase orders should only come from authorized personnel to prevent fraud and unauthorized expenditures. This control mechanism helps maintain budget integrity, ensuring that only approved and required items are purchased. Additionally, it eliminates unnecessary purchases and duplications, streamlines the procurement process, and enhances accountability. By having a clear authorization process, organizations can better track spending, improve supplier relationships, and maintain accurate financial records.

4. Create Copies of the PO:

There should always be two or more copies of a purchase order. The buyer needs to keep one, the seller will be sent one, and any other department that needs a copy will need to have one. Additional copies can be kept for internal auditing purposes, providing a backup in case of discrepancies or disputes. Alternatively, processed POs can be made available on a digital platform or application within the business to avoid duplication.

5. Quality Assurance:

Accuracy is one of the purchase order management best practices. Accurate data entry of purchase orders is required into the system, with minor errors, even if the volume of documents increases. Quality checks should be implemented to ensure that all details have been accurately filled in. The shipping details, purchase quantity, price, and whether the goods are taxable or non-taxable are all vital information. The QC person should check these details carefully to ensure they are accurate.

6. Cancellation Process:

The procurement team has to be very careful when a purchase order is canceled. Firstly, the team should accept cancellation orders only when they are in writing; in these days of e-mail communication, a properly formatted and written e-mail is also considered an acceptable authorization. A hard copy of the cancellation request and the original purchase order should be taken for filing. In case it is an e-mail, a printout of the e-mail should be taken. In many businesses, confirmation of the cancellation request is also needed. This normally comes from the authorized signatory. This should also be filed along with the other documents. Only when all the documents are in place should the purchase order be canceled.

7. Maintain Documentation:

The documentation involved in purchase order management has to be maintained for a long time. It is one of the most important among the purchase order management best practices. When audits are performed, the internal or external auditor will ask the concerned department to produce these documents so that he can verify their accuracy. All documents related to a particular order have to be filed together correctly so that the backstory of the trade is clear to all those concerned. Whether the documents are maintained in hard copy, online, or a combination of both, a responsible person should ensure they are not intentionally or unintentionally misplaced, deleted, destroyed, or altered. Data security is important in this regard.

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Conclusion

While knowledge of purchase order management best practices is important, implementing them in-house can be challenging due to resource constraints, lack of specialized expertise, and the need for robust technology solutions. It requires significant investment in training staff, developing efficient processes, and integrating sophisticated software systems. Additionally, maintaining compliance with evolving regulatory requirements and adapting to fluctuating market conditions further complicates internal implementation. Outsourcing to experienced providers can alleviate these burdens, ensuring streamlined operations and optimized procurement practices.

Invensis is a specialized service provider of purchase order management process with over 24 years of experience under its belt.  We have assisted several organizations across the world in streamlining a range of order management requirements. Contact us now to know more about our services. 

Frequently Asked Questions

1. How do you manage purchase orders?

Managing purchase orders involves creating and issuing purchase orders to suppliers, tracking order status, receiving and inspecting goods, matching invoices to orders and receipts, and processing payments. This process is often supported by purchase order management software, which automates and streamlines tasks, ensures accurate record-keeping, and provides real-time visibility into procurement activities. Effective management also includes maintaining clear communication with suppliers and conducting regular audits to ensure compliance with procurement policies.

2. What is a good purchase order process?

A good purchase order process is streamlined, efficient, and ensures accuracy and compliance. It starts with identifying the need and creating a detailed purchase requisition, followed by obtaining necessary approvals. The next steps involve selecting reliable suppliers, creating and issuing purchase orders, and tracking order fulfillment. Upon receiving the goods or services, they are inspected and matched with the purchase order and supplier invoice. The process concludes with invoice approval and timely payment, ensuring all records are accurately maintained. By following these purchase order management best practices, organizations can minimize errors, optimize inventory levels, and strengthen supplier relationships, enhancing overall operational efficiency and financial management.

3. What are the four steps of the purchase order process?

The four steps of the purchase order process are:

1. Purchase Requisition: Identifying the need for goods or services and creating a purchase requisition.
2. Purchase Order Creation: Converting the approved requisition into a formal purchase order and sending it to the supplier.
3. Order Fulfillment: The supplier delivers the goods or services as specified in the purchase order.
4. Receipt and Payment: Receiving and inspecting the goods or services, verifying the invoice, and processing the payment.

4. What are the four types of purchase orders?

The four types of purchase orders are:

1. Standard Purchase Order: Issued for one-time purchases with specified quantities, prices, and delivery dates.
2. Blanket Purchase Order: Used for recurring purchases over a period, with specified terms but without fixed quantities or delivery schedules.
3. Contract Purchase Order: Based on a pre-negotiated contract outlining terms and conditions for multiple orders over time.‍
4. Planned Purchase Order: Created for purchases planned in advance, specifying estimated quantities and delivery schedules, but allowing for adjustments.