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The Lofty Importance of the Humble Purchase Order

Holly Condon April 8, 2022

The Lofty Importance of the Humble Purchase Order
Spend Management

9 Benefits of the Consistent Use of POs

We all know what a purchase order (PO) is, but do we understand the vital importance POs play in managing our company’s procurement process? In our continuing series covering the basic steps in the procurement cycle, we offer nine ways that the humble purchase order serves a vitally important role in controlling costs, driving efficiency, delivering key insights, and incorporating best business practices.

1. Avoiding Duplicate Orders

As your company grows, and the purchase request volume increases, it can be very difficult to determine who ordered what, when, and from whom. In the confusion, it’s not uncommon for duplicate orders to reach your vendors. Utilizing purchase orders consistently for all purchases helps avoid duplicate spending. By creating a digital, searchable record of every purchase, POs provide full visibility into your spending, making mistakes much less likely.

2. Better budgeting and spend management

By using purchase orders, you are building a clear picture of what, when, from whom, and for whom you are buying. Reviewing and analyzing this data over time delivers clear insights into your company’s spending patterns which can help make budget planning more accurate. You can also gain a clear picture into where in the company spend is coming from, which can alert you to potential waste and opportunities for savings and efficiencies.

3. Negotiate volume discounts

When you can quickly and easily share with potential suppliers how much you spent with them last year, and what specific items you purchased, you can more effectively negotiate volume discounts with those vendors going forward. Consolidating all current requests onto one PO from multiple departments and requesters will help you will meet vendor requirements for additional discounts such as free freight. Utilizing purchase orders can also help you identify opportunities for earning those discounts by consolidating spending of similar items with a single, high-performing vendor.

4. Help with invoice confirmation/matching

Vendor invoices typically arrive in the payables department for processing. The trouble is, if the invoice doesn’t reference a PO, it’s difficult for the payables department to determine if the charges are warranted or if the goods have been received. By routing all purchases through the requisition and purchase order cycle, and the associated approval process, your payables team can focus on the rapid processing of invoices, rather than tracking down the source and legitimacy of the charges.

5. Serves as legal contract

Purchase orders can act as a legally enforceable contract. Having a written agreement regarding the prices and quantity of items in your order protects both you and the seller. Purchase orders protect you by giving you a legal, binding record of exactly what you ordered and at what price. If the vendor delivers the wrong quantity or substitutes an incorrect item, or if you’re charged the wrong amount, you can refer back to the purchase order to help resolve the issue.

6. Reign in maverick spending

Maverick spending refers to purchases made outside of agreed upon contracts (i.e. purchase orders). It’s estimated that up to one-third of all purchases organizations make are made without the knowledge of the procurement department. Research suggests that maverick spending increases purchasing costs by almost 40 percent. Making requisitions and purchase orders a cornerstone of your procurement process goes a long way toward reigning in maverick spending. By bringing most expenses under direct management, you gain the efficiencies and control that help reduce waste and keep costs in line.

7. Track encumbrances

Depending upon the items ordered and the vendor ordered from, there can be a long lead time between the time you order a product and the time you receive the goods. Even though those products may not yet be in your warehouse, you have committed to and are liable for the associated costs. Without a purchase order, these costs are often invisible to an organization, which can lead to overspending and inaccurate reporting. By using purchase orders, you can easily track these encumbrances — the financial obligations associated with goods in transit.

8. Track vendor performance

Which vendors consistently deliver products on time, at the agreed upon price, and without errors? Using purchase orders helps build a history of your vendors’ performance by creating an audit trail containing information like date ordered, date promised, price and quantity ordered, quantity and date received, and quantity and price invoiced. You can report upon this data to gain insight into your best and worst performing vendors, and award future contracts accordingly.

9. Improve inventory management

Many eProcurement solutions offer integration with popular ERP solutions. Integrating your requisition and purchase order processing with your ERP provides you with an inventory management system with access to pending and approved requisitions and purchase orders as it performs routine replenishment calculations, allowing it to make more accurate, informed recommendations for reordering inventory items. Purchase orders don’t always receive the respect they deserve at gatekeepers of corporate spending. When leveraged as part of a comprehensive eProcurement solution, the humble purchase order is elevated to a vital role at the center of an effective, successful, corporate-wide procurement cycle.

Holly Condon

With over 25 years' experience in the SaaS space, Holly brings a wealth of industry knowledge to the table. She previously held leadership roles at PairSoft's subsidiary PaperSave and resides in South Carolina with her family.

View all posts by Holly Condon
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