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 system serves an important role in controlling costs and cash flow, driving efficiency, delivering key insights, and incorporating best business practices.
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.
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 in real-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 workflow efficiencies.
Negotiate volume discounts
When you can quickly and easily share a paper trail with potential suppliers on 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.
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 purchasing system, 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, which is time-consuming.
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. The benefits of purchase orders include protecting you by giving you a legal, binding contract 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 number (PO number) to help resolve the issue.
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 purchase 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.
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.
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.
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 order software doesn’t always receive the respect it deserves by the gatekeepers of corporate spending. When leveraged as part of a comprehensive eProcurement solution, the humble PO process is elevated to a vital role at the center of an effective, successful, corporate-wide procurement cycle.