27 September, 2022

Why is purchase order management important?

There are two areas of purchase order management: the number of POs issued and the timing of them. The first means finding the right balance – failing to write up enough of the orders could result in stock shortages, which could lead to you being unable to fill your customers’ orders; writing up too many could result in you being overstocked. If you’re overstocked, the additional cost of extra storage space and labor mean your business runs inefficiently. The second, your timing, refers to when you actually issue the PO. Do you wait until you’ve used up all your stocked items, or do you take care of restocking before reaching that point? When making these decisions, you have to keep in mind not just the amount of stock you want to keep tied up in storage, but the length of time it will take for your supplier to get your goods to you. If your supplier is in another country, for instance, your order could take months to get to you. It’s all about making sure you have enough of your items on hand at all times to keep your customers supplied and happy, but not too much of it.

You can see that managing your purchase orders can help your business run better. Let’s explore purchase orders in detail.

 

What is a purchase order?

A purchase order is a contractual agreement between a buyer and a supplier. In the United States, it becomes legally binding when the supplier accepts it. Purchase orders are issued by a company when it wants to purchase more goods from its supplier. Basically it is an instruction for the supplier. The description lists the names of the products, their stock numbers, colors, quantity, cost, the place they’re to be delivered to, and any other requirements.

Now that you know what a purchase order is, let’s check out the role they play in the buying process.

1. Issuing purchase orders

A purchase order is written up when a company needs to add items to its inventory. If the company is small, this can be the responsibility of the owner. But if it is a large company with many divisions, the PO may have to go through several administrators for approval. The PO will be sent over to the supplier at the completion of this stage.

2. Supplier approval

When the supplier receives the PO, they go over it to make sure they can fill the order and are comfortable with any stipulations it contains. They may ask the buyer to make some changes, and there may be some negotiating between the two parties. When both parties reach an agreement, the supplier has, in effect, accepted the PO, and it’s then that it becomes a legally binding contract.

3. Delivery of goods

The supplier sends the items requested on the PO to the buyer and issues an invoice. This invoice itemizes the goods the supplier has packed and shipped off, as well as the cost of each item and the full amount the buyer owes the seller. An invoice lets the buyer check a) that it is receiving everything it has ordered, and b) that it has been sent everything it is being charged for. The buyer will also, at this stage, carefully inspect the items to make sure they’re of high quality.

4. Payment

The buyer indicates that the items are accepted by sending the supplier a goods received note (GRN). The GRN is a confirmation of having received the goods in good order. Like the PO and the invoice, it lists the products, but as a legal document, it indicates the date and time of delivery and is signed by someone who has the authority to do so.  Payment of the invoice is dependent on the terms of the PO. These terms could indicate an immediate payment by the buyer, or a stated period of time after satisfactory receipt of the goods.

 

Explaining purchase order management

Purchase order management is an umbrella term that covers the process a business uses to handle their purchase orders. It covers everything from creating POs to dispatching them to maintaining records of them.

For a new company that’s still small, this process can be simple. Along with emails and phone calls, in these early days, a spreadsheet could be all that’s needed to record and keep track of purchase orders. But the information on spreadsheets has to be put in manually, making the system time consuming and prone to human error. These downsides only get worse as a business grows and the volume of orders increases. When that happens, a better, more manageable system is needed. That’s where purchase order management software comes into the picture.

Before we jump to PO management software, however, let’s check out the benefits of managing your purchase orders efficiently.

 

The importance of purchase order management

When you pay attention to purchase order management, your organization benefits in the following ways:

1. Better control over the amount you spend

Having department heads or managers approve purchase orders is a good way to control spending. In addition to making warehouse staff think about the items they put on a PO, it gives these supervisors the ability to make sure that everything being ordered is really needed and that their cost will not exceed the budget that’s been allocated for inventory. This approval process also gives managers a clear picture of how their department’s money is being spent.

2. Reduced storage costs

Keeping hold of more inventory than you need may ensure that you’ll always be able to fill an order, but it also means using up more storage space than is necessary. This unwanted, additional warehousing cost can be cut by controlling the amount you purchase. Controlling the amount you purchase is a major part of purchase order management. It means you only order when your stock is too low to cover your sales.

3. Help when it comes to avoiding stockouts

Purchase order management software automates the restocking process. This is how it works: The computer program recognizes when the inventory, or particular items in your stock, falls to a set lower limit. When that happens, the system automatically sends a PO to the supplier for more goods.

Computerizing your warehousing this way means always having the right amount of inventory to cover sales.

 

How Cin7 can help you with purchase order management

Cin7 is an integrated tool with several power-packed features. It can help you manage and control everything from the inventory you keep on hand to your restocking of it.

Cin7 keeps a record of all the purchase orders you create through our platform. With Cin7, you can instantly pull up specific purchase orders and generate reports for each one of them. These reports, customized by you, can include vital information such as the currency used for the order, exchange rates, customs and freight fees.

Our computerized system also allows you to save supplier details in the database. This information can be used to automatically add addresses and telephone numbers to forms, or it can generate purchase orders. It can even send the PO to the supplier. More than a time saver, when you can take care of your restocking like this, you get peace of mind.

As mentioned, Cin7 can be programmed to take care of restocking automatically. When the amount of stock you’re holding reaches a predetermined low, the system will automatically trigger a PO and send it directly to your supplier. You won’t have to worry about stockouts, and your business operations will run smoothly.

In addition to keeping track of your inventory and POs, Cin7 integrates accounting software like QuickBooks. This feature enables you to import all your POs and PO reports into your accounting system. It’s another aspect of Cin7 that improves and streamlines your business, making sure it’s as efficient as it can be.

To learn more about how Cin7 can help you manage purchase orders, schedule a call with one of our experts today.

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