Purchase Order System – Ultimate Guide For 2024

Imagine this…

You’re managing a growing business, and your procurement team is frantically processing purchase orders manually - calling and emailing suppliers to check stock, get quotes, and place orders. Orders get delayed, incorrect items get purchased, and you have a frustrated team and impatient stakeholders.

Though it takes an initial time and cost investment, a Purchase Order (PO) system makes managing procurement much more efficient.

In this article, we’ll show you how to set up a PO system in a few simple steps. Plus, you’ll learn best practices so your team and suppliers have the best experience.

What is a purchase order system?

A purchase order system is a process that companies use to manage and track the ordering of goods and services from suppliers. It involves creating, approving, sending, and tracking purchase orders, which are formal documents that outline the details of the requested items, quantities, prices, delivery dates, and terms and conditions.+

Why you need a Purchase Order system: 5 advantages

Using a PO system is a win-win situation, reducing frustration for your team and your suppliers. A PO system also helps you:

Increase procurement efficiency: 

POs are processed faster when key information like item details, quantities, and delivery dates are standardized in a system. A study by The Hackett Group found companies with a standardized PO system process POs 56% faster.

Decrease errors and save resources:

Having a PO system eliminates the need to manually check stock, get quotes, and place orders with suppliers. Plus, a PO system helps catch errors and mismatches early.

Prevent unauthorized spending: 

When all purchases require an approved PO, it’s much harder for maverick spending to occur. PO systems help enforce purchasing policies and approval workflows.

More professional appearance: 

Having a formal PO system helps you look organized and professional to your suppliers. This builds their trust and strengthens business relationships.

Manage cash flow more effectively: 

Since PO systems give visibility into committed spend, it allows better cash flow forecasting and management. You know exactly how much cash is needed and when.

How a Purchase Order system works in 6 steps

A purchase order system typically follows a six-step process: purchase requisition, approval, purchase order creation, sending the purchase order, receiving and inspection, and invoice processing and payment. This process ensures that all purchases are properly authorized, tracked, and fulfilled according to the agreed-upon terms and conditions.

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Purchase requisition: 

The process starts when an employee creates a purchase requisition specifying the items, quantities, and delivery requirements.

Requisition approval: 

The requisition routes through predefined approval workflows based on amount, category, etc. Once fully approved, it converts to a PO.

PO sent to supplier: 

The system-generated PO is sent to the supplier. It includes all key details like PO number, item info, quantities, delivery date, payment terms, etc.

Supplier acknowledgment: 

The supplier reviews and acknowledges the PO, confirming their ability to fulfill it per the specified requirements.

Receive goods/services: 

When the goods are delivered or services rendered, the receipt is recorded against the PO in the system by the requester.

Supplier payment: 

The PO is matched to the supplier invoice and receipt for discrepancies. Once matched, the invoice is paid per the payment terms.

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Steps to customize your purchase order system

To customize your purchase order system, start by assessing your current process, defining approval workflows, integrating with other systems, setting up vendor management, configuring reporting and analytics, and training users.

1. Create your own forms: 

• Determine if different forms are needed for different types of purchases, e.g., goods vs services, inventory vs non-inventory, etc.
• Decide on the layout and flow of the form - what information goes where, which fields are mandatory vs optional, etc.
• Ensure the terminology used on the form is consistent with your company’s language
• Make the form user-friendly with clear instructions, examples, and validation checks.

2. List the steps in the process:

• Start by documenting the current procurement process, even if manual. Identify what’s working well and what needs improvement.
• List out each step from need identification to invoice payment. Don’t forget exception scenarios like returns and cancellations.  
• For each step, capture who is involved, what tasks they perform, what information they need, and what outputs they produce.
• Identify any external dependencies in the process, such as supplier interactions or third-party approvals.
• Look for opportunities to streamline and automate the process, such as eliminating redundant steps or enabling self-service.

3. Design workflows

• Based on the process steps, identify which ones will require approvals in the PO system, e.g., requisition approval, PO approval, receipt approval, etc.
• Define the business rules for each approval, such as amount thresholds, category restrictions, department budgets, etc. 
• Determine the approver roles for each workflow step, e.g., manager, category lead, budget owner, etc. Consider multi-level approvals if needed.
• Establish approval delegation and escalation paths to handle out-of-office scenarios and delayed responses.
• Design the workflow branching logic based on criteria like amount, category, urgency, etc. Aim to balance control and efficiency.

4. Define roles and access:

• Identify all the stakeholder roles involved in the procurement process, such as requesters, approvers, buyers, receivers, AP staff, suppliers, etc
• Determine what level of access each role needs in the PO system to perform their function. Consider factors like data privacy, segregation of duties, and least privilege access.
• Define read vs write access for each role at the field, document, and process level. For example, a requester may create a requisition but not be able to edit it after submission.
• Establish who will have admin access to configure the system, maintain master data, and generate reports. Ensure adequate backup and cross-training. 
• Document the roles and access levels in a RACI (Responsible, Accountable, Consulted, Informed) matrix for clarity.

5. Implement the PO system

• Configure the PO forms, workflows, roles, and access in the selected procurement software based on the design. 
•  Integrate the PO system with other enterprise systems like ERP, accounting, and inventory management for seamless data flow.
•  Thoroughly test the configured system with different scenarios and edge cases. Involve end users in User Acceptance Testing (UAT).
•  Develop training materials and user guides to help employees transition to the new system. Provide role-based training sessions.
•  Plan a phased rollout approach, starting with a pilot group and gradually expanding to all users. Provide hyper-care support during rollout.

6. Obtain feedback and improve:

• Establish channels to gather ongoing feedback from end users, such as surveys, focus groups, and help desk tickets.
• Regularly review system usage reports to identify bottlenecks, errors, and deviations from the process. Investigate root causes. 
• Track key metrics like PO cycle time, first-pass match rate, and spend under management to measure the impact of the PO system.

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Frequently Asked Questions (FAQs) on Purchase Order System

1. How long does it take to implement a PO system?

The implementation time depends on the complexity of your procurement process, the size of your organization, and the readiness of your data. On average, it takes 4-6 weeks to implement a PO system for a mid-sized company with a straightforward process. However, it can take longer if you have multiple entities, complex approval workflows, or extensive system integrations.

2. How much does a PO system cost?

The cost of a PO system varies based on the software vendor, deployment model (cloud vs on-premise), number of users, and transaction volume. Cloud-based PO systems typically charge a monthly subscription fee per user, ranging from $50 to $200 per user per month. On-premise systems may have a higher upfront license cost but lower ongoing maintenance costs. Be sure to factor in implementation, training, and support costs as well

3. Can a PO system integrate with my existing ERP?

Yes, most modern PO systems have pre-built integrations with popular ERP systems like SAP, Oracle, and NetSuite. These integrations allow seamless data flow between the PO system and the ERP, eliminating manual data entry and reducing errors. If you have a custom ERP or a less common system, you may need to build a custom integration using APIs or flat files.

4. What if my suppliers don’t use PO systems?

   You can still use a PO system even if your suppliers don’t have one. You can email or fax the system-generated PO to your supplier and have them acknowledge it manually. Some PO systems also have supplier portals where suppliers can log in to view and acknowledge POs online. Over time, you can encourage your suppliers to adopt e-procurement practices for more efficient collaboration.

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Spendflo - Best Purchase Order System

At Spendflo, we understand the challenges businesses face in managing their procurement processes effectively. That's why we've developed a powerful purchase order system that simplifies every step of the procurement process, from requisition to approval, ensuring that you can focus on what matters most – growing your business.

Here's how Spendflo can help your organization:

• Our system automates the entire purchase order process, from requisition to approval, reducing manual work and minimizing errors.
• You can set up custom approval workflows based on factors such as purchase amount, department, and type of goods or services, ensuring proper authorization at every step.
• Spendflo provides real-time insights into the status of your purchase orders, deliveries, and payments, allowing you to make informed decisions and proactively address any issues.
• Our comprehensive vendor management module allows you to maintain a detailed database of your suppliers, including contact information, payment terms, and performance metrics.

Curious? Talk to us now!