The purchase order process plays a pivotal role in procurement and supply chain management. However, many organizations fall victim to common mistakes that create inefficiencies, drive up costs, and cause delivery issues. Avoiding these purchase order process pitfalls can streamline operations and boost the bottom line. This comprehensive guide outlines the top 9 mistakes to avoid when it comes to optimizing your purchase order process.
1. Failing to Define Clear Purchase Order Policies
The first major mistake is not having clearly defined policies to guide the purchase order process.
This includes lacking:
- Guidelines for when a purchase order is required versus not required
- Standardized purchase order templates to promote consistency
- Rules regarding purchase order approvals and signatures (e.g. spend authorization thresholds)
- Well-documented overarching procurement policies
Without proper documentation in place, employees may not understand when and how to correctly issue purchase orders. This results in inconsistencies, non-compliances, and overly complex processes. Maintaining meticulously crafted purchase order protocols ensures alignment across the organization and smooth procurement operations.
2. Not Tracking Purchase Orders and Status
Another frequent error is failing to properly track purchase orders after they have been issued to suppliers. There should be systems or databases in place to maintain visibility over:
- Purchase order status – whether each order is draft, issued, pending, complete, on hold, etc.
- Order fulfilment updates from suppliers – acknowledging receipt, providing shipping updates, communicating delays
- Invoice reconciliation – matching invoices back to corresponding orders
- Any purchase order changes or cancellations
Lacking robust tracking makes it virtually impossible to identify issues with orders, obtain timely updates from suppliers, and verify invoice accuracy. Implement purchase order tracking practices to closely oversee the procurement process end-to-end.
3. Missing Out on Order Consolidation Opportunities
Many companies miss significant cost savings opportunities by not consolidating orders across fewer suppliers. When the same or similar items are being purchased from multiple vendors, these should be combined into larger, less frequent orders when possible.
Key benefits of purchase order consolidation include:
- Leveraging bulk order discounts from suppliers
- Reducing administrative costs associated with processing multiple individual orders
- Simplifying supplier management activities like communications and relationship building
Conducting spend analysis to identify consolidation opportunities can optimize suppliers and greatly reduce procurement costs.
4. Failing to Comply with Supplier Contracts
A major yet common procurement misstep is failing to comply with existing contracts in place with suppliers. This happens when:
- Employees are unaware of agreed upon contract terms
- Purchases are made outside of the negotiated contract
- Proper authorizations are not acquired before ordering
Not adhering to contracted pricing, products, volumes, and approval processes results in gross overspending, strained supplier relationships, and potential legal issues. Ensure all employees understand master service agreements, statements of work, pricing agreements, and required approvals.
5. Sticking with Manual Paper-Based Purchase Order Processing
Despite technological advancements, some organizations still rely on paper forms, spreadsheets, emails, and other manual methods to create and distribute purchase orders. This introduces major efficiency issues including:
- Slow, inefficient manual purchase order preparation and internal routing for approvals
- Lack of real-time visibility across the global procurement operation
- Increased likelihood of data entry errors resulting in inaccurate purchase orders
- No integration between procurement systems and backend business systems like accounting, inventory, etc.
Transitioning from antiquated paper-based purchase order procedures to automated digital platforms provides huge advantages. These include faster PO processing, approvals, distribution, invoicing, integration, and access to procurement data for spend analysis.
6. Not Considering External Supply Market Factors
A big picture perspective is also needed when it comes to understanding external supply market forces and dynamics. Key factors like the following must be taken into account within the purchase order process:
- Lead times – how long it takes for a supplier to fulfill and deliver orders
- Market trends – fluctuations in product demand, raw material availability, pricing
- Production schedules and capacities – when and how much output suppliers can deliver
If these variables are ignored, companies will inevitably experience long order delays, stock-outs on key inputs, and sudden price increases. Work closely with vendors to plan around external dynamics like market prices, demand forecasts, and production capacity.
7. Failing to Review Supplier Scorecard and Performance
You cannot enhance supplier relationships without regularly reviewing performance. Key metrics that should be tracked on a supplier scorecard include:
- On-time delivery – orders arriving when originally expected and requested
- Fill rate – orders shipped complete with all items and accurate quantities
- Quality – products/services meeting requirements and specifications
- Responsiveness – timely communications and issue resolution
Analysing these KPIs identifies high performing versus low performing partners. Performance insights should then be shared with suppliers to work jointly on fixing problems and improving results.
8. Providing Unclear Purchase Order Details
Many downstream purchase order mistakes originate directly from unclear or incomplete information included on the PO itself. Key purchase order contents that must be accurate and thorough include:
- Item descriptions – Part numbers, specs, requirements, quantities
- Delivery details – Requested delivery date, ship to location
- Pricing – Unit price per line item, extended totals, overall PO grand total
- Payment terms and conditions – Agreed upon invoice and payment terms
Incomplete purchase orders often result in the wrong items or quantities being delivered. Scrutinize PO details to guarantee suppliers receive complete, accurate information needed to fulfill orders correctly.
9. Lacking a Change Order Approval Process
Another prevalent issue is failing to properly approve any changes required to a purchase order after initial submission. Examples of changes include:
- Increasing or decreasing order quantities
- Pushing out delivery date
- Substituting a different product
- Modifying product specifications or requirements
There should be a formal, documented change order process requiring appropriate approval before accepting any PO alterations. Don’t let suppliers make unauthorized changes without proper oversight as well as agreement.
Conclusion
While the purchase order process is a source of entanglement for many companies, avoiding these 9 common mistakes alleviates significant pain points. Implementing consistent PO policies, consolidated suppliers, contract compliance, including e-procurement, in addition to the performance management, along with diligent PO maintenance will propel procurement apps efficiency to new heights. As your organization continues to mature its purchase order process, keep exploring additional opportunities for improvement as well as remain aligned with industry best practices. With sound PO management, you build the foundation for supplier relationships that deliver maximum value.