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A Complete Guide For Purchase Order System

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by Beroe Inc
13 October 2020

What is a purchase order system? A purchase order system enables businesses to efficiently manage their purchase orders and it aids in the procurement process too. Procurement and purchasing management are difficult for organizations but with the help of an efficient system, these processes can become manageable.  

How Does A Purchase Order System Work?

At present, numerous types of PO systems are there and most provide a purchase order generator facility. To understand how the PO system works, here are the steps that occur.

Purchase Requisition

The first step is the purchase requisition. In this, the requirements of the organization are specified and the expected delivery date is also mentioned. The purchase requisition document contains details of where the goods or services should be delivered, who they need the goods or services from, and the costs of the goods or services required. It is then sent to a person who will either approve or reject the purchase requisition. If it is approved then the next step occurs. However, if it is rejected then the reason for rejection and what changes need to be made are specified by the authorized individual.  

Purchase Order

The second step of the purchase order system is the purchase order. When the purchase requisition has been successfully approved, then it turns into a purchase order. The purchase order or PO is what is sent to the vendor. It is up to the vendor whether he accepts or rejects it. When he accepts the purchase order, then it becomes a legal binding contract. Hence the vendor is required to send whatever goods or services are mentioned in the purchase order to the organization that has sent the PO. A separate PO number is assigned to every PO because it makes tracking more efficient and faster.

Order Fulfillment

The vendor now sends the goods or services to the organization according to the details provided in the purchase order. That is, as the purchase order contains details such as the number of goods or services required, the supplier will fulfill that order by sending that quantity of goods or services to the organization. The supplier is required to show the tracking details to the organization so the goods or services can be efficiently tracked by them in real-time. The supplier will ensure the goods or services are sent so that the orders reach on time or before the time mentioned in the purchase order by the organization.

Goods Received

When the buyer organization receives the goods or services, it first inspects the items received. Is the quality as expected? Are the goods as they should be? Are there any problems with the goods? Does the quantity of goods match with the ones mentioned in the purchase order? The organization should ensure the received goods are in the condition expected. If the organization is expecting goods in more than one shipment, then they should ensure they track well and ensure they receive all the goods ordered before sending their acknowledgment of having received the orders. If there are any issues then it should be communicated quickly and clearly with the vendor.

Invoice Processing

The processing of invoices is the last step in the purchase order system. This is where the three-way matching occurs. The supplier invoice and the purchase order along with the goods received invoice are compared to each other. When they match with each other then it means that everything has occurred well then there is no problem. However, if there is a mismatch anywhere then it means that a problem has occurred. It might mean intervention has taken place somewhere or it can point to fraudulent activity. Once everything is sorted, payment is made by the organization to the vendor.

What Are The Benefits Of A Purchase Order System?

Establishing an efficient purchase order system has the following benefits.

Saves Time

The purchase system helps save the time of employees working in the organization. This is because all details such as the PO number are mentioned in the PO. This ensures proper referencing and ensures the transactions are legitimate. Hence, the accounting aspect is easier and less time consuming because of the details provided in the PO. This can help employees get extra time in doing other activities that can help the growth of the organization 

Ensures Accuracy

When the purchase order system is in place then organizations have documented proof of what they have ordered and other important details of the order. This can help in case there are any disputes between the organization that is buying and the vendor. Since all the details are specified in the purchase order, they can be rectified in case of any error. This leaves less room for errors and ensures the accuracy of what was discussed and agreed upon by the supplier and the organization.

Enables Streamlining

The purchase system ensures that organizations have sufficient stock. Moreover, organizations have better transparency when it comes to price and overall sales. This can help organizations easily find out how much profit they are making. Organizations can also find out the stock they currently have and the reorder levels. All this ensures and boosts the streamlining of processes for organizations.

Ensures Valid POs

The purchase order system is beneficial for an organization because it ensures that it is aware of its finances. Moreover, it helps an organization expand and order from a range of suppliers as the PO serves as a legally binding contract between the two parties. Those organizations with a purchase system in place can do business with local authorities and government agencies because they require PO.

Help Find Best Suppliers

When using purchase systems, organizations get answers to many questions such as the suppliers that are the best among the vendors they have worked with. Organizations also get visibility of which suppliers offer the best discounts, those offering timely delivery, timely support, and so on. This can help organizations find who the best suppliers were and who they should work with more often.

Helps In Effective Management

The purchase order system ensures that purchases and projects are managed effectively. For instance, if an organization is ordering goods for a particular project, then a project reference can be added to the PO. Hence, the system enables organizations to know about the costs involved in advance before anything happens. This can ensure clarity and increase efficiency before the project starts.

To conclude, a good purchase order system sets the foundation for a seamless procurement workflow between various vendors and your business. We hope you found this mini-guide on the PO system useful.

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