What is PO of a company?

A PO, or Purchase Order, is an essential business document used by companies to manage the procurement of goods and services from suppliers. It serves as a legal agreement between the buyer and seller, detailing the items ordered, quantities, agreed prices, delivery terms, and other associated details.

Table of Contents

What are the key elements of a PO?

A standard PO will contain the following key information:

PO number – A unique reference number assigned to the PO by the buyer.

Supplier details – Name and address of the vendor supplying the goods/services.
Buyer details – Name and address of the company placing the order.
Date issued – The date on which the PO is created and sent to the supplier.

Delivery address – Physical address where the ordered items are to be delivered.
Line items – Listing of the specific products/services ordered including:
- Item descriptions
- Product codes/SKUs
- Order quantities
- Unit costs
- Extended totals
Shipping terms – Incoterms defining delivery responsibilities between buyer/seller.
Payment terms – Agreed terms defining when/how payment will be made.

Special instructions – Any additional instructions concerning the order.
Authorised signatures – Signatures of authorised staff approving the PO.

Why are POs important for businesses?

Purchase orders provide a range of critical benefits for companies:

Legal record – The PO serves as a binding agreement between the buyer and supplier. This provides legal protections for both parties in case of non-delivery, disputes, or payment issues.
Cost control – POs allow businesses to clearly define the quantity and price of items being ordered. This supports cost control efforts.
Workflow management – POs support efficient procurement workflows. PO details are used for inventory planning, logistics management, invoice reconciliation, budgeting, and spend analysis.

Audit trail – POs provide auditable documentation on procurement activities, enabling easier regulatory compliance.
Supplier relationship – POs help formalise the buying arrangement with suppliers and minimize misunderstandings.

What are the key benefits of POs?

Some of the major benefits provided by purchase orders include:

Clear communication of order details to suppliers
Better coordination of deliveries/logistics
Greater control and accuracy over procurement budgets

More organized accounts payable process
Standardized purchasing policies and protocols
Reduced maverick or unauthorized spending

Optimized inventory management and control
Streamlined invoice reconciliation
Improved regulatory compliance on spending

Enhanced analysis of procurement data

What are the steps in the PO process?

A typical PO process will involve the following key steps:

Need identification – The initial need for a purchase is identified by the requesting department/stakeholders.

Specifications – Detailed specifications are developed describing the item requirements, quantities needed, budgets, timeline etc.
Supplier selection – Suppliers are identified and selected based on a combination of cost, quality, lead times, reliability etc.
PO creation – The purchase order document is created with all relevant order and delivery details.

PO approval – The PO goes through the agreed approval workflow before being dispatched to the supplier.
Order confirmation – The supplier receives the PO and formally confirms acceptance of the order terms.
Delivery – The supplier dispatches the order by the agreed date and ships to the nominated delivery location.

Invoice – The supplier issues an invoice against the PO for payment by the buyer.
Inspection – The procurement team inspects the order received against PO specifications.
Payment – Accounts payable makes payment to the vendor based on PO terms after invoice validation.

What are the types of purchase orders?

Common types of purchase orders include:

Standard PO – Regular one-time purchase from the supplier for specific quantities of goods/services.
Blanket PO – Long-term PO with a supplier to provide undefined quantities over a set timeframe. Used when exact quantities are unknown.

Planned PO – Raised in advance of production schedules to secure supplies needed as per a production plan.
Emergency PO – Used for urgent unplanned purchases required immediately.
Drop shipment PO – Orders shipped by the vendor directly to customers rather than the purchasing company.

What are some key PO guidelines?

Some important guidelines and best practices concerning POs include:

Ensure POs are complete with all required information accurately entered.
Log and track all POs issued with a robust PO numbering system.

Match PO line items to invoices meticulously before payment.
Leverage PO automation and workflows to optimise efficiency.
Control who can create and approve POs under spending thresholds.

Monitor PO conformance to procurement policies and procedures.
Analyse PO spending trends to identify savings opportunities.
Manage PO life cycles proactively through PO status tracking.

Use PO change management protocols to handle PO amendments.
Develop PO templates to standardize and simplify PO creation.

What are some common PO pitfalls to avoid?

Some frequent PO problems that companies encounter include:

Lack of PO approval controls and spending oversight
Duplicate manual POs wasting time and creating confusion
Incomplete PO details leading to delivery issues

Poor PO version control and document management
PO non-conformance to contracts and agreed supplier terms
Inaccurate or missing PO audit trails

Weak PO and invoice reconciliation leading to payment errors
Maverick buying by staff without PO compliance
Outdated PO processes leading to bottlenecks and delays

How can technology help with PO management?

Technology can greatly enhance PO processes through solutions like:

PO automation software – Automates PO generation, routing, approval and sending. Provides PO analytics.
Procurement software – Centralises all procurement data. Automates workflows. Provides dashboards.

Supplier portals – Enables PO transmission and tracking on supplier portals. Supports collaboration.
ERP systems – Integrates PO data across departments like procurement, accounts payable, inventory etc.
Document management – Digital PO archives with version control, indexing and retrieval.

Electronic PO dispatch – Email/portal transmission of POs to suppliers instead of printing/faxing.
PO analytics – Insights into PO spending, supplier performance, process metrics etc.
Cloud platforms – Web-based PO platforms enabling anytime, anywhere access for authorisers and suppliers.

Adoption of these technologies can lead to substantial improvements in PO process efficiency, visibility, control and cost savings. Automation and analytics provide major benefits but require upfront planning and change management efforts to be effective.

What are some key PO performance metrics to track?

Key PO metrics that should be monitored include:

PO cycle time – Time from PO creation to completion

PO approval time – Time for PO to get approved
PO accuracy – % of POs free of errors
PO compliance – % POs following policy and procedures

PO invoice match rate – % POs properly matched to invoices
PO line item fulfilment – % line items delivered on time and complete
PO document handling costs – Costs of PO management activities

PO maverick spend – Spend not under PO control
PO duplicates – Number of duplicate POs issued

Tracking metrics like these help identify bottlenecks and opportunities for process improvement over time.

What are some PO fraud risks to be aware of?

Some examples of PO fraud risks include:

Fake vendor schemes – POs issued to non-existent suppliers and invoices paid out
PO splitting – Dividing spending across multiple POs to bypass approval limits

Duplicate payments – Suppliers invoicing more than once for the same PO delivery
PO data modification – Unauthorized changes to PO details like quantities, pricing etc.
PO and invoice collusion – Connivance between corrupt employees and suppliers on false invoicing

PO over-ordering – Deliberately inflating order quantities

Strong PO controls, audit trails, spending visibility, analytics and staff training are key to mitigating PO fraud risks.

What are some best practices for PO management?

Some best practices for optimising PO operations include:

Centralised PO approval workflows with system alerts on pending approvals
Two/three way matching of POs, receipts and invoices in the system before payments.
Unique PO numbering protocol and mandated PO reference field in invoices

Defined PO validity periods to prevent payment against expired POs
Fixed PO creators and authorisers mapped to spend policies and category hierarchies
Established escalation protocols for delayed PO approvals

Mandatory comments field for PO approvers
Auto purchase accruals on PO issuance for accounting accuracy
Standards for digital PO retention with scheduled archival of physical POs

Regular internal PO audits and user access reviews

Conclusion

In summary, the purchase order is a pivotal procurement document essential for managing supply orders and payments. Robust PO processes ensure controlled spending, accountable purchasing, and streamlined workflows. Leveraging technology and centralized best practices around POs enables businesses to drive efficiency, savings and compliance improvements. Taking steps to optimize PO management should be a key priority for procurement, finance and accounting leaders across organizations.