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Purchase Orders: Best Methods for Tracking and Management

illustration of purchase order and adding machine

For a buyer dealing with multitudes of vendors daily, purchase orders can prove to be an inconvenience. Purchase orders are a crucial aspect of the purchasing process, but for many businesses, managing them has become a problem in its own right. Here, you’ll learn everything you need to know about them, as well as the tools that can help make tracking and managing them easier.

What is a purchase order?

 A purchase order is a document drawn up when a buyer wants to obtain supplies or products from a vendor. It contains details about what the buyer wants to buy, including the types of products, the quantities, billing terms, and the delivery schedule. Business-to-business transactions require intensive documentation to limit exposure to risk.

Let’s say you’re ordering more supplies for the office. You’ll probably be ordering a lot of many different types of items, so you won’t want to rely on memory alone when making the purchase. Instead, you draw up a purchase order disclosing the required items (staples, printer paper, paperclips, pens, etc.), the quantity of deliverables, the cost of each item, and delivery dates, amongst other such requirements. A suitable vendor receives your order and delivers these items promptly to your office.

The purpose of a purchase order

The need for a purchase order arises when both parties require specifics about the transactions being made, but don’t need a lengthy contract spelling out the details. These documents exist so that both the supplier and recipient know what’s been paid and what’s expected in return. They ensure that both parties are holding up their end of the contract, and can help businesses track their expenses.

Purchase orders also act as legal documents to protect the rights of both parties, especially the buyer. This is because payments are usually made in advance in such situations.  They protect the financial investments of the buyer, and help the vendors understand the exact requirements of the buyers, including quantities, delivery dates, payables, etc.

The limitations of purchase orders

Purchase orders can do a lot to help businesses keep expenses and deliverables organized, but they won’t work for every situation. Only companies and vendors selling finished goods can opt for purchase orders. Buyers usually have to engage with a sole supplier to allow for single payments, and the vendors can often only get paid via a letter of credit when the products have been safely delivered. The funds received by purchase order financing can only really benefit big companies with high gross profits. Similarly, only the suppliers can receive these funds as forms of payment.

Smaller companies might be better served simply buying things in person, or ordering supplies online. But for businesses that have particular product needs, or that often order in bulk, POs are essential for keeping track of expenses and deliverables.

How to create a purchase order

What many companies like about purchase orders is that they don’t have to be complex and packed with legal jargon. Most are simple, just a list of items ordered, amounts paid, and details about the expected delivery. For companies new to purchase orders, here’s a basic rundown of what to include. 

  • Header: This will contain the name of your company and its details, like the address, contact information, date of order placement, and purchase order number.
  • Supplier details: Enclosed here will be the details about the vendor, including a specific name, address, contact information, etc.
  • Shipping details: The location where the items are to be sent, the shipping method, and the delivery date.
  • Details of the order: Includes product descriptions, SKU codes, the per-unit price of each item, and the total quantity.
  • Summary: This is to provide a brief overview of the whole order, and offer any other essential details of the agreement.

Purchase orders can be as basic or as complex as you need them to be. Starting out with a basic template, then editing and importing it to your Contract Lifecycle Management platform can help you make sure you always include the essential information.

Purchase order vs. buy-side contracts

Purchase orders (POs) are an essential component of the buy side contracts in commercial transactions. Here’s how they interrelate:

Buy side contracts: These contracts are agreements between a purchasing entity (buyer) and a supplier or vendor (seller). They outline the terms and conditions under which goods or services are purchased. Buy side contracts encompass various agreements such as supply contracts, purchase agreements, service level agreements, etc.

Purchase orders: A purchase order is a document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the buyer wants to purchase. It’s essentially a buyer-generated document that signals the buyer’s intent to acquire goods or services from the seller.

Relationship: Purchase orders often refer to and derive from the terms set in the buy side contracts. These POs serve as a formal confirmation of the specifics mentioned in the broader buy side contract. They detail the specific items, quantities, prices, delivery dates, and any other specific terms agreed upon in the contract. Purchase orders essentially operationalize the terms agreed upon in the broader buy side contracts on a more granular, transactional level.

Compliance with contracts: POs ensure that both parties adhere to the terms of the broader buy side contracts. They act as a control mechanism to ensure that the actual purchases made align with the terms agreed upon in the contracts. It helps in tracking, record-keeping, and ensuring that both parties fulfill their obligations as per the larger contractual agreement.

In essence, while buy side contracts establish the overarching terms, conditions, and obligations between the buyer and seller, purchase orders are the practical, day-to-day instruments that translate these terms into specific, actionable transactions. They are interconnected as one forms the foundation, and the other executes the agreed-upon terms in a transactional manner.

Managing purchase orders

When a large company deals with various purchase orders every day, it becomes difficult to keep track of all of them with ease. Effective purchase order management is a necessity to make sure that each transaction runs smoothly.

Common pain points of purchase order management

Managing documentation is tricky when you’re frequently placing and receiving new orders. ‌Lack of automation makes them prone to errors, which are easy to overlook and cost time and money to correct. Physical documents also run the risk of being lost or incorrectly filed.

Even with digital documentation, it’s easy for the process to become isolated if the information is stored in separate systems, making cross-verification difficult. Especially when companies use multiple platforms like Excel, Google Sheets, or other Microsoft Office tools, the management process can lose transparency, and make interdepartmental communication challenging

With automation, however, companies can more effectively manage purchases and ensure everyone is on the same page.

Automating workflows for purchase orders

Automated software helps facilitate growth for businesses of all sizes. Paperwork is inherently slow, and automation aids in rapid documentation while reducing the risk of mistakes. With the right technology, the purchase order process is expedited and gets documented efficiently.

Templatable workflows help simplify purchase order management, reducing storage, organization, and time concerns. It can also make the process more secure, as data is always backed up and easily accessible to all the essential teams. A CLM designed with procurement in mind can help reduce the overall wastage of time and resources, resulting from hurdles encountered during the procurement process.

A solution for complex purchases

Digital contracting and contract automation connect the information, processes, and people involved in contracts through an online platform. These systems enable companies to come up with strategic plans and exclusive contracts for all kinds of business agreements, then securely store records of the contract while saving templates for easy access in future agreements.

If you are a steel manufacturer, for example, your purchase order will probably comprise different alloys of steel, forging equipment, and CNC machines, etc. On the other hand, a cosmetics company will purchase pigments, chemicals, and tools. Every purchase order is unique, and digital contracting allows you to cater to your needs exclusively. Automation of workflows allows for faster and more efficient contract design at all levels and for all companies.

With automation, businesses can:

  • Easily access data: It’s easy to re-order products or check prices for past orders when purchase order documentation is easy to access,
  • Save money and time: CLM software allows for more accurate documentation and reduces the need to run back and forth between teams all day. It also speeds up the process by decreasing the need for routine updates.
  • Increase process transparency: All the parties involved in the purchase order contract can double-check and participate actively, instead of performing their roles in a silo.

Workflow Designer

Ironclad’s Workflow Designer is a self-serve tool to create contract workflows without long implementation times or the need for technical expertise. With a straightforward drag-and-drop user interface, users can build and launch contract generation and approval processes in minutes — not weeks or months. The workflow designer enables you to control the creation of workflows and get contracts processed in a more efficient manner. 

You will find the ability to create templates for all types of contracts, including purchase orders. They are fully customizable, and you don’t need to know how to code to make them work. The Workflow Designer is also compatible with other digital tools like Salesforce and Docusign, so you can continue using your existing systems and make the transition to a new purchase order management process seamless.

Why use digital contract management for purchase orders?

Digital contract management allows innovators to transform their companies’ contracting process, making business faster, more collaborative, and more controlled. 

Digital contract management means inclusivity of designing all types of contracts without employing extra labor and wasting valuable time. ‌Collaboration and negotiation are faster and more transparent, and data is easily searchable and verifiable.

Ironclad aims to digitize legal work and enable the integration of all the teams within a company for increased productivity. Take your purchasing operations to the next level and streamline your purchasing process with better purchase order management and streamlined digital contract automation.

Quiz: test your own contract processes!

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