Pros and Cons of Purchase Order Management for Supplier Performance

Nov 26, 2021 | Supplier management

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Nov 26, 20214 min read

Purchase orders (POs) play a crucial role in supplier performance. A well-structured PO outlines the products, delivery dates, and payment terms, reducing misunderstandings and improving communication between the buyer and supplier. Streamlining the PO process through automation and integration with other systems can improve efficiency and accuracy. POs have a significant impact on supplier performance, as poor management can lead to delays, increased costs, and quality issues.

By streamlining the purchase order process, organizations can improve supplier performance, while also reducing costs and risks associated with procurement. This article will explore the role of purchase orders in supplier performance, analyze the benefits they can bring, and examine the effects they have on supplier reliability. 

Understanding the Role of Purchase Orders in Supplier Performance 

A crucial part of supplier management is monitoring and managing purchase orders. A purchase order is a document that is used to initiate, confirm and track a purchase. It can include details such as the type and quantity of items or services being purchased, payment terms and delivery dates. In addition, it can be used to establish communication and expectations between the buyer and the supplier. 

The purchase order process is an essential step in the procurement process, as it enables organizations to maintain an accurate record of their suppliers and the products or services they are providing. By having a detailed purchase order in place, organizations can identify potential problems, such as delayed shipments, incorrect items or services being provided, and pricing discrepancies. This helps organizations ensure that their suppliers are meeting expectations and providing quality products or services. FactWise empowers users with smart dashboards and notifications to ensure all stakeholders have tremendous visibility over POs, invoices, and goods along every step of the journey. 

The purchase order process also helps organizations keep track of costs associated with the purchasing process, such as shipping and handling fees, discounts, and taxes. This allows organizations to plan their budget more accurately and maximize their return on investment. FactWise offers users deep, holistic analytics into POs and supplier performance. 

Streamlining the Purchase Order Process for Improved Supplier Performance 

Improved supplier performance can be achieved by streamlining the purchase order process and minimizing manual tasks. By automating the process, organizations can reduce errors and improve accuracy. Furthermore, automation can reduce the amount of time it takes to process orders, resulting in faster delivery times for suppliers. FactWise improves efficiency by up to 20%

Organizations should also consider integrating their purchase order system with other systems, such as accounting or inventory management software. This will enable them to keep better track of their suppliers' performance and ensure that orders are fulfilled in a timely manner. FactWise makes swift and seamless integrations with ERP/inventory management and accounting systems to ensure data integrity and provide a single source of truth across systems.  

The impact of purchase orders on supplier performance 

The impact of well managed Purchase Orders include the following:

  • Clarity of expectations: A well-structured PO clearly outlines the products or services being purchased, delivery dates, and payment terms. This reduces the risk of misunderstandings and disputes between the buyer and the supplier, as both parties have a clear understanding of the agreed upon terms. For example, a buyer may specify in the PO that the supplier must deliver the goods within a certain timeframe to meet the buyer's production schedule. This can help the supplier better plan and allocate resources, leading to improved delivery times and reduced costs. POs generated on FactWise include user-defined Terms and Conditions, company information for buyer and seller including addresses, identifications and the person-in-charge, any additional comments and all item information including item details and specifications, payment terms, and delivery timelines. POs can be auto-generated or manually created on FactWise source-to-pay
  • Improved communication: Effective communication is key to a successful procurement process. POs can facilitate communication between the buyer and the supplier by providing a clear record of the agreed upon terms. For example, the buyer may use the PO to communicate changes in the delivery schedule or to request an update on the status of the order. This improved communication can lead to more efficient and effective collaboration between the buyer and supplier. FactWise empowers users to manage POs directly on the system via updating delivery schedules, placing holds or requesting terminations, and allowing buyers and sellers to interact directly via PO comments. 

The impact of poorly managed Purchase Orders include the following:

  • Delays in delivery: Poorly managed POs can result in delays in delivery, which can have a significant impact on supplier performance. For example, if the PO is unclear or incomplete, the supplier may have to wait for clarification before proceeding with production. This can result in delays and increased costs as the supplier may have to reschedule production or incur additional expenses to meet the delivery date. 
  • Increased costs: Poorly managed POs can also result in increased costs for the supplier. For example, if the PO does not specify payment terms, the supplier may have to bear the cost of financing the production until payment is received. This can impact the supplier's cash flow and negatively affect their performance.
  • Quality issues: Poorly managed POs can also result in quality issues, as the supplier may not have a clear understanding of the buyer's requirements and expectations. For example, if the PO does not specify the required materials or specifications, the supplier may use sub-standard materials or production methods, resulting in poor quality products. 

Overall, POs play a crucial role in the procurement process and it is important for buyers to manage them effectively to ensure a positive outcome for both parties. FactWise source-to-pay ensures that PO management processes are carried out efficiently and with accuracy.   

In conclusion, purchase orders (POs) play a critical role in the procurement process and can have a significant impact on supplier performance. POs serve as legally binding contracts that outline the products or services being purchased, delivery dates, and payment terms. A well-structured PO can provide clarity of expectations and improve communication between the buyer and the supplier, leading to improved delivery times, reduced costs, and better quality products. 

About the Author

Stawan is the founder and CEO of FactWise. Before founding FactWise, Stawan was the NA TMT-Procurement Leader at McKinsey. Passionate about procurement, Stawan has 15 years’ experience in enabling clients of all sizes to achieve business impact via procurement.


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