Updated: Mar 24
Facing the growing threat of economic uncertainty and disruption to global supply chains, the need for more adaptable procurement processes has never been clearer. In today’s rapidly changing economic environment, a slow purchase order process is one thing that can cripple a business. Manual processes take too much time, making it all the more difficult to change to new suppliers should the need suddenly, and often unexpectedly, arise.
A look into existing processes
Purchase orders have always played a central role in procurement, and they will continue to do so. That said, they also rely heavily on manual processes, which are cumbersome, lacking in agility, and time-consuming. For this reason, they should only be used for larger purchases with strategic suppliers.
The problem for many companies is that they use these complex purchase order processes with all suppliers, including the numerous minor, inexpensive purchases that make up the long tail of their suppliers. This makes onboarding long-tail suppliers far more expensive and unnecessarily time-consuming.
Traditional purchase orders are costly to businesses because they make use of many arcane processes, large amounts of paperwork, and lengthy manual checks to ensure full compliance with anti-money laundering (ALM) and know your customer (KYC) checks. Here is an overview of the typical purchase order process flow:
- Create a purchase request - Complete approval flow of the purchase request - Request quotations from suppliers - Analyse and select suppliers - Conduct ALM and KYC checks - Onboard supplier - Create a purchase order - Complete approval flow of the purchase order - Place an order at the supplier - Receive goods or services - Receive invoice and match against the purchase order - Complete approval flow for the invoice - Authorise payment to the vendor - Pay the supplier using an account-to-account transfer - Complete documentation of the purchase
Due to the significant differences between one industry and another, as well as the complexity of individual purchase orders themselves, it is impossible to give a precise figure on how much it costs to create a purchase order. The Center for Advanced Procurement Strategy provides a range between US$50 and US$1,000, depending on industry and inclusion of supporting activities, for example.
The total cost will be different in every situation, depending on the degree to which each stage of the process flow is automated. For example, businesses might use their existing ERP system to automate the creation of purchase orders, but stages like invoicing and records-keeping might still be done manually.
The costs come down to various factors. For example, purchase orders need to be processed and approved internally, as well as externally via any interactions with suppliers themselves. Orders also need to be received, managed, and validated and invoices processed to ensure that payments are made on time. All these stages consume valuable work hours.
Three ways to cut the costs
Traditional purchase orders should only be used for more complex purchases, such as those made from strategic suppliers. Long-tail procurement, by contrast, typically encompasses hundreds or even thousands of small suppliers. In this case, reliance on conventional purchase orders can quickly spiral out of control in terms of cost. For example, for a minor purchase worth only €100, it hardly senses if the purchase order process costs €50 worth of documentation and working hours each time.
Fortunately, there are some proven ways to greatly reduce the costs associated with purchase order creation and management:
- Process automation: Automating procurement processes like purchase order creation completely eliminates the need for manual intervention. - Online purchases: Online purchases are not only faster – they are more convenient and provide a complete and readily accessible audit trail. - Machine learning: Machine learning helps you get more out of your procurement data with spend classification and enrichment and global sourcing insights.