Digital Purchase Order : How to shift from paper to Electronic Purchase Order?
Purchase orders (POs) are a fundamental part of any company and have been around since the dawn of business in one form or another. Digital purchases remain a vital part of modern enterprises with the ability to procure needed supplies faster and easier than previous methods. A company must be able to process, create, send, and receive purchase orders in the most efficient way in order to manage day-to-day business needs. This is the timeless theme in business that never seems to change.
What has changed in recent years is the transition from paper to digital purchase orders. The digital PO system has created a much more streamlined procurement process that results in greater accuracy and better workflow. Electronic POs also require less time, freeing up Accounts Payable (AP) departments to focus on other tasks.
Understanding Digital Purchase Orders
A digital PO is an electronic purchase order created using an e-purchase order or e-procurement system laying out the terms and conditions of a transaction between a buyer and a seller. A digital order presents several advantages over its hard-copy ancestor, which is why it is gaining in popularity.
In particular, the workflow of a DPO is less prone to mistakes and inaccuracies, which is why so many businesses are making the switch to electronic purchase orders. Here’s how the digital PO system functions from start to finish:
First, establish a DPO policy. This is a foundation that helps the operation’s employees know what the rules are for creating a digital PO. Limits and exceptions need to be established, and the responsibilities of all parties in the procurement process should be clearly outlined. The policy for a digital purchase should be reviewed on a regular basis in case any changes are needed.
Second, establish the workflow for approval. Rules need to be set up regarding what digital purchase orders need to be approved and by whom. An automated AP system can select the appropriate department head for electronic purchase orders above a certain amount, for example. Perhaps a digital PO above $3,000 needs special approval.
Third, it’s time to choose the right DPO template. A good software program will have templates already installed for digital purchase orders. The goal is to select the right format for the company’s needs.
Fourth, a digital PO needs to be created. Because modern PO software makes this process as easy as possible with the help of Artificial Intelligence (AI), a few clicks of the mouse may be sufficient in many cases. In other situations, a few more items may need to be added on-screen using human input, such as account codes and the reason for the digital purchase.
Fifth, the digital purchase order needs approval. Once again, user-friendly software makes this process easier than it was in the past. An automated system can automatically identify a digital PO that needs acceptance and route it to the appropriate team. Much of the human work that was required previously is accomplished at the speed of light.
Sixth, the electronic purchase order is dispatched to the supplier. Once again, this step is fully automated with today’s advanced software. No human worker is needed to manually submit the purchase order. The electronic PO can be sent via email or some other digital route.
Seventh, the digital PO needs to be tracked. This step, too, is largely automated with the important tracking details noted in the PO software. Issues such as vendor receipt, shipping status, and delivery confirmation are all tracked in a paperless AP system. As changes occur on an electronic PO, updates are made in the digital PO system in real-time.
Finally, the AP team or other relevant department should verify that they have received the product. At this point, the invoice should be paid. A digital-purchase receipt, also known as a goods receipt note (GRN), will be generated by the digital PO system to further assist in tracking the original PO from start to finish.
Digital PO vs. Paper PO
In a nutshell, a paper purchase order is a physical document. A digital purchase order, by comparison, is fully electronic. The hard-copy PO is the older format. Although paper POs contain the same information as their digital cousins, they come with a variety of differences that can make them more difficult to manage.
For example, hard-copy purchase orders must be physically stored, and this situation can be cumbersome and costly. As the amount of paperwork stacks up, more and more space is required to manage and store all the red tape. Businesses of all sizes must purchase the necessary filing cabinets and floor space to store the physical documents, and this burden could hit small businesses particularly hard.
When an audit is necessary, more time is required to search through the physical storage system that by its very nature does not provide a user-friendly search capability. Obviously, this old-school system is very labor intensive. An Accounts Payable team must spend hours rummaging through physical documents to research a previous digital PO or perform some other accounting task.
Another downside of old-fashioned purchase orders is their accuracy. Because they are fully human managed, they are more prone to errors, inconsistencies, and inaccuracies. These mistakes are also more difficult to correct due to the hard-copy format of the POs.
The long-term cost of paper POs is also higher than their digital-order cousins. The storage system mentioned above is more expensive than today's e-tender systems, which take up less floor space.
The workflow for hard-copy purchase orders tends to be slow and cumbersome. PO approval takes time, and more human oversight is required. This traditional system of bureaucracy is burdensome on staff and requires more capital to process.
And because paper documents can’t possibly be updated in real-time, traditional purchase orders do not show up-to-the-minute changes that are helpful for a company’s accounting staff.
Creating a Digital PO System
A business of any size can construct a fully-digital PO system. And because today’s AI-driven software is designed from the start to be user-friendly, only a moderate amount of training is required for an accounting department to learn the electronic tools and use them right away.
The following steps should be employed to by an Accounts Payable team to get started on its journey to digital purchase orders:
First, determine the accounting or finance goals your business needs to accomplish. Does it require detailed reporting in key areas? Does it need streamlined approval for DPOs? Would real-time cash-flow tracking be of value? Come up with a list of the salient problems the business needs to solve.
Second, develop a PO template that can be used across many vendors. It should include fields such as PO number, date, unit price, and item description.
Third, come up with a workflow that matches the company’s needs. Information from the hard-copy system should be imported into the new digital PO system.
Fourth, build an approval hierarchy for digital orders. A notable strength of digital-order software is the ability to create an electronic approval chain. Settings can be adjusted for the levels of control and accountability desired.
Fifth, create a catalog for each vendor. This digital shopping mall makes it easier to buy from a specific vendor using the least amount of time possible. A catalog provided by the vendor can be used, or one can be created internally.
Sixth, test the digital purchase system. Run some example POs and have some AP team members provide feedback.
Seventh, it’s time to train the accounting department on the new electronic PO system. A slide deck can be useful as staff can go back over it at a later time. Be sure to field questions as the new software is demonstrated to team members.
Finally, track the performance of the new software and the AP department’s use of it.
An Example of a PO Workflow
A PO workflow will vary from business to business. Here is a common outline:
- The buyer needs to identify a want and find a vendor.
- The buyer looks over a possible purchase, which could come in the form of a purchase requisition.
- The buyer creates a PO.
- The buyer sends the PO to the seller.
- The seller approves the PO.
- The buyer confirms the order.
- Finally, the seller creates an invoice and transmits the goods.
Benefits of Using Electronic POs
The advantages of switching from the outdated paper system to a fully-electronic PO system should be clear at this point. A computerized system is easier to search during an audit or other research need. It saves time and reduces cost. Because digital orders can now be saved in the cloud rather than on site, less computer hardware is needed by the business. A fully-automated system reduces approval time and can be accessed from multiple devices at once, including outside of the workplace.
An electronic purchase-order system can also automatically match an invoice with its PO, reducing the amount of background work necessary to track the paperwork, which is all digital now.
With real-time notifications, full automation operating with the help of Artificial Intelligence, in-depth reporting, and customized workflows, the electronic PO system is far superior to the older paper system. Switching should be a no brainer for any business.
Digital purchase orders deliver cost savings and a host of other benefits to businesses that use them. Businesses that continue to use the outdated alternative risk being left behind by their competitors.