Purchase order systems suck for most users within the average organisation and also their suppliers.
In case the link stops working, in this post, James states that “Late payment = weak financial leadership”. Failure to pay suppliers promptly suggests you are either unethical or lack control of your cashflow.
We then got into a conversation in the comments about the reasons for late payments which led us onto purchase order systems.
I have worked with purchase order systems early on in my career, including as part of an implementation team within a large organisation. I also have experience of them from a supplier perspective at smaller organisations. Specifically from chasing payment for work that we’ve done. (Note the past tense there – I will come back to this.)
As a result of these overwhelmingly negative experiences I have never introduced a purchase order system anywhere, and perhaps never will. In my view, they add a lot of bureaucracy while rarely delivering the promised benefits.
What are the alleged benefits of a purchase order system?
- To give an organisation an overview of its commitments at any time.
- To save processing time in the finance department. The idea being if a purchase order is correctly set up and approved and an invoice matches it, the invoice can be paid without seeking further authorisation.
- It might be coupled with wider procurement controls, so that people have to order from specific suppliers, which might lead to procurement efficiencies.
- To be able to communicate your order to a supplier in a clear and consistent way.
Why purchase order systems suck for (most) of your suppliers
In practice, what seems to happen in most organisations is that the purchaser raises the PO when the invoice comes in. This negates most of the advantages listed above for the paying organisation. It is the classic useless control.
However, it really sucks for the poor old supplier. It turns out that they are no longer dealing with Jane Bloggs in Operations. They have to go through a torturous web of supplier set-up forms and potential checks just so they can be added to “the system”. If they’re lucky, they might get added in a week. Then Jane can raise the purchase order and receipt it. Then the supplier can submit the invoice to accounts payable who might eventually get round to paying it. (Terms and conditions apply, naturally).
Why purchase order systems suck for (most) of your organisation
Fundamentally, finance people introduce purchase order systems to make finance processing smoother. For finance teams. “It will be more efficient because we don’t have to waste time keying in invoices”, says the finance transformation lead.
What this means in practice is that data input tasks that were done by trained professionals – and can increasingly be done by OCR software – is pushed back into the business to non-finance staff, often quite senior. A busy operational manager who processes maybe 1-2 orders a month has to log onto a procurement or finance system and spend ten minutes remembering how it works, probably getting coding incorrect on the way. This, multiplied across an organisation, is a real productivity killer.
Isn’t it chaos without a purchase order system?
I think SMEs can usually achieve the same advantages of a purchase order system with;
- A strong budgeting and forecasting process. This is a better way of understanding your commitments than a purchase order system that no one uses properly;
- OCR invoice input or other tools to speed up invoice entry;
- Some form of electronic invoice approval system. This will depend on the size of the organisation but there are plenty of standalone workflow packages that tie into existing accounting systems; and
- A really efficient expenses systems for smaller purchases.