The Purchasing Process
Wholesale distribution is all about purchasing goods for subsequent resale. Distributors need comprehensive, integrated purchasing management software that provides an automated, structured flow for the whole purchasing process. To succeed, both the purchasing and sale processes need to work in concert and have access to the same purchasing management software information. Maintaining inventory of purchased goods is the single largest cost element for any distribution business. You don’t want to purchase goods that you aren’t selling, just as it does you no good to get orders for goods you don’t have.
The elements of a successful purchasing process include:
- Determining inventory replenishment needs
- Vendor selection
- Placing Purchase Orders (POs)
- Vendor acceptance
- Receipt of goods
- Payment of Vendor
- Evaluation of Vendors
In this article we are going to focus on how you can optimize what is referred to as Purchase Order Management. The definition of Purchase Order Management varies somewhat but is most commonly understood to cover steps 3 through 6 above, starting with Placing POs and running through Payment of Vendors. The process of Determining Inventory Replenishment Needs is extremely important as are the processes of Vendor selection and Evaluation, but these will all be covered in other posts. Optimizing Purchase Order Management comes down to putting in place a systematic process and having the right purchasing management software to create, record and track POs at every stage so that your purchasing and sales personnel are always up to speed.
Placing Purchase Orders
Purchase Orders are orders the distributor sends to its vendors or suppliers. At a minimum, POs will specify the goods to be delivered, the date delivery is requested, the shipping method, the price that will be paid, together with applicable discounts as well as the payment terms the vendor is extending. POs can also specify the price for freight, the FOB terms (usually for overseas purchases) which specify which party pays which costs and where title transfers, as well as special packaging instructions and BOL documentation.
In modern purchasing management software, POs are typically created by Vendor from the Inventory Replenishment Process, based on reordering parameters established for each product. The Inventory Replenishment Process is typically run periodically by Vendor on a set cycle. The Inventory Replenishment Process determines the optimal reorder size by balancing among other things, how quickly a product sells, how long it takes to repurchase and how much capital is tied up in maintaining the product’s inventory. The purchasing manager may then review and possibly adjust the PO to take full advantage of Vendor discount levels.
POs are usually put together over a period of time as the distributor’s needs are finalized. POs that are not finalized have the status of Open-In Process. When finalized and reviewed the POs may have a status of Open-Submitted. At that time the PO is sent to the Vendor either by email or as an EDI document. Your purchasing management software must keep track of these statuses, manage transmittal of the PO to the Vendor and record when receipt of goods is expected.
Once the Vendor receives the PO, a PO Acknowledgement may be sent signifying the Vendor’s acceptance of the order, pricing and terms. Your purchasing management software should be able to specify whether an acknowledgement is required or not, and if required whether received or not. Vendor acceptance may be done informally or formally through sending an acceptance by email or as an EDI document.
Receipt of Goods
Once the Vendor processes the PO the goods will start to be delivered. Delivery may be through one or, more commonly, multiple shipments. As each shipment is received, the goods are counted and inspected and the PO updated line by line. Your purchasing management software should record for each line on the PO what quantity was Received, is Open or has been Cancelled. The PO remains Open until all lines are either Received or Cancelled. Good purchasing management software will track each PO receipt and each Landed Cost invoice for services related to the PO (freight insurance, clearing, handling, drayage, etc.) to a PO.
Payment of Vendor
Paying the Vendor requires tying out the PO and all its related Receipts and Landed Costs then verifying against the Vendor’s invoice. Once the receipt of goods are verified, the Vendor’s invoice has to be verified for the correct prices, discounts and terms. Most often the terms negotiated with a Vendor apply to all purchases from the Vendor, but it not uncommon to have negotiated special discounts and/or payment terms for specific POs. Your purchasing management software should be able to track all of this. Then the Accounts Payable team issues payment to the Vendor in a timely fashion to collect early-payment discounts.
Conclusion: Optimizing Purchase Order Management
Purchase Order Management is all about keeping track of your POs, so there are no inventory stockouts or overstocks. To do this you need strong purchasing management software that will record all POs and PO Receipts by status and sub-status as well as allow the saving of multiple Landed Costs against each PO. Expected PO Receipt dates should be able to be constantly updated based on new information from the Vendor so that the sales team knows what is available or expected. If you are ordering from overseas your purchasing management software should provide an ability to store estimated Landed Costs so these can be capitalized when the PO is received even if final Landed Cost Vendor invoices are not yet available. You should be able to track POs by Vessel by Voyage No, by Container by Arrival Date, etc.
If your purchasing management software cannot do all this, contact ADS Solutions to demo the Accolent ERP Cloud-based ERP software solution.