The complete guide to optimizing the purchase order cycle
Research indicates that 95% of purchasing leaders say procurement has room for optimization. Almost half say complex, inefficient processes are their biggest challenge — followed closely by rising costs. (Amazon Business 2024 State of Procurement Data Report).
These challenges often stem from an inefficient purchase cycle. The PO cycle is the series of steps organizations take to request, order, receive, and pay for goods and services. It’s a critical process that impacts everything from cost control to supply chain stability. A complicated and inefficient PO cycle can create a ripple effect, leading to employee burnout, higher costs, and supply chain instability.
A well-defined and efficient purchase order cycle is critical to addressing these challenges. Optimizing and automating steps in the PO cycle frees procurement teams to focus on strategic activities, including:
Attracting, retaining, and developing talent
Experienced procurement professionals are essential for developing purchasing strategies, navigating markets, and negotiating good contracts.
Reducing costs
Optimizing spending and finding cost-effective procurement solutions is essential in a volatile economic climate.
Building resilient and agile supply chains
Diversifying suppliers, ensuring sustainable procurement, and building flexibility into the supply chain help prevent supply disruptions and ensure business continuity.
But how does this actually work in practice?
This guide takes you step-by-step through the PO cycle, from “I want to buy this” to “Oof, now we need to pay for it.” We’re going to tell the (fictional) story of BTB Toys, a growing manufacturer struggling with an inefficient manual procure-to-pay process. Follow along as they struggle with paperwork, rogue spending, and angry vendors. Along the way, we’ll uncover insights into how adopting best practices and automation can make its procure-to-pay process smoother and more efficient.
Let’s meet Joan, the CFO of BTB Toys. Her CEO just gave her a mandate: fix the company’s broken purchasing process or risk losing a game-changing deal.
Challenge: scaling up the purchase order cycle fast
BTB Toys produces Cognito, a popular AI-powered toy robot that helps children learn, create, and explore. It’s been a smash hit, with rave reviews (even a famous celebrity mom is a fan), and sales are skyrocketing. BTB has been scrambling to keep up, but so far, so good. That is, until last week when a huge opportunity landed on its doorstep.
A major retailer wants to stock Cognito in over 400 stores and needs it ready for the holiday rush. BTB’s board is pushing for the deal and has already approved funding to scale up production. This could be BTB’s big break, but there’s just one problem.
BTB has only 18 months to meet the retailer’s deadline, but its manual purchase order process is a major roadblock. It’s slow, error-prone, and impossible to scale. To meet that deadline, the company will have to drastically increase production, which means fixing its PO process and connecting with key suppliers— fast. Failing to deliver means it loses the deal and its investors’ money.
BTB’s CEO tasks Joan with overhauling the company’s procurement cycle to meet the retailer’s deadline.
Breaking out the PO cycle
Joan starts by reviewing the procure-to-payment (P2P) process at BTB Toys that follow a simple, 6-step cycle:
- Purchase request and approval
- Creating and issuing a purchase order
- Receiving goods and services
- Receiving and processing the invoice
- Three-way matching the PO
- Paying the supplier
After reviewing the P2P process, Joan realizes that to scale BTB’s procurement processes, she needs to address the following issues:
Onboarding new suppliers
Expanding production means adding new suppliers to BTB’s supply chain. It needs a way to quickly add and onboard vendors without adding complexity or risk.
Preventing errors and fraud
BTB’s reliance on manual procurement and accounts payable processes makes it vulnerable to human error and fraud. Joan must close this vulnerability before increasing expenditures.
Optimizing cash flow
BTB will rapidly burn through cash as it expands production. Joan must improve visibility and control over spending to make strategic decisions about where to allocate resources and avoid non-essential spending.
Controlling procurement costs
The lack of good visibility into spending also means that BTB doesn’t have good control over procurement costs or a complete audit trail, placing it at risk of financial losses if the company scales up production.
Keeping expenditures aligned with the budget
BTB doesn’t have good visibility into whether spending is within budget, making it difficult to forecast future expenditures and manage cash flow during expansion.
With the clock ticking, Joan focuses her team’s efforts on optimizing BTB’s purchase order cycle, starting with purchase requests.
Step 1: Purchase request and approval
Like many medium-sized businesses, BTB Toys is evolving from an informal purchasing process to a more structured model. Currently, when an employee wants to purchase a good or service, they email their manager, who approves or rejects the purchase. After approving the purchase, the manager forwards the email to the purchasing department, although some leave that to the employee requesting the purchase.
Problem: Lack of control and visibility over spending
BTB’s email-based process makes tracking and controlling spending difficult — an obstacle to scaling its operations. The lack of a standardized system for approvals creates confusion and adds complexity. Some managers may be more lenient than others, leading to unauthorized or unnecessary purchases.
Currently, the purchasing department tracks each purchase request in a spreadsheet. Unfortunately, this requires the procurement manager to open each email and manually enter the purchase data into Excel. As a result, BTB’s ability to track and control spending often lags behind the rest of the process, making it difficult to get an accurate picture of its spending in real time.
Solution: Standardize and automate purchase requisitions
Accurate and complete purchase requisitions and an efficient approvals process are fundamental to optimizing and scaling the P2P process. Joan addressed these problems by making the following changes:
Automated purchase requisitions
Joan decides that automating the purchase requisition (PR) process is the best way to gain control and visibility over purchase requests. Her team selects and implements a procurement software solution that replaces BTB’s manual, email-based processes with an automated workflow.
Standardized purchase requisition forms
Joan’s team creates a standardized purchase requisition form within the automation platform. This requires requesters to provide the complete details of their purchase request, making it easier for approvers to review and approve requisitions. The platform keeps a real-time record of all purchase requisitions, making it easier to track spending and compare it to budgets.
Established an approval policy
Joan creates a formal approval policy and process. To save time, she adopts a simple process that requires all purchases to be reviewed and approved, with higher-value purchases requiring approval by senior management. Her team configures the automation platform to automatically route completed PRs to the correct approver.
Step 2: Creating and issuing a purchase order
The second step in BTB’s PO cycle is creating and issuing POs. For orders over $5,000, BTB follows a manual purchase order process. The purchasing department creates a purchase order using the details from the purchase request email. Then, they save the purchase order as a PDF and email it to the supplier. When existing suppliers can’t provide the requested goods or services, the purchasing department finds and adds a new supplier.
The purchasing department doesn’t use POs for purchases under $5,000. In those cases, they simply email the supplier and request the required goods or services.
Problem: Inconsistent purchase order process undermines financial control
Joan’s team discovered two issues with the PO creation process.
Inefficient manual purchase order creation
BTB’s purchasing department relies on manually copying information from emails into POs and then emailing the PDFs to suppliers. This slow, complicated process is inefficient, error-prone, and can’t easily be scaled.
Lack of standardization for small purchases
Although BTB uses a formal but manual system for purchases over $5,000, it handles smaller purchases haphazardly through emails. This makes it hard to track spending and enforce the purchasing policy — problems that could lead to financial losses as spending increases with expansion.
Solution: Standardize PO processes and automate PO creation
A clear and simple PO process minimizes errors and makes tracking and controlling spending easier. Here’s what Joan did to fix the problem:
Automated PO creation and sending
As with the purchase requisition process, Joan implemented a purchase order software solution to automate BTB’s PO process. Her chosen solution integrates with the purchase requisition process to automatically create POs and populate them with the information from the purchase requisition. It then automatically issues the POs to the supplier. The new automated process is faster, more accurate, and easily scalable.
Standardized purchasing policies
Joan changed BTB’s purchasing policy to require POs for all purchases over $500. This change provides greater transparency and accountability and will help keep costs under control during expansion. Although the change increases the number of POs and the workload on the purchasing department, that is offset by the improved processing efficiency from automation.
Step 3: Receiving goods and services
After the supplier receives BTB’s purchase order, they deliver the goods or services. BTB receives the delivery and confirms that it matches the purchase details. Although BTB has a dedicated receiving department, deliveries are often made directly to different departments. However, not every department verifies deliveries.
Problem: Decentralized receiving compromises efficiency and control
BTB’s current receiving process is unstructured and decentralized, with deliveries often bypassing its receiving department. This creates several issues:
Compromised operational efficiency
BTB’s current receiving process lacks standardization and centralization. Deliveries often bypass the receiving department, meaning there’s no consistent way to verify orders, check for damage, or ensure the delivery meets quality standards. These issues can result in production delays, order discrepancies, and increased work for employees who must fix these problems. The problems will only worsen as production increases.
Reduced cost control
The lack of a centralized receiving process makes tracking and verifying deliveries difficult. This can complicate matching invoices and POs to deliveries, potentially resulting in overpayments or supplier disputes. It also increases the risk of receiving incorrect or damaged goods, leading to increased costs from returns, replacements, and write-offs. Without tight control over these costs, BTB risks further financial losses when it scales up its supply chain.
Solution: Centralize and standardize receiving
To address these challenges, Joan implemented the following actions:
Centralized receiving
Joan restructured BTB’s receiving process to route all deliveries through the receiving department. This ensures that all deliveries are checked for quality and damage and shipment details are verified against the PO.
Established a standard receiving procedure
After centralizing receiving, Joan’s team developed a standardized receiving procedure that includes steps for receiving, inspecting, and documenting deliveries, reporting discrepancies, and routing goods to the appropriate departments.
Step 4: Receiving and processing the invoice
After the goods and services have been delivered, BTB receives invoices from its suppliers. Due to BTB’s decentralized receiving process, suppliers send invoices to various individuals and departments. Some suppliers send paper invoices, while others send them electronically.
Once they receive an invoice, the recipient forwards it to BTB’s accounts payable department. The AP team manually enters the invoice data into the accounting system and adds GL codes. From there, the process moves to the next step, three-way matching, where the AP team verifies the invoice against the PO and shipping receipt to ensure accuracy.
Problem: Slow and error-prone manual invoice processes
Several problems with BTB’s current invoice processing system can make it difficult to scale the PO cycle.
Inconsistent invoice receipts
BTB’s suppliers send invoices to different people and addresses across the company. This creates delays and makes it difficult for the AP to track invoices and payments. The problem is especially bad for paper invoices, which often get lost.
Inefficient manual invoice processing
The AP team relies on manual data entry and coding for invoice processing. This approach is slow, prone to errors, and isn’t easily scalable.
Solution: Implement procure-to-pay automation
To optimize invoice processing, BTB must centralize invoice receiving and optimize manual invoice processing workflows. Here’s how Joan’s team tackled this problem:
Automated invoice processing
Joan recognized that BTB needed a scalable solution to improve employee productivity, handle complex invoice formats, and improve processing accuracy. She selected Stampli, a leading finance operations automation platform, to automate BTB’s AP processes. Using Stampli, she replaced manual invoice capture and coding processes with a fully automated system. Stampli automatically extracts, enters, and GL codes invoice data and can handle paper and electronic formats.
Centralized invoice receiving
BTB’s decentralized purchasing process meant that invoices were going everywhere except where they were supposed to go. To address this, Joan’s team established a dedicated email address for supplier invoices and encouraged suppliers to switch to electronic invoices. Invoices sent to the address are automatically entered into Stampli and processed. Finally, Joan established a central physical mailbox for supplier invoices to capture the remaining paper invoices.
Step 5: 3-way matching the purchase order
BTB’s Cognito robot is a complex toy. Its manufacturing process requires hundreds of specialized components sourced from a variety of suppliers. This intricate manufacturing process leads to equally complex POs and invoices, making three-way matching a task that demands specialized knowledge — knowledge that BTB’s AP team already possesses.
This specialized knowledge is the key to BTB’s highly effective three-way matching process. After they process an invoice, BTB’s AP team carefully matches each line item to the PO and shipping receipt.
This is where their specialized knowledge comes in. The line items can be very similar. For example, the invoice might contain two line items that read: “200 servomotors (left hand)” and another, “220 servomotors (right hand),” while the PO may say “200 left-hand servomotors” and “220 right-hand servomotors.” Because they understand the difference between the different components, the AP team can quickly and accurately confirm if the line items match.
If the documents match, they forward the invoice for approval, knowing everything is in order. However, if there’s a discrepancy, AP puts the invoice on hold and investigates the issue with the supplier. This might involve clarifying quantities, confirming prices, or locating missing information.
Problem: Scaling up requires replicating specialized knowledge
Scaling up Cognito production means expanding BTB’s supply chain, which means more PO and invoices that need to be matched. However, with the deadline looming, BTB doesn’t have time to hire or train new employees with the same specialized knowledge as its AP team. Joan must find a way to scale the three-way matching process without increasing headcount. She needs a solution that can handle the increased volume of POs and invoices while maintaining BTB’s high standards for three-way matching.
Solution: Use an intelligent 3-way matching solution
To scale up BTB’s three-way matching process while maintaining its high standards requires a solution that can replicate human understanding and decision-making. Here’s how Joan solved this tricky problem:
Implemented an AI-powered matching solution
Joan reviewed several automated three-way matching solutions but found their rules-based matching algorithms fell short when it came to understanding the nuances of BTB’s manufacturing processes. She finally chose Stampli’s Cognitive AI™ PO Matching solution. Trained on millions of invoices, Cognitive AI understands context and can match POs and invoices with 100% accuracy. Designed to have a human in the loop, Cognitive AI flags any discrepancies for investigation, letting BTB’s AP team focus their expertise where it matters — and saving hours on tedious manual matching.
Established exception thresholds
BTB needs to scale up production quickly, which means everyone will be busy. To expedite invoice processing and ease the burden on approvers, Joan’s team set up exception thresholds. For example, they set a 5% price matching threshold to automatically approve invoices with prices within 5% of the price on the purchase order.
Step 6: Paying the supplier
After the invoice has been processed, verified, and approved, BTB pays the supplier. Its current process is to issue payments from within its accounting system. To pay an invoice, the AP team confirms the invoice has been approved, checks the supplier’s preferred payment method, and then issues the payment.
Problem: Manual vendor management slows down payments
While BTB has streamlined many payment processes, it still relies on manual methods to manage vendor information and communicate with suppliers. This creates several challenges:
Information silos
Vendor data, like contact details, payment terms, and banking information is scattered across spreadsheets and emails. This makes accessing and updating information difficult, leading to errors and delays.
Miscommunication
BTB relies on email and telephone to communicate with vendors. Information gets lost in email chains, and messages fall through the cracks, preventing effective communications.
Solution: Establish a vendor management system
As BTB expands its supply chain, tracking vendor information across spreadsheets and emails would become more complex and error-prone, potentially leading to more payment delays, strained supplier relationships, and even disruptions to Cognito production. Joan needed a solution that would centralize vendor information and communications. She found the answer in Stampli’s Advanced Vendor Management. Here’s how Stampli helped:
Self-serve vendor management
Advanced Vendor Management enables vendors to update their information and documents. This ensures BTB always has access to current data, reducing errors, speeding up payments, and minimizing the administrative burden on its AP team.
Centralized communications hub
Stampli centers all communications on the invoice itself, giving BTB’s AP team and suppliers a single, transparent platform for all discussions. This eliminates email chains and keeps everyone informed and in the loop.
Transforming the PO cycle for business growth
By systematically addressing the weaknesses in its purchase order cycle, BTB Toys successfully transformed its procurement process from an inefficient manual system into a streamlined and scalable automated workflow. The company is well-equipped to handle the increased demands of growing business, confidently scale production of Cognito robots, and capitalize on new opportunities.
Stampli: Evolutionary P2P and AP automation
Optimizing P2P processes is crucial for any business aiming to improve operational efficiency, reduce costs, gain visibility, and control overspending. Stampli, the leading solution for evolving your procurement and AP processes, connects every dot — every step, every discussion, and every approval.
Don’t just take our word for it. Stampli consistently receives rave reviews from customers who have transformed their businesses. One accounting manager describes Stampli’s integrated solutions as “unbelievable,” praising its ease of use, automated features, and exceptional customer service.
Ready to evolve your P2P processes? Contact Stampli today for a free demo.
