Shipping air is never a good strategy. When purchase orders aren’t optimized, it often results in less-than-truckload shipments and a host of associated issues, including extended lead times, inflated inventory holding costs, and overstocked goods. The solution? Purchase order optimization—a strategic approach that streamlines the procurement process and enhances supply chain management. In this article, we’ll explore the benefits and strategies of purchase order optimization, along with the essential steps to implement it.

What Is Purchase Order Optimization?

Purchase order optimization is a strategic approach aimed at efficiently managing the flow of goods within and beyond your organization. It involves close collaboration with internal departments to ensure seamless goods flow between locations and external partners, such as distribution centers, stores, and vendors. The primary objectives of purchase order optimization are to expedite purchase order creation and maximize truckload capacity, closely aligned with replenishment planning processes.

Common Business Issues

Companies often face various challenges when their purchase order process is suboptimal:

1. Long Time to Build Purchase Orders: Constructing orders can be a laborious process, particularly when it involves coordinating with numerous internal and external stakeholders, including vendors and transportation teams.
2. Can’t Add Vendors: A lack of flexibility in onboarding new vendors can limit your ability to diversify your supply sources and seize cost-saving opportunities.
3. Increased Time to Replenish Goods and Quantity to Order: Delays in replenishing goods can lead to stockouts, resulting in customer dissatisfaction and lost sales.
4. Available Stocks Not Considered: Failing to account for existing inventory can trigger unnecessary orders and increased holding costs.
5. Overstocked Goods at Warehouse: Overstocking ties up valuable capital and storage space, potentially rendering goods unsellable.
6. Increased Inventory-Holding Costs: Maintaining excessive inventory levels adds extra expenses related to storage, insurance, and depreciation.

Benefits of Purchase Order Optimization

Optimizing the purchase order process can yield several benefits:

1. Substantial Time Savings: Automating and streamlining the purchase order process saves time, allowing organizations to redirect resources to more critical tasks.
2. Reduced Logistics Costs: Optimized orders help cut transportation and warehousing costs, making your supply chain more cost-effective.
3. Consideration of Vendor Minimums and Truckload Capacity: Purchase order optimization accounts for vendor-specific requirements and load constraints, ensuring efficient ordering.
4. Mitigating Buying Challenges: By utilizing algorithms and data-driven insights, purchase order optimization helps organizations make informed buying decisions, reducing the likelihood of overstocking or understocking.
5. Managed Inventory: Optimized orders enable better control over inventory levels, reducing the need for excessive storage space and associated holding costs.

Setting Up Purchase Order Optimization

Implementing purchase order optimization involves several key steps:

• Define Internal Distribution Planning Network & SKUs: Identify your internal distribution network and relevant stock-keeping units (SKUs).
• Define External Vendor Locations and SKUs: Determine your external vendor locations and the SKUs they fulfill from those locations.
• Specify Lead Times, Calendars, Minimums, and Transportation Constraints: Establish parameters related to lead times, order calendars, minimum order quantities, and transportation constraints.
• Service Levels and Safety Stock Rules: Set up service levels and safety stock rules to ensure reliable order fulfillment.
• Vendor Sourcing: Determine the source, destination, and mode of transportation for each item.
• Create an Order Review Calendar: Specify the days when vendors are open to receive orders and the coverage duration for orders.
• Set Order Optimization Parameters: Define vendor minimums and the parameters for optimizing truckload orders.

The Purchase Order Optimization Process

On a daily basis, the optimization cycle ensures that purchase orders align with daily changing conditions, such as vendor stockouts, fluctuating store demands, or quality issues in delivered items:

• Import Actual Transactions: Collect actual transaction data and any SKU changes.
• Run Calculations and Plan: Generate a replenishment plan based on on-hand inventory and orders and determine whether an order should be placed.
• Review and Resolve Exceptions: Address any exceptions arising during the ordering process.
• Review and Approve Vendor Orders: Verify that recommended purchase orders meet your organization’s standards.
• Export Recommendations: Finalize and export purchase orders for vendor use.

Conclusion

Purchase order optimization is a powerful tool that can significantly enhance supply chain efficiency, reduce costs, and improve overall procurement processes. By addressing common business challenges and leveraging advanced algorithms, organizations can streamline their procurement operations and gain better control over their inventory. Implementing purchase order optimization is a key strategy for any business seeking success in today’s competitive marketplace. Contact us today, and let us help you achieve these benefits.

Here are the other supply chain processes we support including demand planning, master planning, and fulfillment provided by our partners like BlueYonder, o9, and Kinaxis.

• Category: Supply Chain