Moderated by Riya, Digital Transformation Consultant at Hyperbots
Riya: Hi, everyone! I’m Riya from Hyperbots, and I’m very excited to have Mike Vaishnav join us on the call today. Mike is a CFO consultant and strategic advisor to many privately held organizations. The topic of discussion is PR-PO processes. Let’s jump right in. To start off, please explain the difference between PR and PO processes, Mike.
Mike Vaishnav: Nice to be here. The PR and PO processes are extremely critical for any procurement function. Just to make sure the company has the proper control authorities and how the goods or services have been ordered. Let me start with the PR. PR is a purchase request, an internal document prepared by internal management to ensure that any goods or services ordered have the proper approvals. There’s a workflow for PR approval with the appropriate hierarchy and limits, making sure that only what’s required is approved, to avoid over-inventory or excessive services. The PR involves collaboration between multiple levels or cross-functional teams for approvals. Once a PR is approved, it’s essentially saying what is needed, ensuring the budget is in place, and detailing the requirements. Once all that is set, the PR is converted into a PO. On the other hand, a PO is an external document, essentially a commitment from the company to purchase certain items, either goods or services. It’s like a confirmation of the order. The PO document is sent to the vendor and serves as a legally binding agreement, indicating what needs to be shipped or serviced. The PO outlines everything from the quantity to the price, ensuring no confusion about what’s ordered. So, to summarize, PR is the initiation of a purchase, while PO is the confirmation of the purchase.
Riya: Right. So, how do the distinct PR-PO processes help in maintaining compliance and risk management within the procurement function?
Mike Vaishnav: PR and PO processes create structured, controlled, and transparent environments that help with compliance and risk management. From a compliance standpoint, PR provides authorization and approval, ensuring that any purchase is pre-approved and within budget. It enforces segregation of duties, meaning that no single person has full authority to make large purchases, which helps prevent the misuse of funds. Documentation and audit trails are also key to compliance, showing what was approved, by whom, and why. On the PO side, it’s all about contractual compliance. The PO serves as a legally binding agreement between the company and the vendor, confirming what has been ordered and at what cost. This ensures enforcement of procurement policies and adherence to local regulations if necessary. The PO also allows for tracking and reporting, ensuring that all transactions are transparent and verifiable. In terms of risk management, PR mitigates the risk of over-ordering or over-commitment. The approval process ensures budgetary control and verifies demand, reducing the likelihood of unnecessary purchases. PO mitigates risks related to vendor performance, ensuring that the supplier delivers what was agreed upon without deviating from the contract terms.
Riya: That’s very interesting. Thank you for elaborating. So, can you explain how PR-PO processes improve efficiency and speed in procurement operations?
Mike Vaishnav: Absolutely. On the PR side, automation of approval workflows improves efficiency. The system routes requests based on hierarchy, speeding up the approval process and reducing the need for manual interventions. PR also helps with standardization, making it easier to manage budget controls and keeping centralized information accessible for everyone involved. This cuts down on the risk of over-ordering and ensures cross-functional validation of orders. On the PO side, operational efficiency is improved through standardized processes and external collaboration with vendors. By having a PO ready, the speed of ordering increases since there’s no need for additional approval. It also helps with order tracking, inventory management, and vendor performance monitoring. Additionally, the PO process makes accruals easier, especially for services, by ensuring that all orders are tracked and accounted for.
Riya: Right. So for better understanding, Mike, would you like to highlight? What are the key challenges faced by organizations that implement PR-PO processes? And how can that be mitigated?
Mike Vaishnav: So PR and PO processes can introduce several challenges with the proper planning implementation of the technology and process optimization. This could be mitigated. So actually, let me give you some examples of that. So one of the biggest challenges is the process and approach to dealing with rigid workflow. How the process has been created. Some companies have a pretty rigid workflow. Some companies have a long process flow, so that can create a delay in converting PR into the PO, and also sending it to the vendor. So what are the things you can do that can streamline the process like streamline, the workflow? Whether what type of approval is required when there is a critical approval or critical inventory you want to order, you may require multiple approvals. When you have a certain threshold, you may require multiple approvals, but every time you don’t have to go through multiple channels for the approvals. You need to have flexibility on the approval there also. Another challenge you can have with that is people’s dependency. So if somebody is approved, and that person is on vacation or traveling, you cannot get the approval done faster, and that will delay the operations. In that way, your process workflow should be more flexible, and make sure that if that person is out, either they can give the authority to somebody else, or the process flow can be changed after proper approvals. So that’s one of the challenges. The second one I can think of is the complexity of the implementation. The implementation in the sense of the process and the system. There are quite a few times when there are multiple systems. There are quite a few times people will use external solutions for the PR and PO, which may not be integrated with the ERP system. In that way, it would be very difficult to integrate with the system. That could create the challenge of data integrity as well as delay in the process. The things we can mitigate this are simplified automation communication, proper training, PR-POs, and making sure that systems have the proper integration of the systems. As I said, there’s also integration of the system that can be mitigated with how the ERP is working. Whether your ERP can integrate with that, if not, then you need to create certain processes, then make sure that this system has been integrated. There are quite a few other challenges when you send it out to the vendor. The PO vendor may not have the capability of accepting the PO online, so that can create the delay. So we need to make sure the vendor has a proper system setup, or whether we have proper API to handle the documentation. In that way, it creates more efficiency. The other option would be, like in the current environment, AI is another good option where you can implement the AI, which can mitigate some system issues as long as the AI solution has been integrated with your ERP systems. The other challenge is compliance and enforcement with the internal and external policy. The internal policy needs to ensure that when people approve the PR, they are following the policy based on the hierarchy, approval limits, and key requirements. The next-level policy needs to focus on local regulation, government requirements, and so on. These challenges can be mitigated by enforcement of compliance, proper risk management, training, communication, and monitoring of all those policies, ensuring that people are doing proper compliance. Another thing is scalability. If the company has a solution and is growing fast, but the solution cannot grow with the company, that could be a big challenge. So the system should be flexible and agile to accommodate the company’s growth without introducing complexity.
Riya: Absolutely. Can you tell us what are the key challenges your organization faces with the current procurement process and approval? How do these challenges impact operational efficiency and project timelines?
Mike Vaishnav: There are always challenges in the approval process, and I can give you some examples of that. Sometimes it’s based on the workflow. How it’s created can lead to lengthy approval times, with multiple layers of approval. This can impact critical timelines when goods or services are urgently required. The lack of transparency requires a lot of collaboration between cross-functional departments to confirm priorities and timelines. Without good collaboration, that’s another challenge. If the company lacks a good system and relies on manual processes, that can also delay the overall process. Budgetary constraints and compliance can also create inefficiencies. If you exceed the budget or order without sufficient approval, it can lead to cost overruns. Supplier management is key. We need to ensure that suppliers are well-equipped, maintain good communication, and have sufficient inventory to meet our requirements on time. Even with a good PR-PO process, timely communication with suppliers is critical. These are just high-level examples of challenges. Focusing on efficiency impacts operational timelines, particularly inventory procurement. If inventory isn’t received on time, it can delay production, impacting customer relationships and revenue. In terms of project timelines, not meeting deadlines due to procurement issues can affect new product introductions or existing manufacturing timelines. Rush orders due to delays can also incur extra costs, like expedited shipping and supplier penalties. Finally, collaboration is key—both internally and externally. If there’s no good communication between internal departments and suppliers, operational efficiency will suffer.
Riya: Thank you for sharing your insights today, Mike. It’s been a pleasure discussing the crucial aspects of the PR-PO processes with you, and I’m sure the viewers agree with me. Have a great day.
Mike Vaishnav: Thank you. Nice to be here.
Moderated by Riya, Digital Transformation Consultant at Hyperbots
Riya: Hi, everyone! This is Ria, and I’m very excited to have Mike join us on call today. Mike is a CFO consultant and strategic advisor to many privately held organizations. The topic of discussion for today is goods versus services and the similarities and differences between them when it comes to purchases. So to start off, Mike, would you share your thoughts on the key differences between purchasing goods and services in a typical organization?
Mike: Sure. Thanks. Yeah. So let’s focus on that. It depends on the size of the organization, a big company versus a small company. But let me focus on the general process and how the goods and services differ. The goods would be more on tangible property, where you need to have a specific quantity, specific price, and specific quality of the product you require. It depends on whether you’re buying the raw material or you’re buying the machinery or equipment. It all depends on whether you’re buying for a fixed asset or an inventory. What services would be different? It’s more on the intangible nature, like consulting services, temporary labor, or high-level consulting. It depends on the expertise required, and the level of people needed. The goods are more tangible and measurable, while services are milestone and delivery-based, often tied to hours or retainership agreements. These are the main basic differences between goods and services.
Riya: Got it. So in terms of terms and conditions for procurement, how do they differ between goods and services?
Mike: For goods, as I said, you need specific quantity, quality, and specifications. When you purchase something, you need to ensure that you have specific quantities and specifications, including delivery timing and any maintenance if you’re buying fixed assets. Services can include follow-up services, installation, or after-sales support. On the services side, it’s more about expertise, confidentiality, and deliverables. Milestones and performance levels need to be clearly outlined, including time and labor-based or lump sum agreements. These are the key differences in terms and conditions for goods and services.
Riya: Got it. So would you like to explain when it comes to pricing? How do the considerations differ between goods and services, especially when you’re negotiating with a vendor?
Mike: Goods pricing is largely market-driven. It depends on market rates, supply and demand, and the economic environment. Bulk purchases often allow for negotiations on price and discounts based on payment terms. Services, on the other hand, depend on labor costs and expertise. You negotiate hourly rates or lump-sum fees based on the level of experience and type of service provided. These are the key differences between pricing for goods and services.
Riya: Okay, so could you elaborate on how the approval processes differ when purchasing goods versus services?
Mike: One commonality between goods and services is the need for cross-functional collaboration. For goods, purchasing raw materials, for example, requires operations, procurement, finance, and legal departments to work together. Services, on the other hand, may involve less cross-functional approval, especially for specific departments like legal services, which can order on their own under certain thresholds. Generally, services may involve fewer approval channels if the department has the budget and authority.
Riya: Got it. How does the receiving process differ between goods and services? And what challenges does this present?
Mike: Receiving goods involves matching the goods received with the purchase order and ensuring quality and specifications are met. You also need to match the goods receipt with the purchase order and invoice. Some goods may require testing or verification, especially with machinery or equipment. For services, the process is different as there is no physical product to receive. It may involve verifying hours worked for contractors or ensuring milestones and deliverables are met. This presents challenges in verification compared to the more straightforward process for goods.
Riya: Thank you. So, Mike, would you like to explain how purchase orders play a role in both goods and service procurement? And how does that differ?
Mike: The purchase order is critical for both goods and services. For goods, the purchase order details specific quantities, descriptions, and timing. For services, it’s more descriptive and outlines the type of service and terms. Services may use blanket POs, where a general budget is set, and departments draw from it as needed. In both cases, the PO serves as a formal document for procurement.
Riya: Thank you. So would you like to explain how invoice processing differs between goods and services? And what are the best practices in this area?
Mike: For goods, invoice processing involves three-way matching: the purchase order, goods receipt, and invoice. You ensure that what was ordered matches what was received and invoiced. For services, it’s a two-way match, between the purchase order and the invoice, as there’s no goods receipt. If contractors are involved, you can also match the time cards with the invoice. For other services, you ensure the department head approves the invoice based on milestones achieved. These are the main differences in invoice processing between goods and services.
Riya: Got it. So, Mike, how does vendor onboarding differ for goods versus services? And what should organizations really focus on?
Mike: For goods, you need to assess the vendor’s reputation, certifications, and production capacity. Supply chain reliability and logistics are key considerations. You want to ensure the vendor can meet your material needs without causing delays. For services, you focus on the vendor’s expertise, reputation, and the quality of their workforce. In both cases, you need to ensure the vendor can meet your organization’s specific requirements.
Riya: Thank you, Mike. So that brings us to the last segment of the interview. What role do you see AI playing in streamlining procurement for both goods and services?
Mike: AI can play a significant role in automating workflows, reducing human intervention, and improving accuracy in areas where companies don’t have sophisticated systems in place. AI can help with compliance, predictive analysis, and market data insights. It can assist in real-time data sharing with vendors and create dashboards to track purchases, vendor performance, and inventory levels. AI can offer customized solutions to streamline procurement processes for both goods and services.
Riya: Thank you, Mike.
