The Perfect PO Approval Process

A very common request during the requirement process of a lot of CaE projects is the configuration and development of a strong purchase order (PO) approval process. Having one in place reduces the risk of fraud, unnecessary expenditures as well as budget overspend by the business.

It is common to find that a bill approval process and or payment approval process are considered more important than the purchase order approval process, unfortunately this just isn’t the case.

Capturing and controlling the commitment to spend the companies monies upstream allows for better management, more accurate cashflow forecasting and dare we use the term “best practise”.

It’s important to note at this juncture that a PO approval process isn’t always ideal for all businesses at all times and in all scenarios. Examples of this are small businesses, drop ship business, or buying sandwiches in for a meeting.

Before we start to detail our perfect PO approval process below are some of the obstacles that you may or may not find in implementation this process depending on the functionality available in your system, and the requirements from the business.

Multi-Subsidiary Approval:

Some companies are multi-subsidiary companies and in some cases managers of individuals making purchases within these companies are employees of a different subsidiary than that of the individual.

In simple language Dilbert Smith works in Acme Goods Ltd, whilst his direct manager and purchase approver Lesley Jones works in Acme Services Ltd. Both are setup in the companies CaE system in their respective subsidiaries.

This kind of setup is very common especially in the world of companies with shared service centres. Depending on which system you implement enabling this ability may be something that is out of the box or something that requires an elaborate technical workaround.

Multi-Currency:

Multi-currency has traditionally been an issue faced by larger businesses that trade internationally, this is no longer the case in the new modern age. The internet has made it relatively simple to make purchases from China from your desk in downtown Soho.

Multi-currency comes into play during the PO process around the area of budgets and limits.Let’s imagine that Dilbert Smith has been given a purchase approval limit of $1200 which allows him to make a purchase up to that amount without requiring approval from anyone else in the business.

Dilbert entered a PO for a box of quantum widget maximisers from a company in Germany at a cost of €1000 in January, this PO was under $1200 based on the exchange rate at the time of purchase. Two months later Dilbert enters another PO identical to the previous one in January €1000.

However, the market has shifted enough so that at the March exchange rate this PO is over Dilbert’s approval limit by a few dollars. A solution to a problem like this really depends on various factors e.g. Your CaE system may not have a method to pull in market exchange rates so this wouldn’t be a problem.

Or the business is not too concerned with market rates as they have already hedged for this and therefore rely on a “plan” rate for the year (a constant currency to currency exchange rate predefined by the business at the start of each year to reduce the impact of market fluctuations on management reports).

In the event that controlling actual spend at as close to a market rate is more important to the business then unless an approval limit is set for each employee and each currency that the company trades in and has a bank account in each of these currencies then the frustrating “I can approve $100, I can’t approve $100”

Four Eyes:

Some organisations may employ a four eyes principle in that every purchase has to be reviewed by at least two employees (including the PO creator).

Some think it’s overkill and so only subscribe to this approach for purchases over a specific amount, which opens up the window for multiple purchases just under the limit.

Budget Control:

It is common for businesses to allocate departments (cost centres) a budget for a period normally a year. It is up to that department how they spend the budget so long as they don’t go over the budget and the spend is within the guidelines of company policy.

Ordinarily a company would have a head of department who would be responsible and accountable for this budget.

So, it’s not surprising to see department heads animated about having all PO’s that would be charged to their departments be approved before going out to vendors.

PO approval by department heads is very simple in most CaE systems however some systems struggle with line level approvals. Imagine Dilbert is creating a PO for Office Depot as there is a need for the following:

– Stationary: For the HR department
– Coffee Machine: For the Marketing Department
– Furniture: For Sales Department

All three departments have different department heads and therefore three different PO approvers. As the business has requested that department heads approve all spend, it can be quite challenging to manage 3 different approvers on the same PO.

In some extreme cases PO budgets are not only at department level, but are also at project/job level.

Holiday Cover:

A common item that normally crops up after requirements have been gathered and normally during UAT is what happens when the designated PO approver is unavailable due to holidays, sickness.

Some companies request that seconds or proxies and in some cases assistants of executives have the ability to approve a PO on their behalf or in their absence, however they only want this to be available when they themselves are actually unavailable.

With all that said let’s detail what could be a perfect PO approval process. This process has been designed to be system agnostic, scalable and flexible enough to cater for some of the obstacles that are faced when designing a solution.

There are areas that won’t be explicitly addressed as this process may serve as a substitute or overlaps with that area, an example would be purchase requisition.

Summary Requirements:

Acme Group of companies requires a PO process that will allow auto-approval based on employees approval limits, some employees will have no approval limits.

Any PO that requires approval will need to be approved by the supervisor of the PO Owner as well as the department head(s) that may incur costs based on the PO.

There must be explicit stages that allow users to draft PO’s before submitting them for approval PO’s can only be assigned a PO number after full and final approval. PO’s can only be submitted for approval if there is enough budget within the relevant cost centre.

The user should be able to see on the screen which department doesn’t have enough budget, this shouldn’t stop the user from saving the PO. The user should always have the ability to recall a PO from approval at any stage in the process prior to full approval and prior to the PO being sent to the supplier.

If the PO is resubmitted after recall without any *material* changes (quantity or pricing) then approval should be required for any approvals that were previously granted.

When POs are submitted for approval the approvers and/or their proxies when absent should be notified via email with details of the PO within the email and a link taking the recipient of the email to the PO inside the CaE system.

The approver should be able to approve or reject the PO by clicking a button, if a rejection is made it’s necessary for the approver to enter a rejection reason so that the PO Owner can take necessary steps to rectify the PO before re-submitting.

If a PO is printed (PDF) or emailed from the system it is an absolute must that the following words be displayed in an unambiguous manner: “DRAFT“ This PO is for illustrative purposes it has not been approved by the necessary persons at ACME Goods Ltd, any bills received based on this PO will not be paid.”

The CaE Solution:

Depending on the capabilities of your CaE system you may need to just configure these options or develop them using a workflow engine or build a fully scripted solution. Irrespective the PO will have to undergo the following stages to meet the requirements.

1. Draft:
At this stage the PO is being composed, it has no PO number and will display available Budget balance as per the department(s) on the PO. Amendments can be made at will however any printing of the PO will display a message on the PO indicating the fact that it’s a draft PO.

2. Submitted – Pending Approval:
The user/PO owner has clicked the button “Submit for Approval” at the draft stage sending the PO to this stage. On entry into this stage an email will be sent to the PO Approver(s). The PO will remain in this stage until all approvals have been made. The PO is locked for editing. The value of this PO is used to reduce the budget of any relevant departments.

3. Auto Approved:
If the value of the PO is <= (equal to or less than) the approval limit of the PO owner AND DOESN’T exceed the available budget for the departmental, the PO is automatically approved.

Although the PO has been auto-approved the departmental budget owners and the supervisor of the PO owner receive an email from the CaE system informing them of an auto-approved PO.

The PO is assigned a PO number, it becomes locked and cannot be edited at this stage. However, it can still be recalled. The PO can now be email directly from the CaE system or downloaded as a PDF and emailed.

If emailed directly from within the system the PO will enter the Stage “Approved-Sent”, The very act of downloading a copy of the PO for manual emailing will also set the PO to “Approved-Sent”. The relevant fields for the date and time stamp of when the PO was auto-approved is populated by the system.

4. Approved:
After submission for approval, the PO enters this stage (bypassing auto-approval) when the value of the PO is greater than the approval limit of the PO owner AND DOESN’T exceed the available budget for the departmental.

An email alert is sent to the PO owner informing them of the approval.
The PO is assigned a PO number, it becomes locked and cannot be edited at this stage. However, it can still be recalled. The PO can now be email directly from the CaE system or downloaded as a PDF and emailed.

If emailed directly from within the system the PO will enter the Stage “Approved-Sent”, The very act of downloading a copy of the PO for manual emailing will also set the PO to “Approved-Sent”. The relevant fields for the date and time stamp of when the PO was approved and by whom is populated by the system.

5. Rejected:
The PO enters this stage after the PO approver clicks on the “Reject” button. A pop window is opened asking the PO approver to textually enter in or select from a drop down list of pre-defined reasons. After which, an email is sent to the PO Owner.

After rejection the PO is open for amendment and resubmission. In the event that there are subsequent rejections the history of PO rejection reasons is maintained on the PO itself.

The relevant fields for the date and time stamp of when the PO was rejected and by whom is populated by the system.

6. Recalled:
The recall button is available on the PO at various stages in the process, once the button is clicked, the PO enters this stage, no email notifications are sent out. The PO is open for amendment and resubmission.

The relevant fields for the date and time stamp of when the PO was recalled and by whom is populated by the system.

7. Approved – Sent:
The PO enters this stage at the point the PO is either printed from the System or a copy is downloaded. This indicates to the user that a third party outside the company now has a copy of this document and therefore should not be changed in anyway.

8. Cancelled:
The PO can enter this stage on the click of a “Cancel” button that is available at all stages post creation of the PO, on the click of the button a pop up will appear with the message “are you sure you want to cancel, this operation cannot be undone!”. This cancelled stage differs from recall or rejected because once cancelled the PO is effectively forever locked and “archived”.

There are almost an infinite variations on this PO process and that’s without adding the oft requested mass approval and mass rejection.

Please feel us free to drop us a line on the usual channels if there’s something that we may have missed.

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