Renewed focus on purchase order management leads to tech vs. service dilemma

Pandemic-induced demand for containerized goods in 2021 and early 2022 brought back in vogue a software category — purchase order (PO) management — that had long been considered by shippers to be important, although somewhat dusty amid shinier new objects on the market. 

PO management is not a new concept, having first emerged in the 1990s. But extended lead times on products sourced abroad during the pandemic reinvigorated the idea that importers needed to better manage the connection between an order to an overseas supplier and the logistics legs once products had been produced. 

"Cargo owners needed to be more particular about which containers they need," said Grant Sernick, director of sales at Toronto-based logistics management software vendor 3rdwave. "It isn't sufficient to assume that goods were flowing and would arrive in time. They need to be prescriptive. But most companies do not have visibility into what product is in which container. For the most part, once a PO is issued, visibility is lost until it is received at a warehouse or distribution center." 

Sernick said PO management systems solve this issue, but that PO management is a "poorly defined product set and varies wildly between software vendors." He suggested shippers that recognize supply and demand shocks are likely to more frequently "require a new class of software that understands the entire inbound supply chain, organized around product or SKU," and not containers. 

Graham Parker, CEO of Singapore-based logistics technology provider Gravity Supply Chain Solutions, said the pandemic "showed the divorce between the suppliers and the buyers when they needed 100% visibility inside, and especially at the first mile." 

"They had an accurate understanding of what they had ordered but no idea where it was in the manufacturing cycle, at origin ports or en route," Parker said. "They could see a container but were scrambling to understand what was inside these containers, not only at the order level but at the SKU, or item, style or part level. When they needed to be agile, they were anything but." 

Impact on margin 

Parker said shippers lacking the visibility that PO management can enable are still paying the price in terms of margin compression.  

"The ever-increasing freight rates [from 2020 through the first half of 2022] meant to try and meet the demand they were paying over the odds," he said. "Then the inevitable downturn in demand meant they had tremendous stock volumes all over the place and no idea where it was and how best to manage the flow, or whether to slow it down or cancel. The burden of managing product flows, paying suppliers and managing cash flow was greater than ever, yet the various business departments had no end-to-end collaboration. So, essentially, they were blind." 

Bryn Heimbeck, CEO of Seattle-based logistics management software vendor Trade Tech, said the importance of PO management software has risen in tandem with stronger linkages between finance and supply chain. 

"Twenty or 30 years ago, [chief financial officers] were not as closely tied to supply chains," he said. "The focus was on point of sale and restocking store shelves. Inventory carrying costs were not a key financial factor in the market's understanding at the time. Now, we are looking at full replenishment models, incorporated into just-in-time, and the CFO has a major focus on the supply chain and is working with supply chain executives, who themselves have a far greater breadth of responsibility." 

No one size fits all 

But even as international transit times have now normalized, the scars of the pandemic have yet to wane. Beyond shippers focusing once again on PO management is a secondary dilemma: Do they use a PO management system from a third-party logistics provider (3PL), or do they use one from a software vendor? 

"It depends," Rob Garrison, CEO of PO management software vendor Mercado, said at the TPMTech conference in Long Beach in late February. "There are benefits to both models." 

Garrison said the pure technology approach provides neutrality in terms of which providers a shipper uses. But it can also depend on the person within the importer organization that wants to manage purchase orders. 

"A typical product is manufactured for three months, shipped for one month and then sold," Garrison said. "Depending on where you're at in the customer continuum on that journey, what's going to be most important to you? For some, they want to optimize for logistics, and so that combination of service and technology is exactly what they're looking for. But if I'm on the purchasing side of the organization, and that provider doesn't have a purchasing solution, maybe it's not the best option." 

Not a 'throw-in' service 

Sernick said PO management "isn't a 'throw-in' service." 

"So shippers need to ask themselves how wedded they are to their 3PL," he said. "PO management is really hard to do well. Most 3PLs don't have their own PO management software. They have bought a third-party software application and what cargo owners will find is that they cannot affect any meaningful changes with that third-party software." 

Heimbeck said finance will play a determining role in whether a beneficial cargo owner (BCO) goes with a 3PL's PO management solution. 

"The real question is whether a BCO has, or wants to have, the staff and logistics expertise to manage the supply chain overseas," he said. "Decisions on setting up, controlling and expediting the origin supply chain process is still grounded in local staff. Previously, BCOs relied primarily on their 3PLs' systems, but this is changing with the attention to information flow demanded by the CFO and others within the BCO. And this trend will probably continue." 

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.