Midsize business

Order Management Process: Key Steps & Flow

When a customer visits your store or website, they select an item, they purchase it, and your staff updates inventory records to reflect that purchase. At its most basic level, this is the order management (OM) process.

Traditionally, order management has been viewed as an internal process necessary for conducting business—but today’s customers expect to be in the loop. IBM research suggests that up to 72% of consumers make purchasing decisions based on the availability of expedited delivery, while 66% will forego future trips to a store if their desired item cannot be located at a nearby location.

Customers want to know what is in stock and where. They expect an intuitive user experience when they visit your website and want multiple delivery options. Once an order is made, customers expect a precise delivery window and regular status updates.

With demands for more personalized product experiences delivered quickly, order management can no longer be viewed as a transactional process. It must be viewed as a value-added process and a key business differentiator.

Before discussing how successful companies are reimagining order management, let’s first dissect the basics of order management and how it fits into your operations.

What is order management?

Order management is the process of organizing the way a company receives and fulfills its customer orders. From the moment a customer makes a purchase to the time they receive their product, order management coordinates the entire process to make it as efficient as possible.

While order management is different for every company, it typically involves order and information collection, inventory management, payment processing, and fulfillment.

Order management vs. order fulfillment

One important part of order management is order fulfillment. While the two terms are often used interchangeably, order management encompasses a broader scope. Order management considers overall business resources, seasonal trends, and sales order data.

Order management can also be segmented further, depending on the company’s unique needs (i.e., ecommerce order management, multi-channel order management).

On the other hand, order fulfillment deals specifically with fulfilling customer orders. It also handles receiving, packaging, and fulfilling orders but is more focused on processes in warehouses or distribution centers.

The three steps of order management

The three core steps of order management are placement, fulfillment, and inventory management. But with the omnichannel expectations of consumers, now more than ever, order management is far more nuanced.

  1. Order Placement

Business-to-customer (B2C) sales are most often carried out with an online cart or physical cart at a store location. In addition to online and physical sales, business-to-business (B2B) sales may have more purchase options, including fax, phone, email, or electronic data interchange (EDI).

  1. Order Fulfillment 

Fulfillment is the most important part of the process, as it ensures the order is delivered to the end customer. A fulfillment team or mechanism verifies that the appropriate items are available, determines which stock location to fill the order from, and how to ship it to the end customer. A warehouse worker, or in some cases a robot, will pick, pack, and dispatch the order for delivery. An internal or external logistics team will carry out the delivery to the customer.

  1. Inventory Management

Inventory management is the background process that makes order fulfillment possible. Not only does inventory management entail tracking all parts and orders from one end of the supply chain to the other, but it also includes analysis of historical trends and demand forecasting to achieve optimal inventory levels at each warehouse or depot location. With a modern inventory management system, businesses can track orders and items byproduct name, SKU number, UPC number, description, size and dimensions, weight and price.

How to set up your order management process up

With stakeholders ranging from raw materials suppliers and logistics partners to end customers, order management is a complicated process with plenty of opportunities for things to get lost, costs to balloon and cash to flow out instead of in.

To avoid mishaps and retain customers while remaining profitable, companies need to manage order processes more efficiently and cut costs by:

Two means of achieving these goals include using entity relationship diagrams and having a firm understanding of your order-to-cash cycle.

Entity-relationship diagrams

From order placement to delivery, numerous stakeholders must coordinate and information must be collected at each step of the process. This information is stored in a database that enables your team to take customer orders, fill the order with the correct items, dispatch packages to logistics, and deliver it to the proper person at the proper address. That’s a lot of information to get right!

To help get this process right, companies might use entity relationship diagrams (ERDs). ERD’s are graphical representations used to show entity relationships and data attributes of real-world processes. They can be a useful communication tool to explain complex order management processes.

Below is an example of a basic conceptual ERD for an order management process. It shows customer attributes such as name, address, number, and the relationship among entities. More advanced ERDs can show business constraints like which products can exist on an order and whether or not one order can be linked to multiple customers.

If you build your own order management database, you will most likely use an ERD to help developers understand how it should be constructed.

Order to cash process

The order to cash (O2C) process goes hand-in-hand with your order process with the addition of invoicing and billing. A typical order to cash process is represented in the flowchart below:

As is evident in the diagram, companies are often required to make a large upfront investment for each order before they receive payment. When a company is taking on new accounts or manages longer buying cycles, this can become problematic. To avoid defaulting on day-to-day business expenses, consider the following order-to-cash best practices:

Optimize your product mix: Having the right inventory in the right location will expedite your O2C cycle.

Credit management: Performing a credit check or approval at the time of order helps to ensure you will be paid in full upon delivery.

Integrate & automate the order process: A digitally enabled order management system reduces the chance of human error and eliminates the need for paper-based hand-offs.

Make payment easy: Payment should be done through a single point of contact to avoid confusion. Order management systems can automatically generate invoices, send payment reminders, and attach PO numbers to emails.

Five key metrics for order management

There are several factors that lead to a successful customer order. To better understand the process and determine how your order management is performing, here are the important key metrics to track:

Rate of return

The rate of return (or return rate) measures the frequency at which customers send their orders back to your company. Common causes for returns are defective products, poor quality, delayed delivery, or the like.

The rate of return is a good indication of how satisfied customers are with your product and is usually expressed as a percentage of the total number of orders within a given time period. The formula to calculate your return rate is:

Rate of returns = (Total items returned / Total items sold) x 100

Order lead time

Order lead time is how long it takes a company to process an order, from receiving the customer’s order to delivery time. Depending on the company, the order lead time can involve manufacturing a product, immediately shipping a ready-made product, or delivering the product on a requested date.

The formula to calculate order lead time is:

Order lead time = Delivery date – Order entry date

Purchasing frequency

Purchasing frequency looks at the average number of orders a single customer places within a given time period. It accounts for how often a customer purchases from a company and shows the percentage of return customers.

Purchasing frequency helps indicate a company’s overall customer engagement and loyalty. The formula to calculate purchasing frequency is:

Purchase frequency = Total number of orders / Total unique customers

Order accuracy

Order accuracy (or fulfillment accuracy) is the rate at which a company successfully completes its customer orders. Factors that can prevent order accuracy include picking the wrong item, packing the wrong quantity, shipping a defective product, and the like.

Order accuracy is one of the most important metrics in order management, as it can prevent unnecessary costs and customer churn. The formula for order accuracy is:

Order accuracy = (Total number of orders accurately fulfilled / Total number of orders fulfilled) * 100

On-time delivery

On-time delivery rates measure a company’s ability to fulfill customer orders by the expected delivery date. Whether the customer or company selects the delivery date, orders that consistently arrive on time are a part of efficient order management.

The formula for on-time delivery is:

On-time delivery rate = Orders shipped on time / Total number of orders shipped

Omnichannel order management

In addition to providing multiple order mediums, companies are under greater pressure to provide diverse delivery options. Customers want the options to purchase online with home delivery, buy in-store with home delivery, and buy online (click) and collect in-store—with 68% of U.S. consumers already using click and collect order fulfillment. Unfortunately for retailers, each new channel adds costs and complexity to the order management process.

Some companies find value in on-demand fulfillment arrangements to rein in supply chain costs and complexity.

On-demand order fulfillment enables a retailer to leave its inventory with the manufacturer, wholesaler, or third-party partner. When an order comes in, it is transferred to the fulfillment center, which performs picking, packing, and delivery duties on behalf of the retailer. The most prominent example is Amazon, with thousands of retailers entrusting the tech giant to fulfill and ship orders from its distribution centers around the country. This saves the business making the sale much of the upfront costs involved in the order process, including storing inventory, employing a warehouse team and logistics delivery costs.

While this method can help businesses stay more liquid and compress the O2C cycle, there may also be drawbacks. By outsourcing fulfillment to a third party, you relinquish some control of your supply chain and, with it, control of the speed, quality, and cost of fulfillment—not to mention the ability to troubleshoot the customer experience.

How are growing businesses overcoming fulfillment challenges?

There is a trend of industry leaders bringing order processes back in-house to extend visibility and re-exert control over their supply chains.

General Motors, for example, which outsourced its global logistics management 15-20 years ago, found that without direct control of its logistics network, its supply chain was fragmented. They could not effectively localize operations for cost and efficiency, nor could they deploy advanced planning made possible with big data and artificial intelligence.

In 2014, under their transformation project GLIDE (Global Logistics Integrated Design and Execution), GM began an effort to bring all order management stakeholders back under the same management umbrella. This included order fulfillment, supply chain sourcing, and logistics. They did so by opting out of logistics contracts, absorbing partners, and upgrading systems at various plants.

At the time, GM’s Executive Director of Global Purchasing and Supply Chain Organisation, Jim Bovenzi said the goal was to “have visibility from the moment a part comes off the supplier’s assembly line, all the way through delivering a car to a dealer.”

Note that GM’s local logistics partners still move parts from place to place. But with the engineering of supply chain networks in-house, GM has transparency over the order management process to standardize efficient processes, coordinate hand-overs, make informed sourcing decisions, and leverage data analytics to drive down operational costs. The core of GM’s strategy was breaking down operational and data silos.

Like GM, International Paper, the one of the world’s largest paper and forest product suppliers, brought greater efficiency to their order management process by having previously isolated stakeholders collaborate more closely.

With the customer relationship management team and the order fulfillment team working together, the company created a new set of fulfillment rules based on sales, profitability, and customer requirements. By integrating customer relationship insights into order management, the fulfillment team was able to better fill orders by cut-off dates, meet delivery objectives, and make informed decisions about when orders should be shorted and when safety stocks should be used.

The benefits of strong order management

Order management is the central process of the supply chain that pulls materials into production and sees value-added products and services delivered to the end customer. Tightening up your order management process can help your business reduce costs and boost efficiency in almost every operational area.

By leveraging data for better sourcing and demand forecasting, you can optimize inventory levels freeing up cash flow. By automating processes you can reduce human errors and improve the speed and accuracy of hand-offs. By facilitating the flow of information between teams and systems, managers can gain visibility to avoid bottlenecks, pinpoint inefficiencies and wasted costs, and troubleshoot fulfillment.

All of this amounts to more cost-efficient operations for your company and a higher value service delivered to your customers, both of which will bring returns to your company for years to come.

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