The Purchase Order Process Explained: A Comprehensive Guide
Purchase orders are among those parts of the business that can sometimes get buried under other tasks. Perfecting the purchase order process can take time and thus is often not prioritized. However, having an efficient purchase order process goes a long way in maintaining AP efficiency. The time taken to rework a purchase order can significantly slow down other production activities, leading to delays.
In this article, we cover what a purchase order process is and the various steps involved in executing a purchase order.
What is a Purchase Order Process?
Before looking at the purchase orders process let us understand what exactly a purchase order is. A purchase order is a document that officially confirms the purchase of goods and services between a buyer and seller. It is created by the buyer to authorize a transaction that may not have been confirmed in writing before. As it is an official document, it is legally binding on both parties.
A purchase goes through several stages between when it is created and it is accepted by the vendor. These stages form a purchase order process.
Purchase Order Process Flow
The purchase order process involves several crucial steps to ensure compliance and efficient processing. Here are the key stages:
- Create a Purchase Order: Initiate the purchase order based on organizational needs.
- Request for Quotation (RFQ): Send out multiple RFQs to potential vendors.
- Vendor Selection: Analyze quotes and select a suitable vendor.
- Contract Negotiation: Negotiate terms and conditions, then issue the purchase order.
- Goods/Services Receipt: Receive the ordered goods or services.
- 3-Way Matching: Validate the invoice against the purchase order and receipt.
- Invoice Authorization and Payment: Approve the invoice and process payment to the vendor.
- Record Keeping: Maintain detailed records for audit and reference.
- Purchase Order Closure: Close the purchase order after successful completion of the transaction.
What Information Needs to be Included in a Purchase Order?
A purchase order is important since it gives a clear set of guidelines and instructions to the vendor. It also provides the buyer with legal proof of the exact details that have been agreed upon. This helps avoid miscommunication.
A purchase order includes every bit of information about the transaction such as:
- Specifications and quantity of the items required
- Contact information
- The price at which goods or services are to be purchased
- Order date
- Delivery timelines and details
- Payment terms and conditions
- A purchase order number for tracking
Why Do Companies Use Purchase Orders
As mentioned earlier, the purchase orders process might be a bit lengthy but it benefits both the seller and buyers in the long run. Here are some of the reasons businesses use purchase orders:
- For vendors, it helps to have a clear understanding of the requirements so that the order can be fulfilled without any scope for miscommunication
- For buyers, it provides official confirmation of all the goods and services so that they can be cross-verified alongside the actual delivery to know if it has been fulfilled as expected.
- Buyers can also use the document in case they need to take legal recourse as the official document can be held up in court as opposed to verbal or unofficial agreements.
- Businesses also benefit by having a clear record of all the purchases so that budgeting and inventory management becomes easier and faster.
The 6 Steps for Creating a Purchase Order
Before any purchase is made, an internal requisition needs to be created and approved before the purchase order can even be created. Once a go-ahead is received at this stage from the relevant teams, then the process of generating a purchase order can begin.
After the requisition is approved the buyer initiates communication with vendors and agrees upon the specifications of the required goods and services, price, and other terms of delivery. A purchase order is then created that mentions all the agreed-upon details.
Confirmation / Approval
As the purchase order process gets under way, the vendor reviews the order to ensure all the details are as discussed. If everything is in place the vendor accepts the order. They may also reject the order if there is any discrepancy, or flag any concerns.
Recording / Filing
Since one of the purposes of following the purchase orders process is to streamline purchases, it is always a good practice for buyers to record or file the purchase order for future references.
Dispatch and Delivery
As the next step of the purchase ordering process, the vendor dispatches the goods or service providers from their end and the buyer verifies whether the quality and specifications are as discussed. This quality check helps to identify any shortcomings so that the vendor can be notified immediately.
This is the final step in the purchase ordering process. Once the buyer is satisfied with the order, the purchase order is sent for closure. The vendor raises an invoice (Creating an invoice from a purchase order is known as a PO flip) that is approved by the buyer’s finance team. After the payment is processed, the order is closed, bringing an end to the purchase order process.
Manual vs Automated Solutions in the Purchase Orders Process
A manual purchase ordering process involves the use of legacy systems/tools such as emails, physical documents, and spreadsheets. It is typically a long process and requires constant human input. Some if the cons of manual purchase orders process are:
- Slower output since all the data needs to be entered and validated manually.
- The possibility of human error, when different systems are involved in a single purchase order.
- Manual data entry effort requires a constant need for manpower at every step.
- Verifying information takes longer with manual records.
Workflow automation can optimize all if not some of the steps involved in the purchase orders process. A few benefits of an automated purchase order process are as follows:
- Manual input can be avoided at each step. For example, as the inventory reaches below a certain level, procurement requests can automatically be generated by a system and sent to a list of vendors after adequate approval.
- Fewer manual inputs mean fewer chances of manual errors in the purchase order.
- Cloud-based servers make purchase order processes easy to monitor so that approvals can be given from anywhere without having to be in an office.
- The entire process becomes faster and more efficient.
- Besides making things faster, automation helps protect against cheating and fraud during purchase order processes as the system cross-references invoices and requests against original purchase orders.
Accounting automation helps to streamline purchase order processes so that all the information is always available and easy to access without the need for manually going through multiple books of record. Ultimately, this ease of transferring and verifying data leads to better trust and relationship-building between buyers and vendors.
Purchase Order Process Flow
As we can see, the entire purchase orders process can be broken down into many smaller steps that lead up to each other. A purchase order process flow tracks the entire lifecycle of this process from requisition to delivery. If the purchase order flow is discussed and consolidated before POs are sent out, the process becomes much faster.
Here are the typical steps involved in a purchase order process flow:
- Purchase order creation is the first step of purchase order purchases after requisition
- Inviting quotations from multiple vendors
- Selection of the most appropriate vendor
- Initiating communication and sending the finalized purchase order
- Dispatch and receipt of items
- Quality check
- Raising of an invoice and payment processing
- Recording or filing away the order for future references
- Closure of the purchase order to wind up the purchase orders process
Purchase orders make the purchasing process simpler and easier to track for both buyers and vendors. The purchase order procedure involves multiple steps that need to be followed in order to ensure a smooth delivery. Any mismatch in data between the requisition raising to the delivery stage can delay the purchase order procedure to a large extent. In case of discrepancies, records have to be manually checked for every step of the purchase order procedure.
Automation service providers such as Nanonets help classify documents, capture data from existing documents, manage document workflows, manage documents and reduce turnaround times for typical purchase order processes. The risk of errors, information mismatches, and miscommunication is greatly reduced as manual input is reduced to a minimum throughout the purchase order procedure.
While purchase order processes may seem long, they are vital for a business’ supply chain management. Automation of purchase order processes can make purchasing inventory efficient and quick.