When facing challenges in tracking orders, missing details, or experiencing delays, it's time to review and establish a well-structured purchase order process.
Purchase orders are the backbone of any organized procurement system, helping companies track spending, manage supplier relationships, and ensure everything runs smoothly from order to delivery.
In this guide, we’ll break down the purchaser order process, explore its key steps, and share valuable tips on how to make it work better for your business.
What is a Purchase Order?
A purchase order (PO) is a formal document issued by a buyer to a seller, outlining the details of a purchase transaction. It typically includes information such as the type and quantity of goods or services, pricing, delivery timelines, and payment terms. Whether you’re ordering office supplies or outsourcing services, the PO acts as a legally binding contract between both parties, ensuring the seller delivers the specified products under the agreed conditions.
In the procurement process, the PO acts as a key tool for managing and tracking purchases, helping businesses manage their budgets and keep inventory in check. It also provides a reference point for resolving disputes or discrepancies that may arise during the transaction.
Types of POs
Not all purchase orders are the same. Depending on what you’re buying and how often, you might use one of several different types of POs. Here’s a quick rundown:
- Standard Purchase Order (SPO): The most common type, used for one-time purchases with specific details on the quantity, price, and delivery date. For example, an office might issue an SPO to buy a new batch of computers.
- Blanket Purchase Order (BPO): Used when a buyer agrees to purchase a set amount of goods or services over a period, often at pre-negotiated prices. This type of PO is common in long-term supplier relationships, such as when a company orders office supplies regularly from the same vendor.
- Recurring Purchase Order (RPO): Similar to a blanket PO but used for recurring orders of the same items. For instance, a manufacturing firm might use an RPO for monthly deliveries of raw materials.
- Planned Purchase Order (PPO): Issued when the buyer knows the details of future needs but not the exact delivery schedule. The PPO is later followed by a release that specifies the delivery dates. An example could be a retailer planning for seasonal stock replenishment.
Purchase Order Process: Definition and Importance
The purchase order process refers to the series of steps a business follows to issue, approve, and manage purchase orders. A structured PO process not only helps organizations stay on budget but also ensures that everything they buy is properly authorized and accounted for.
A well-defined PO process also helps businesses avoid overordering or underordering and fosters strong supplier relationships by providing clear expectations.
Steps of the Purchase Order Process
While each organization has unique needs, there is a standard workflow that forms the basis for an effective purchase process.
Step 1. Create a PR
The first step is identifying the purchasing need, which kicks off the creation of a purchase requisition (PR).
A PR is an internal document that includes the items needed, quantity, and preferred vendors. It serves as the first formal step in the procurement process, signaling the need for a purchase.
Step 2. Sent a PR for Approval
This step involves obtaining the necessary approvals from department heads or management to ensure the purchase is justified and aligns with the company's budget and procurement policies.
The approval process varies depending on the organization’s structure, but it typically involves several layers of review to prevent unauthorized or unnecessary spending.
Step 3. Create a PO and Approve
After the PR is approved, the next step is creating the actual purchase order. The PO is generated based on the information provided in the PR and should also go through an approval process. This step ensures that the details of the purchase are accurate.
The approval of the PO often involves verifying the supplier details, pricing, and terms to ensure they are correct before proceeding.
Step 4. Send Your PO to the Vendor
Once the PO is approved, it is sent to the vendor to confirm the order. This can be done through email more commonly these days, through an eProcurement platform.
The vendor reviews the PO and either accepts it or negotiates any necessary changes. Upon acceptance, the PO becomes a legally binding agreement, committing the buyer and the seller to the terms outlined.
Step 5. Goods Receipt
When the ordered goods or services are delivered, the receiving department checks them against the PO to ensure that everything matches the order in terms of quantity, quality, and specifications.
This step is critical for accurate inventory management and ensuring that the business only pays for what it has received.
Step 6. Three-way Matching
Three-way matching is a crucial step in the purchase order process that involves comparing the purchase order, the goods receipt, and the supplier’s invoice to ensure that all details match. This process helps to identify discrepancies and prevent payment errors, such as paying for goods that were not received or were delivered incorrectly.
Ensuring consistency across these documents is key to maintaining financial accuracy and preventing fraud.
Step 7. PO Closure & Record Keeping
Once the three-way match is completed and the invoice is approved for payment, the PO is closed. This means no further action is required, and the transaction is considered complete.
Proper record-keeping is essential at this stage, as it provides a clear audit trail and ensures that all documentation is available for future reference, compliance checks, or financial reporting.
Additional Steps in the PO Process: Strategic Sourcing
In certain procurement scenarios, strategic sourcing may be necessary. It involves additional steps that maximize savings through targeted negotiations, especially for high-value or complex purchases. Here's a closer look:
Create an RFQ
Once the purchase requisition is approved, a procurement officer should issue a Request for Quotation (RFQ).
An RFQ is a document sent to multiple vendors inviting them to submit a price quote for the required goods or services. The RFQ outlines the specifications, quantities, and terms of the purchase, allowing vendors to provide their best offers.
Compare Offers
Once the quotes are received from various vendors, the next step is to compare them. This step isn’t just about finding the lowest price; it’s about evaluating the total value, including quality, delivery times, and supplier reliability.
The goal is to identify the deal that provides the best value for the company while meeting all the requirements.
Contract Negotiation
After selecting the preferred vendor, the negotiation process begins. It involves finalizing the terms, including price, delivery schedules, payment terms, and any warranties or guarantees.
Effective negotiation ensures the company secures favorable terms while maintaining strong vendor relationships.
Best Practices for a Flawless PO Process
To keep your PO process running smoothly, it’s essential to follow the leading practices. These tips will help you avoid common pitfalls and keep things efficient.
Build a Structured and Formalized Purchasing Process
First off, having a structured process in place is non-negotiable. This means clearly defining each step, from purchase request to record-keeping, and making sure everyone involved knows their role.
A properly organized buying process reduces confusion, ensures consistency across all purchases, and provides a clear path for resolving any issues that may arise.
Create Approval Workflows
Streamlining your approval workflows is another best practice. By establishing clear approval paths for various scenarios, you speed up the process while maintaining control over spending. It also helps in preventing bottlenecks and minimizes maverick purchases across the organization.
Establish a Preferred Vendor Network
Building a network of suppliers you trust and rely on saves your purchasing department a lot of effort. By working with a select group of reliable vendors, businesses benefit from better pricing, consistent quality, and faster turnaround times.
Establishing strong relationships with preferred suppliers also simplifies the negotiation process and ensures the company can quickly source goods and services.
Use Strategic Sourcing Whenever Possible
Take advantage of strategic sourcing, especially for complex purchases. In addition to cost savings, RFQs and eAuctions help foster long-term relationships with suppliers who can support the growth of your business.
This approach adds an extra layer of value to your purchasing process and helps mitigate risks associated with supply chain disruptions.
Use Procurement Software to Automate
Automation is a game-changer in the PO process. Purchase order management systems take a lot of the manual work out of the process, from generating PRs and converting them to POs, to tracking approvals and deliveries. As a result, digital tools help reduce errors, speed up purchase order processing, and provide greater visibility into procurement activities.
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Benefits of Purchase Order Automation
Automation isn’t just a trend — it’s a necessity for modern procurement operations. Market studies show that about 90% of procurement leaders will prioritize digital transformation within the next three years. Here’s why:
- Increased Efficiency: The latest APQC study highlights that manual PO processing can cost organizations $506.52 per purchase order. Automation transforms this time-consuming and quite costly workflow into an efficient operation. It reduces the time needed to complete routine tasks like approvals and payment processing. This shift frees team members to focus on strategic initiatives.
- Reduced Errors: Human errors are inevitable, especially when processing multiple documents in a single PO cycle, including quotes, packing slips, invoices, and bills. Automation minimizes the risk of these errors by ensuring that all data is accurately captured and consistently processed throughout the entire process.
- Cost Savings: With faster and error-free processes come cost savings. Additionally, some procurement systems offer eSourcing solutions like RFQs or eAuctions. These tools help companies secure the best deals in hours, not days, leading to reduced expenses.
- Better Visibility: Automation provides real-time visibility into the acquisition process, enabling businesses to track spending, identify trends, and make informed, data-driven decisions. This transparency helps in better budget management and uncovering opportunities for cost optimization.
- Improved Reporting: Purchasing tools streamline data collection and analysis, simplifying the generation of accurate and timely reports. This enables better monitoring of key performance indicators (KPIs), helping organizations refine their procurement strategies continuously.
Facilitate Your PO Process with Team Procure
Team Procure is a cloud-based platform that automates the procure-to-pay process, from purchase requisitions to order fulfillment and reporting.
With Team Procure, your organization gains complete control over every aspect of purchasing. Our system provides:
- Tailored PR forms to meet the internal purchasing process by adding extra fields. For complex PRs, easily import products in bulk rather than adding items manually
- Create custom approval templates for projects, departments, order amounts, and more.
- Generate purchase orders from approved PRs with a single click. Specify projects and budgets per line item for improved category management and spending analysis.
- Schedule and manage the bidding process with multiple suppliers using our RFQ solution. Track bids in real time, compare offers using the built-in matrix, and convert winning bids to POs.
Curious to learn more? Schedule a personalized demo to see how our system transforms the buying process, streamlines operations, and drives better business outcomes.
