Purchase Order Process Steps and Procedures Simply Explained

A purchase order (PO) is an official document, created by the buyer, which authorizes a purchase transaction for goods or services from a supplier.

POs play an important role in controlling business purchases. A professional PO process builds robust supplier relationships and provides an audit trail of all transactions.

It is generally assisted by some level of automation that helps speed up the process, improves communication, and minimizes financial risk.

In this blog, we'll break down the basic PO process in detail:

1. Creating the Purchase Requisition (PR)
2. Issuing the PO
3. The supplier approves the PO
4. Purchaser records and files the PO, awaiting delivery
5. Approval and payment

How PO analytics fuel P2P performance

Why do companies use purchase orders?

Let's face it. Businesses of all sizes can benefit from more financial control.

Purchase orders are one way to keep control of costs. Here are 5 key benefits of purchase orders to business:

• They define the exact needs and clear expectations of the supplier
• They formalize the purchase process and allow us to track progress
• They help with budgeting and cash flow
• They are legally binding when accepted by the supplier
• They are a key part of auditing the transactions

The PO process in detail

The PO process is a part of a broader procurement process that includes confirming and specifying the actual need for goods or services before embarking on the purchase. It also includes processing payments and auditing results.

Here's more explanation of the 5 step process:

1. Creating the Purchase Requisition (PR)

A requisitioner creates a document to obtain permission for the purchase to go ahead. It could be amended or added to before approval is received, or even canceled.

2. Issuing the PO

Once the PR has been approved, the PO can be created after prices, delivery, terms, and conditions have been agreed. For large purchases, organizations usually issue a Request for Proposal (RFP) to their preferred suppliers.

Before the order can be issued, some level of financial authority is required to sign off the purchase. The PO is usually then issued electronically to the chosen supplier.

POs generally include the name of the company purchasing the goods or services, the date, PO number, the description and quantity of the goods or services required, price and payment information.

3. The supplier approves the PO

If any details are incorrect or unacceptable, the supplier may request amendments. The supplier then approves the amended PO if necessary, usually via email or using an e-procurement platform.

4. Purchaser records and files the PO, awaiting delivery

After the product has been delivered or the service has been performed, the organization will review the purchase to see if it meets acceptable standards. Goods are signed in on a Goods Received Note. Services are usually similarly signed off when the services have been supplied satisfactorily.

5. Approval and payment

On receipt of the invoice, it is matched to the PO. Provided all is correct, the invoice is paid as per the agreed payment terms.

Best practices in the PO process

There are some best practices in day-to-day or transactional purchasing  (there are more formal processes used in strategic sourcing and contract negotiation - not covered here).

• Ensure that all employees involved in the purchasing process understand the policy, procedures, and approval methods that need to be adhered to.
• Establish an up-to-date panel of preferred suppliers that can provide quality products at acceptable prices and deliver reliable services. This provides the opportunity to compare prices and terms of supply with the minimum delay.
• Regular key suppliers of the same product or service can be engaged under a Master Agreement that defines pricing, escalations, and terms and conditions. Ensure that all product information is current and that complete catalogs are kept. This reduces interactions and eliminates excess paperwork.
• Maintain good relationships with current reliable suppliers so that problems can be solved quickly. Adversarial relationships are counter-productive and create unnecessary stress and cost.
• Where possible, purchasing information should be centralized and made accessible to all users. Use the best technology you can afford to streamline the PO process.

Some problems to watch out for with POs

1. Inflexible Suppliers. Suppliers don’t always offer discounts or offer to pay delivery costs unless they are asked. Most terms and conditions are negotiable.
2. Errors on orders. Errors can be managed if addressed quickly with a supplier. Wrong quantities or sizes or delivery dates can be adjusted and the PO amended accordingly before any activities occur.
3. POs issued, either in writing or verbally, without the requisite financial authority. This happens often and can have consequences for the issuer and for the budget.

Many purchasing problems can be attributed to human error. Issues can usually be resolved fairly easily if your relationship with a supplier is based on clear communication and mutual understanding.

Photo credit: Robert McGoldrick - Flickr.