Purchase Order Process | Explanation of the purchase order procedure

Purchase orders are among those parts of the business that can sometimes get buried under other tasks. Refining the purchase order process can take time and is therefore often not prioritized. However, having an efficient purchase order process goes a long way in keeping AP efficient. The time it takes to rework a purchase order can significantly slow down other production activities, causing 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 we look at the purchase order process, let’s 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 a seller. It is created by the buyer to authorize a transaction that may not have been confirmed in writing before. Since it is an official document, it is legally binding on both parties.

A purchase goes through several stages from the moment it is created until the seller accepts it. These stages form a purchase order process.

What information should be included in a purchase order?

A purchase order is important as it provides a clear set of guidelines and instructions for the supplier. It also provides the buyer with legal proof of the exact details that have been agreed. This helps to avoid communication problems.

A purchase order includes all information about the transaction, such as:

1. Specifications and quantity of required items
2. contact information
3. The price at which the goods or services are to be purchased.
4. order date
5. Delivery times and details
6. Terms and conditions of payment
7. A purchase order number for tracking.

Why do companies use purchase orders?

As mentioned above, the purchase order process can be a bit lengthy, but it benefits both the seller and the buyers in the long run. Here are some of the reasons companies use purchase orders:

• For suppliers, it is helpful 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 goods and services so that they can be checked alongside the actual delivery to see if it was fulfilled as expected.
• Buyers can also use the document in case they need legal recourse, as the official document can be retained in court instead of verbal or unofficial agreements.
• Businesses also benefit from having a clear record of all purchases to make budgeting and inventory management easier and faster.

The 6 steps to create a purchase order

Requisition

Before any purchase can be made, an internal requisition must be created and approved before the purchase order can be created. Once the go-ahead is received at this stage from the relevant teams, the process of generating a purchase order can begin.

Creation

After the request is approved, the buyer initiates communication with suppliers and agrees on specifications for required goods and services, price, and other delivery terms. A purchase order is then created mentioning all the agreed details.

Confirmation / Approval

As the purchase order process gets underway, the vendor reviews the order to ensure that all details have been discussed. If everything is in place, the seller accepts the order. They can also reject the order if there are any discrepancies or point out any concerns.

Recording / Archiving

Since one of the purposes of following the purchase order process is to expedite purchases, it is always a good practice for buyers to record or file the purchase order for future reference.

Dispatch and Delivery

As the next step in the purchase order process, the seller ships the goods or service providers from their end, and the buyer verifies whether the quality and specifications are as discussed. This quality control helps to identify any deficiencies so that the supplier can be notified immediately.

Closing

This is the final step in the purchase order process. Once the buyer is satisfied with the order, the purchase order is submitted for closing. The seller issues an invoice that is approved by the buyer’s finance team. Once the payment is processed, the order is closed, ending the purchase order process.

Manual vs. Automated Solutions in the Purchase Order Process

A manual purchase order process involves the use of legacy systems/tools such as emails, physical documents, and spreadsheets. It is usually a lengthy process and requires constant human involvement. Some if cons of the manual purchase order process are:

• Slower output as all data has to be manually entered and validated.
• The possibility of human error, when different systems are involved in a single purchase order.
• The manual data entry effort requires a constant need for manpower at every step.
• Verification of information takes more time with manual registrations.

Workflow automation can streamline all, if not some of the steps involved in the purchase order process. Some benefits of an automated purchase order process are as follows:

• Manual input can be avoided at every step. For example, as inventory falls below a certain level, a system can automatically generate procurement requisitions and send them to a vendor list after appropriate approval.
• Fewer manual entries mean less chance of manual purchase order errors.
• Cloud-based servers make purchase order processes easy to monitor so approvals can be given from anywhere without ever having to be in an office.
• The whole process becomes faster and more efficient.
• In addition to speeding things up, automation helps protect against cheating and fraud during purchase order processes, as the system matches invoices and requisitions against the original purchase orders.

Accounting automation helps streamline purchase order processes so all information is always available and easy to access without the need to manually go through multiple ledgers. Ultimately, this ease of data transfer and verification leads to greater trust and relationship building between buyers and suppliers.

Purchase Order Process Flow

As we can see, the entire purchase order process can be broken down into many smaller steps that connect to each other. A purchase order process flow tracks the entire life cycle of this process from request to delivery. If the purchase order flow is analyzed and consolidated before the purchase orders are submitted, the process becomes much faster.

These are the typical steps involved in a purchase order process flow:

1. PO creation is the first step of PO purchases after requisition
2. Request quotes from multiple vendors
3. Selection of the most suitable supplier
4. Initiate communication and send completed purchase order
5. Sending and receiving articles.
6. QA
7. Generation of an invoice and processing of payment.
8. Record or archive the order for future reference
9. Purchase Order Closing to close the purchase order process

Conclusion

Purchase orders make the purchasing process simpler and easier to track for both buyers and suppliers. The purchase order procedure involves several steps that must be followed to ensure a smooth delivery. Any discrepancy in data between the request going up to the delivery stage can greatly delay the purchase order process. In case of discrepancies, the records must be manually verified for each 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 response times for typical purchase order processes. The risk of errors, information discrepancies, and miscommunication is greatly reduced as manual entry is kept to a minimum throughout the purchase order procedure.

While purchase order processes may seem lengthy, they are vital to a company’s supply chain management. And automating purchase order processes can make purchasing inventory efficient and fast.