Purchase order processes play a critical role in making your business succeed. Without an efficient and accurate process for managing POs, time and resources are wasted and unnecessary mistakes become common.
One challenge businesses in every sector face is the need to create a consistent, reliable process for generating, approving, and tracking purchase orders. Managers are often looking for ways to add accountability and standardization to their PO workflows, in order to gain control of (and insight into) their purchasing decisions.
If this sounds familiar, then this article is for you. Below, we’ll explore the purchase order process from beginning to end by defining the term, breaking it down into its basic components, and providing some best practices for POs, regardless of the size or industry of your business.
What is a purchase order process?
Purchase orders (PO) help businesses understand and account for all the goods or services that they have requested. Managers can use POs to keep tabs on additional, relevant information such as quantity, delivery instructions, cost, terms, and date required.
The purchase order process consists of all the steps businesses take to create, approve, validate, manage, and track POs, from the moment a need is identified up to the point of delivery or sale.
While the PO process for your company may be unique in some ways, there are 7 elements of the workflow that are common to most, if not all, purchase order processes:
7 steps of the purchase order process
1. Order creation
The first step in the PO process is to create a purchase request. At this point, you’ll need to know what is being purchased, the priority level of the requisition, your budget, when the product or service is needed, who needs to approve the order, and the suppliers.
After the order has been created, the next step in the process is to get approval of the requisition. In some cases, this approval may be verbal or sent as an email. In other companies, more formal actions, such as completing paperwork, may be required.
The level of approvals depends on the purchase amount, company policies or guidelines, and the requirements of the supplier. Approvals may also require verification of budget or documentation, such as product specs or detailed statements of work (SOW). After approval, the requisition turns into a PO.
After the requisition is approved, the PO is sent to the selected vendors. The vendors then submit bids based on the POs. The bids are approved based on price, quality, support, service, schedule, and other factors relevant to your business.
4. Binding contract
After the bid is accepted, the company and the vendor must agree to a contract. The contract typically includes terms and conditions relevant to the purchase, such as what support comes with the item being purchased or how to handle any disputes.
5. Goods delivery
The supplier will then produce and deliver the items being purchased based on the outlined schedule and shipping requirements. Your company will verify quality and match the goods received against the expected goods. From there, you can notify the supplier if the goods don’t meet your requirements. Typically, the supplier will send the purchasing company an invoice that outlines the price and payment terms.
6. Three-way match
After the goods received are approved, the purchasing company will then match the purchase order with the PO and invoice from the supplier. Companies should check to ensure that all charges are accurate.
After the three-way match is approved, the purchase order is closed out.
Why is it important to implement a purchase order process?
A consistent, repeatable PO process provides a range of benefits, including enhanced control, visibility, and efficiency.
Consistent PO processes help your finance department accurately account for all relevant purchase expenses and maintain forecasts and budgets.
An established PO process allows you to manage many orders at once and provides visibility into related activities, such as shipping and receiving, inventory control, and production planning. In addition, a healthy purchase order process should allow for transparency at every touchpoint along the way.
A robust PO process will create a paper trail for cash flows and add accountability for the cost of goods along the way. Banks, auditors, and legal departments will see this as an asset for your company.
Creating a legal contract between your company and your suppliers during the PO process helps define responsibilities and resolve disputes. Terms and conditions are clearly stated, and details such as warranties, guaranties, or other policies are set down in black and white.
Best practices for optimizing your PO process
Businesses evolve, and their processes need to be retooled from time to time to remain efficient and accurate. PO processes are no exception.
The immediate risks of not maintaining your PO process include errors, waste, overspending, under budgeting, and, ultimately, high burn rates. That’s to say nothing of the stress and disorder an outdated PO process can cause you or your team. In the long term, an inefficient or inaccurate purchase order process can also cause problems in your relationships with suppliers and your ability to acquire goods or services on pace with your company’s needs.
Managers preparing to improve their PO processes should consider the following best practices:
- Review and analyze your current purchase order process. Every process in every business should be continuously reviewed and analyzed for areas of improvement. Make sure to map each step out, identify and resolve any bottlenecks, identify the number of approvals required in the process, and account for the different factors that might be impacting your budgeting process. You should also review key stakeholders in your process — internal players and long-term vendors — and how technology can be integrated to help orchestrate this process.
Establish goal-oriented results. Outline and detail goals surrounding your purchase order process. Consider metrics revolving around speed of deliveries, reliable vendors, or reduced spending.
Create written guidelines accessible to everyone in the PO process. A written process is a great way to communicate best practices and standardized procedures to an entire company. These rules and policies should include the necessary information required for each step of the process, number of approvals needed, and who the internal reviewers are.
Develop a list of preferred vendors. This list will help your team quickly pick from a go-to list of vendors your company has built longstanding and trusted relationships with and negotiate the best deals.
Create budget allowances and expense groups. These budgetary restrictions help streamline the process by automatically implementing purchase guidelines. For example, if a company has a monthly budget of $1000 allocated to office supplies, the finance team knows how much they have to spend for necessary resources.
Assign an internal stakeholder to manage the process. Having someone oversee this process helps improve company-wide adoption and provides a point of contact to answer questions that might come up when implementing a new procedure.
Leverage technology. Integrating a purchase management system into your company’s PO process is an easy way to standardize procedures and replace repetition with automation.
Benefits of automating the purchase order process
PO tracking can be managed through emails and spreadsheets or by using dedicated software. Using software to manage and simplify your PO process is an easy way to save time, money, and stress. Key benefits of automating your purchase order process include:
Reduced repetition. A PO management tool can free up time by automating some tasks, allowing you to focus on other priorities.
Increased transparency. Creating a standardized PO process and defining information requirements, such as quantity requested or approval signatures, will add accountability and clarity to your purchase orders.
More control: Purchase management software helps you control expenses and improve budgeting, as well as provide a complete audit trail. It also lets financial stakeholders easily view or share information.
Centralized & visualized data: Data is consolidated into a single source of truth to make it faster and easier to manage POs. Since data is centralized, you’ll also have the option to run reports and create visualizations to help you keep control of many purchase orders at once.
Take control of your PO process
Purchase Orders (PO) help businesses understand and account for all the goods or services that they have requested.