Understanding The Purchase Order Process: A Quick Walkthrough

The purchase order or PO is a document that is sent by the buyer to the seller which specifies the products or services that are required by the buyer. The purchase order specifies the delivery-related information, the products needed, payment information, and the price of the products that were negotiated earlier. When the vendor accepts the PO sent by the buyer, then it becomes a legally binding document. The purchase order process defines the purchase order cycle which starts from the creation of a purchase order to the closure of the PO. The purchase order processing also includes quality checks.

Purchase Order Process Steps

Here are the basic purchase order process steps that will enable you to fully comprehend the process of a purchase order.

Step 1: Create

The first step in the PO process is the creation of a purchase order. This happens only after the purchase requisition has been approved by the people in authority. Sometimes if the purchase requisition is rejected, then the person needs to resubmit before he can create a PO. If you are making a recurring purchase then you need to prepare a new purchase order from start. During this step, the administrative staff and the procurement team are the involved stakeholders.

Step 2: Approve

The next step in the purchase orders process is approval. When you create a PO, it needs to be sent to people to ensure it is factually correct. Sometimes, additional changes may occur in case your organization’s requirements have changed. In this case, these modifications are made before being sent to the vendor. The people involved in this step include the finance team, requisitioner, procurement officers, and sign-off authority.

Step 3: Dispatch

When the purchase order is approved by the authority and all changes required have been made, then the order of purchase is sent to the vendor. How it is sent depends on how the vendor prefers the purchase order to be sent. Some vendors prefer if you send them a PO via an email while others prefer traditional modes such as fax. Today, the PO is increasingly being sent via email because of how quickly it can reach the vendor and the lower cost involved.

Step 4: Contract

The next step in the process of a purchase order is the contract. When the vendor receives the PO and accepts it, the PO becomes a contract between the two parties involved; the buyer and the vendor. The PO now serves as a way to ensure the agreed-upon terms are adhered to and if any disputes occur in the future then they can be quickly resolved with the help of the purchase order. The contract needs to include payment terms, PO number, payment information, delivery date, pricing details, buyer details, order details, and vendor details.

Step 5: Delivery

The fifth step in the process of the purchase order is delivery. In this, the supplier delivers the required goods to the buyer. The buyer then ensures the goods are as expected. If any goods are missing or if there are any problems with the goods received then the buyer lets the supplier know about it. The person who receives the delivery of goods can be the procurement officer or the administrative staff. In some cases, it can be the warehouse manager.

Step 6: Matching

Three-way matching is then performed in the purchase order processes. A three-way matching is a vital method that is a must in the PO. It is used to verify that the invoices are legitimate. In this case, the invoice, the purchase order, and the GRN are matched together to ensure they are legitimate. The purpose of the three-way matching is to ensure that the organization did request the particular goods specified in the invoice and that it did receive the requested goods or services mentioned in the invoice.

Step 7: Closure

The last step in the process of a purchase order is PO closure. When no problems have been found in the invoice, i.e. it has been found to be legitimate then the finance team receives the invoice. The finance team then starts the process of paying the vendor the specified amount which is mentioned in the PO. Once this is done, the PO is closed.

Purchase Order Process Flow

The purchase order process flow is the cycle that begins from the PO creation to the closure. Although the steps are generally followed the same way, there may be certain products for which the steps are not followed exactly as mentioned below. It all depends on the requirements of a particular organization. Here are the action steps of the PO process.

PO Creation

The PO is first created and then sent for approval by the authorized individuals. They have the authority to reject, make modifications, or approve the order for purchase.

Request For Quotation

In the next step of the purchase ordering process, the RFQ takes place which involves the organization asking the supplier to quote the price of the items they require.

Vendor Selection

When many sellers exist for the items required by the buyer, then the buyer analyzes all the vendors available. Then he selects the seller depending on various factors.

Contract Term Negotiation

The next step in the purchase order cycle is the negotiation process that involves negotiating terms of the contracts and agreeing on the terms such as price and additional costs.

Receive Goods

This involves the buyer receiving goods from the supplier and ensuring they are as mentioned. Factors such as the quantity of the ordered goods and their quality are inspected in this step.

Receive Invoice And Match

The next important step in the purchase order cycle is the invoice. The invoice is checked thoroughly and three-way matching is performed.

Pay Seller

When the invoice is clear then the finance team from the buyer organization pays the vendor according to the specified terms in the contract.

Keep Record

Then the invoice of the purchase order is kept for record-keeping. This can be used for future reference by the buyer organization.

Closure

The closure is the last step in the PO cycle which occurs after the successful completion of all the related activities.

A well-established PO process enables seamless movement of raw materials and goods, helps maintain good relationships with suppliers and most importantly result in huge savings for organizations.