The Purchase Order Cycle: A Guide to Master the Purchase Order Process

Shivasankari Bhuvaneswaran

November 21st, 2018 Procurement Process   purchase order  

Purchase Order Cycle

Purchase orders are supposed to keep the purchasing process free from disputes. However, in manual PO processing, purchase orders are often the main cause of chaos and confusion. Outdated tools, neglected processes, and friction in internal communication haunt every step of the manual purchase order life cycle.

The most terrifying part of a paper-based PO process is finding the purchase order itself. Once it enters the Bermuda triangle of the paper process, what happens to the PO is a mystery. Is it in a drawer? A filing cabinet? An email inbox? A folder labeled “New POs-Karen-DONOTDELETE”?

As a result, everything from staff efficiency to spend optimization goes up for a toss. Typically, purchase order software is the ideal solution to this problem. However, it might not make sense for all organizations. SMBs run on a tight budget and often have unique business processes and working styles. In such cases, purchase order automation might be a better choice than ready-to-use PO software in creating an online purchase order whose entire cycle is automated.

But before you take advantage of automation, make sure you know the full purchase order cycle.

What Is the Purchase Order Cycle?

The purchase order life cycle is the set of key steps involved in processing a purchase order. It begins with an approved purchase requisition, which is then converted to a new purchase order and sent through the purchase order approval process. The PO life cycle includes steps that range from cross-checking budgets to PO matching and closure.

Purchase Order Cycle Steps

Listed below are the steps involved in a typical purchase order life cycle:

  1. Purchase order creation
  2. Budget check and RFP
  3. Vendor qualification and selection
  4. Negotiation and PO dispatch
  5. Delivery and quality check
  6. PO Matching and closure

Lifecycle of a purchase order

1. Purchase Order Creation

The first step of the purchase order life cycle is purchase order creation. Once a purchase request is approved and authorized, it is converted to a purchase order. In case of multiple line items, each item will be transferred to a new purchase order.

While purchase requests can be raised by employees, purchase orders can only be created by the procurement team in an organization. In case of small businesses, this authority may reside with the finance head, or the business owner/CEO.

2. Budget Check and Requests for Proposal (RFP)

Once the procurement team creates the purchase request, the finance team carries out a budget check. After this, there is a standard search for existing purchase contracts. If such a contract exists, the purchase order will be sent to the respective vendor.

If not, then the procurement team will have to send requests for proposals (RFP) to a list of prospective vendors with the intention to elicit quotations for a product or service.

3. Vendor Qualification and Selection

After receiving commercial quotes from suppliers, the purchasing team will compare their business requirement with the vendor proposal. To arrive at a unified vendor selection decision that is in the best interest of the organization, the procurement team will conduct a thorough investigation and also seek input from all stakeholders.

4. Negotiation and PO Dispatch

Once a vendor is selected, it is time for contract negotiation. This is the time where suppliers and buyers discuss and address issues that will forge a better business relationship. Typically, purchasing negotiations will cover the following items:

  • Time constraints
  • Delivery expectations
  • Quality benchmark
  • Payment terms
  • Potential liabilities and risks
  • Confidentiality of purchase
  • Dispute resolutions
  • Change in requirements (if any)

Once the negotiation is complete, the purchase order is forwarded to the vendor for approval. The vendor’s approval and acknowledgement will activate a legally binding contract between the vendor and the buyer.

5. Delivery and Quality Check

Vendors usually send an advance shipment notice to the purchaser once the order is shipped. This notice includes shipping date, shipping agency details, tracking number, a copy of PO and invoice, etc.

After receiving the product/service, the buyer checks the packaging slip and PO information, and acknowledges the receipt. Then, the purchaser performs a standard quality check and notifies the vendor or rejects products in case of damage or defect in delivered item.

6. PO Matching and Closure

In this step, three important purchasing documents—the purchase requisition, purchase order, and vendor invoice—are lined up and evaluated to make sure there are no discrepancies, and to verify the accuracy of information. Discrepancies need to be addressed according to the dispute resolutions mentioned in the purchasing contract.

Once this three-way document match is complete, the invoice is approved and forwarded to payment processing depending on organizational norms. Next, the purchase order is formally declared as closed and stored for the purpose of bookkeeping or audits.

KiSSFLOW Manages the Entire PO Cycle For You

Managing a purchase order throughout its life cycle might be overwhelming when handled manually. With a purchase order automation tool like KiSSFLOW, organizations can protect their complex purchase order ‘ship’ from tomorrow’s compliance storm.

Manual processing and outdated tools can never give organizations the power they need to control their procurement process, let alone optimize spend.

Process automation tools like KiSSFLOW will let organizations optimize and automate their processes so that they don’t spend extra time and resources managing the whole PO life cycle.

A cloud-based purchase order app created on KiSSFLOW not only offers greater transparency and ease of access, but also actionable insights on the spend culture and purchasing trends.

Looking for a way to process purchase orders faster without spending too much? Give KiSSFLOW a try and find out why it is the fastest way to create, store, and process purchase orders!

Automate the Entire Purchase Order Cycle in 15 Minutes

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