The Extensive Guide to Purchase Orders

Shivasankari Bhuvaneswaran

September 25th, 2018 Procurement Process   purchase order  

Procurement is often like quicksand, sucking in employees with sticky processes and exhausting paperwork. The tedious cycle of manual purchase order processing is eerily similar to wading through a bed of silt—messy, slow, and exhausting. But is manual procurement really a danger, or just a hassle?

What happens if your purchase orders succumb to the sinking processing problems of multiple touch points, arduous document routing, time-intensive data entry, too many errors, and the ever-growing approval cycle? Unfulfilled purchase orders may lead to several operational challenges.

A number of people and processes will fall prey to these inefficiencies, leading to missing early order discounts, cloudy visibility and process transparency, and an ever-growing negative impact on the organization’s bottom line. Is there no way to prevent this? Is there a way to make your purchase order process more efficient and hassle-free?

Unlike quicksand, which takes a lot of energy to get out of, purchase order struggles can be easily averted by just looking out for a few problematic areas and steering clear of them. Before you start trying to pull yourself out, let’s take a better look at the process itself. Here’s all you need to know about the purchase order management process.

What Is a Purchase Order?

The purchase of most goods/services for an organization requires a review and approval from the procurement squad. By definition, a purchase order denotes an organization’s offer to buy goods and services. Usually, purchase orders are a legally binding contract (once a seller accepts), with exclusive terms and conditions between an organization and its vendor.

Purchase orders are filled out by the employee who is in charge of purchasing decisions. Once created, he/she authorizes the purchase decision and forwards it to the supplier, so they know what is required. When all parties fulfill specifications outlined in a purchase order, the buyer will process the payment to the vendor.

Data Handled in a Purchase Order

While some of these details differ from one organization to other, purchase orders usually contain:

  • Buyer’s information (Name of the organization purchasing the goods/services)
  • Purchase order number (Vital reference information for three-way matching)
  • Vendor information (Name, address, and contact information of the service provider)
  • Order details (Order date, items, quantity, shipping address, and delivery schedule etc.)
  • Payment information (Unit price, Total PO value, adjustments, payment schedule etc.)

Types of Purchase Orders

Specific purchase order forms are used to order distinct purchases. These are 4 common types of purchase order forms:

Standard PO’s

The most commonly used PO’s are used for occasional purchases. When the buyer is sure about all order details (item, price, delivery, and payment terms etc) of a one-off purchase, standard PO’s are created.

Blanket PO’s

This type of PO is used for ordering certain unquantifiable items (without exact quantity, price, or delivery date) over a given period of time. Blanket PO’s usually restrict the item types and has an individual order limit, total order value, and expiry date.

Contract PO’s

This type of PO is created with the supplier to agree to certain terms for a specific interval (often for a year). Anytime during the contract period, a buyer can raise a standard PO with specific requirements while adding a reference to the contract PO.

Planned PO’s

This type of PO is used when a buyer makes a long-term commitment to purchase items or services from a specific supplier. Since the date of delivery is unclear, tentative dates are provided to the seller with quantity, pricing, and other payment details.

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Purchase Order vs. Purchase Requisition vs. Invoice

Purchase orders, purchase requisitions, and invoices are the most commonly confused financial documents. At first look they might seem like the same thing since:

  • They list the goods/services that an organization wants to purchase from a vendor
  • Each document plays an integral role in controlling an organization’s spend
  • These documents identify requirements and approve the purchase of goods/services
  • The documents offer a greater visibility and control over the purchasing process
  • All three documents include basic order info, shipping address, vendor details, and price

Although these three financial documents have many similarities, they’ve got a number of differences.

Purchase order vs invoice vs requisition

The Need for Purchase Orders

Few businesses choose to remain satisfied with verbal allegiance and email threads for making purchasing commitments. And, they tend to ignore purchase orders without ignoring their critical role in organizational spend management.

By maintaining a proper purchase order process, organizations can:

Minimize risk

Setting clear expectations with a legally binding document that displays order details, agreed cost, and payment terms reduce the likelihood of disputes and legal issues.

Improve budget management

Creating and maintaining online purchase orders which include actual cost will help procurement officers to optimize organization’s spend culture.

Ensure compliance

Running audit reports, identifying invoices, and matching orders are relatively easy with electronic purchase orders.

Forge better buyer-vendor relationship

Communicating purchase requirements with an electronic purchase order software help businesses manage order expectations properly and improve purchaser-supplier relationships.

Purchase Order Process

The number of steps in a purchase order process may vary from one organization to another, but the process flow is more or less consistent. Major steps in a purchase order process:

Step1:

A business leader creates a purchase request for necessary merchandise and sends it to the purchase/finance managers.

Step 2:

The finance/procurement team reviews the request and either approves or rejects the purchase requisition.

Step 3:

Unless the previous stage ends with a firm ‘no’, the purchase request is converted to a purchase order and forwarded to the supplier.

Step 4:

Once a vendor receives the order, he/she reviews it and either accepts or rejects the PO. If the PO is accepted, an acknowledgment receipt will be sent to the buyer.

Step 5:

Now that the vendor has agreed to the PO terms, a binding contract will be created. The purchaser records the PO and the vendor takes steps to fulfil the order.

Handling these Steps Manually?

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Managing Purchase Orders

Despite inefficiencies in manual purchase order processing, several organizations still prefer the paper-heavy process. In a recent survey, almost 43 percent organisations felt their manual PO practices are inadequate.

A paper-based purchase order process:

  • Is cumbersome, error-ridden, and long
  • Lacks transparency
  • Has too much human dependency
  • Creates delays due to process bottlenecks
  • Makes regulatory compliance challenging
  • Increases operational expense

While it might be tempting to skip the daunting purchase order process, it is essential to document every purchase order. Organizations can resolve problems in their purchase order process by using a purchase order system.

A simple purchase order app eliminates paperwork, reduces manual intervention, decreases human errors, ensures transparency in the process, lowers operational costs, and bridges process gaps.

In a recent Global CPO Survey, automation was deemed as the second highest priority of CPO’s around the world. They believe that an electronic purchase order process improves accuracy, speeds up execution, and enhances process efficiency.

Take Control of Your Purchase Orders

An automated purchase order system offers procurement officers the necessary tools and resources they need to streamline their purchase order process. Additionally, purchase order automation reduce the processing time and costs.

Cloud-based, online purchase order solutions like KiSSFLOW can be used by SMBs and enterprises. Organizations can customize the process flow and order forms as per their business needs. KiSSFLOW allows the purchasing manager to create a dynamic purchase order process using workflow automation.

Customizable electronic purchase order system offered by KiSSFLOW is a user-friendly, cost-effective alternative to paper forms. Automating the purchase order process with KiSSFLOW’s purchase order software helps organizations manage costs and inventory, reduce order duplicates, maintain policy/legal compliance, simplify processing, and protect stakeholders (buyers and vendors).

Looking for ways to optimize your organization’s expenses? Give KiSSFLOW a try and see how it can improve your purchase order process. Sign up for a free trial today!

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