The Purchase Order Cycle: A Guide to Master the Purchase Order Process
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 Outdated tools, neglected processes, and friction in internal communication haunt every step of the manual purchase order life cycle.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. To sort this out, you need procurement software with a solid purchase order solution. These tools are designed to help you run procurement operations smoothly, and with consistent results. When you digitalize procurement with a suitable comprehensive solution, you can rest assured that purchase orders are taken care of.
To better understand how this works, you will need to get familiar with 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.
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Purchase order cycle steps
Listed below are the steps involved in a typical purchase order life cycle:
- Purchase order creation
- Budget check and RFP
- Vendor qualification and selection
- Negotiation and PO dispatch
- Delivery and quality check
- PO Matching and closure
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1. Purchase order creation
The first step of the purchase order life cycle is creating a purchase order. Once a purchase request is approved and authorized, it is converted to a purchase order. In the 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 the case of small businesses, this authority may reside with the finance head or the business owner/CEO.
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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 requirements 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 acknowledgment will activate a legally binding contract between the vendor and the buyer.
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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 the 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.
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Kissflow Manages the Entire PO Cycle For You
Managing a purchase order through its life cycle might be overwhelming when you do it manually. With a made-for-procurement solution like Kissflow’s procurement suite, 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 processes, let alone optimize spend.
Kissflow can help your organization digitalize and optimize all of its procurement processes. This way, the entire purchasing department has it easier–for instance, they won’t have to spend extra time and resources managing the PO life cycle.
Being a cloud-based procurement solution, Kissflow’s customizable procurement suite not only offers greater transparency and ease of access, but also actionable insights on things spend culture and purchasing trends.
It’s as simple as getting Kissflow, and running procurement processes from vendor onboarding through the PO cycle right down to invoice approvals! You can see how this would work for you right now–take a look at Kissflow Procurement Cloud.